Greetings, welcome to the Homeowners Choice fourth quarter 2011 earnings conference 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. Thank you, Mr. Madhu. You may begin.
Thank you. Welcome to Homeowners Choice fourth quarter and full year 2011 earnings conference call. Before I hand the call over, I wanted 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 condition, and results of operations. Homeowners Choice, Inc.
disclaims all of the obligations to update any forward-looking statements. Earlier today, we released our financial results of our fourth quarter and year ended 2011. The press release and other materials are available on our website. We encourage investors to review those materials. Joining in the discussion for fourth quarter results are Homeowners Choice Chairman and Chief Executive Officer, Paresh Patel, and Chief Financial Officer, Richard Allen. First, Paresh Patel will review the past year, followed by Richard Allen's financial comments, followed again by Mr. Patel, who will review our outlook and direction. This call is being recorded and will be available for replay for a period of 30 days via the investor events section of the company's website. Paresh?
Thanks, Jay. Welcome to our fourth quarter 2011 conference call. We appreciate your interest in Homeowners Choice. I'd like to review our accomplishments of 2011 to start. We started 2011 with approximately 55,000 policyholders and annualized premiums of about $130 million. During the first quarter, we completed our preferred offering, which raised approximately $11 million net of fees. During the second quarter, we strategically acquired some real estate, which produced the bargain purchase gain of just under $1 million. During Memorial Day weekend, we moved into our new corporate headquarters with ample room for expansion and growth. Third quarter was quiet as we went through what was an active hurricane season, but did not affect anybody in Florida. In November, we assumed the HomeWise Florida book of policies, which doubled our policy count.
All the other items we had done earlier in the year came to play. We ended the year with approximately 120,000 policyholders and annualized premiums of $230 million. Basically, just about doubling in the course of the year. Also during 2011, we paid dividends of 52 and a half cents per common share versus the $0.30 per common share we had paid throughout 2010. In summary, our balance sheet is in great shape, and we are well-positioned to continue growing our market share. I'd like to turn our call over to Richard Allen, our CFO, to run through the financials.
Thanks, Paresh, and good afternoon, everyone. Both the fourth quarter and 2011 showed significant improvement year-over-year. Earnings per share more than doubled during the fourth quarter, from $0.27 to $0.62 per common share. For the year, earnings per share increased by 65% to $1.34 per common share. Due to the increase in policies acquired from HomeWise, gross premiums earned during the fourth quarter increased 66% to $49.8 million. Net premiums earned increased 130% to $35.7 million. For the year, gross premiums earned increased 20% to $143.6 million, and net premiums earned increased 40% to $87.2 million. For the fourth quarter, losses and loss adjustment expenses increased to $16.9 million versus $18.2 million last year, primarily the result of increased exposures, further reserve development on reported claims, and a strengthening of reserves for incurred but not reported claims.
Policy acquisition and other underwriting expenses for the three months ended December 31st, 2011 and 2010, were $7.6 million or 15% of gross premiums earned, and $4.2 million or 14% of gross premiums earned respectively. Other operating expenses, which includes a variety of general and administrative costs, for the three months ended December 31, 2011 and 2010, were $4.4 million and $1.9 million respectively. Losses and loss adjustment expenses for the year ended December 31, 2011 were $48.2 million compared to $37.7 million in the prior year. Policy acquisition and other underwriting expenses for 2011 and 2010 were $18.1 million and $14.9 million respectively. Other operating expenses were $12.1 million for the year ended December 31st, 2011, compared with $7.5 million in the prior year. Stockholders' equity increased to $63.8 million at year-end, an increase of 27% from 2010.
Cash and cash equivalents were $100 million at year-end, compared to $55 million in 2010. Investments in fixed income and equity securities were $59 million for 2011 versus $43 million in 2010. Unearned premiums were $109 million versus $65 million in the prior year. Total assets ended the year at $215 million compared to $141 million for 2010. With that, I'll turn the call back to Paresh.
Thank you, Richard. Homeowners Choice has made tremendous strides in 2011 to expand our market share by doubling our policy count, while at the same time maintaining a strong balance sheet, diversifying our portfolio, increasing our dividend, and providing exceptional service to our policyholders. On a personal note, I believe 2011 will be remembered as a major transition year for Homeowners Choice, and I want to personally thank all of our employees for their contributions in achieving this. As we look forward, our strategy is the following. We will continue to maximize the benefits of the Homeowners acquisition in the coming year. We will continue to strengthen and improve our corporate capabilities as we've done every year for the past five years. Finally, we will selectively and strategically capitalize on acquisition or assumption opportunities as they may arise.
In summary, we feel confident in our strategic vision and will continue to execute our plans for the company as we move through 2012. In keeping with this, in January, we announced an increase in our dividend from $0.125 to $0.15 per quarter for common shares, which represents our board's confidence in the future. We believe our company is well-positioned, and we look forward to keeping you updated on its progress. Thank you, and we will now take questions. Operator, can you please open up the call?
Certainly. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 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 the line of Casey Alexander with Gilford Securities. Please go ahead.
Good afternoon. First of all, congratulations on a fabulous quarter. Richard, if I got this right, book value is around $834, somewhere around there?
Book value for common share, Casey, is $828.
$828. Okay. That's not too far off.
Right.
All right, good. Can you give me an update on sort of the pace of the renovations and potential lease-up of the marina property?
Yes, Casey. Jay Madhu here. The renovations are moving along quite well. We're upgrading the property. The lease-up is moving along as well. We've renewed some leases on some of our tenants. We have two spaces that are still pending. All in all, moving in the right direction.
How leased up is the headquarters building now?
We're approximately 85%.
Okay. Good. Is there a seasonal rent roll aspect to that? The last couple of quarters where I thought the rent roll was coming from the headquarters had other income a little higher than it was this quarter. I can't quite figure out why the other income is down some.
Casey?
I think.
Casey, I think what you may be seeing in some of that effect is things like gas sales at the marina and those kinds of things.
Huh?
We're not really looking at those numbers as being material to the performance of the company.
Right. Okay. I'm just trying to figure it out for modeling purposes.
Yeah.
Richard, the last couple of quarters, the accrual for the preferred dividend has been $218,000. Is that the right number going forward?
Until they start to convert.
Okay. Right. All right. The stock is in the money now for the first time since we've had this conversation.
Right.
Lastly, Paresh, my understanding is that reinsurance negotiations have begun. Do you have any color on how it looks and what we might expect when we go into the second half of the year?
Yes, Casey. Two things. I should caveat the answer because last year we gave these answers, and then there were three months of global disasters, which changed numbers dramatically. This thing isn't over till it's signed. Having said that, what is basically coming through is, at least our indications from the market are maybe flat to up 5% in terms of rates. In terms of the two books coming together, we are seeing a significant savings in what a 100-year exposure looks like for us. We expect at the end of all of that, the combined companies will do much better than they did last year.
Okay, great. All right, thank you very much.
Thank you.
Thank you. Our next question is from the line of Bernie Harris with BJ Harris. Please go ahead.
Congratulations. About a month ago, there was an article in The Wall Street Journal about the state and their reinsurance and a lot of problems, it sounded like, by this article. Is it possible that because they're going to be wanting to get rid of a lot more accounts or companies, and they could come on the market again?
Bernie, I actually remember the article in The Wall Street Journal. Basically, there seems to be a shift in the political sentiment in the state, going to the fact that there seems to be an active move to try and reduce the size of Citizens, the largest insurer in the state, the state-run insurer. Clearly, the current administration seems to be moving in that direction, which is in some ways an opportunity for us because any policyholder that leaves Citizens will have to go somewhere. Clearly, that gives us the opportunity for growth. As far as what else it means to the state, it's the same item that's been said many times before about the State of Florida should not be in the insurance business. It should be done by private markets like ourselves.
You've always been selective on who you pick from the state. Of course, if they leave, then there's going to be a lot of people looking. Is it making it so that it's a little easier to pick and choose with the state and get more accounts once this other merger is settled?
Yes. The state has basically kept the same rules and/or made them more favorable. One of the items that they just recently passed was that there used to be a ceding commission where you used to pay 16% for picking policies. That ceding commission is now zero. Clearly, that improves that book of business. It's an interesting scenario because for years we've been talking about the benefits of takeouts and most of the industry has looked at takeouts as, well, they didn't think that it was the right strategy. Ironically enough, as we now have grown quite a bit and we're posting the results that we are, we actually haven't done a takeout in almost 16 months, and everybody else now seems to think that a takeout is a great idea. Really, our stance has always been the same.
It's an opportunity, if properly managed, will produce good results, and if mismanaged, will produce bad results. We see all the changes in the state this year that seems to be going in the favor of private carriers, and we applaud that. What we will do at any given moment depends on the opportunities that are in front of us. Clearly, things seem to be improving for private carriers like ourselves. Does that help you with the question?
Yes. Well, the second part, are there any other insurance companies that are also in trouble within the State?
We don't comment on the strength or the lack thereof of any of our competitors. We just look at our own business, and we make sure we get stronger every day.
Well, let's put it a different way then. If another company got in trouble, the State would more likely try to do a deal with somebody already operating than try to take on more. Would that make logical sense?
Absolutely.
Yes.
They clearly would be going down that path. That's how we end up with the HomeWise deal.
That's what I figured. The last question is more, if we take the first three quarters numbers and your fourth quarter number and take the semi increase or the big increase you got, is that a semi, I know you don't like to do guidelines, but is that a basis for correct analysis?
Let me see. We don't like to give guidance as you know. We're just about running the business, but the best thing I can say, which I've heard from somebody saying this, is that if you were running a profitable and healthy business and it was making a certain amount of money, if you now go and double it, all other things being equal, one would expect.
Well, that's what I'm saying. Okay.
Yeah.
Okay. Thank you. Very good.
Yep.
Hope to see you in New York again.
Absolutely look forward to it.
Okay.
Take care.
Bye.
Thank you. Our next question is from the line of Howard Halpern with Taglich Brothers. Please go ahead.
Congratulations, guys. Great.
Thanks, Howard.
Thank you, Howard.
In general, how would you describe the potential rate environment as we go through the year? Have rate increases continued to flow from the state?
Simple answer is, as far as I know, is yes.
Okay.
Rate increases are definitely available. We are in an interesting situation where as long as Citizens continues to be the largest insurer in the state, you do have to maintain rate discipline to make sure that you're competitive with them.
Okay.
Having said that, simple answer to your question is yes, rate increases are still being granted by the state.
Okay. In terms of the HomeWise function of policies, has most of the non-renewals and the pricing meshing between the two books, is most of that in place now, or will that be in place sort of as the first half concludes?
Actually, Howard, it's going to continue on throughout the balance of 2012.
Okay.
If I can just elaborate so that people who aren't as informed as you sort of all get the idea of this.
Okay.
We took over policies in the middle of their term, so the way the deal works is when that policy expires, it will be renewed on Homeowners Choice paper at Homeowners Choice rates. We do have to wait for those policies to expire. When we did the deal on November 1, HomeWise had already issued policies through the end of 2012, with expiration dates through the end of 2012. We are now, month by month, as those policies expire, renewing them onto HCI paper. I think we've done about a third of them at this point, give or take a little bit, and we'll continue to do more throughout the year.
Okay. The general percentages in terms of the contraction of policies, that's going to continue. It's just going to be off of a larger number base, correct?
Correct. I mean, just generally how our business works is that, when we issue renewals, a very large percentage just renew with us. There is a small percentage that upon renewal, will look for business elsewhere and move elsewhere. That tends to decrease the policy count. Then the other thing is during the course of a year, people move, buy homes, sell homes, unfortunately go into foreclosure, and all of those things lead to policies being canceled. The natural tendency for the book is to shrink.
Okay. One final question. As you potentially look beyond Florida, what do you see in the landscape in the potential states that you might wish to move into?
We continue to study most of the Gulf Coast states, actually after last year, we also have been looking into New York. Having said that, we've sort of always wanted to maintain discipline in the sense of, we don't see any purpose in entering a state unless we see a clear path to profitability in that state.
Okay.
We're not about saying we're in eight states. We would rather be in two states and have a profitable book in both states than sort of talk about the larger numbers. Clearly, just to remind everybody that we have stated previously that we are looking to expand into Alabama. That expansion got somewhat sidetracked because of the HomeWise acquisition, we are back trying to finalize and complete that.
Okay. Well, great quarter, great year. Keep up the good work, guys.
Thank you.
Thank you. Our next question is from the line of Jeff Dancy with Copper Capital Management. Please go ahead.
Hello, Paresh.
Hey, Jeff.
All right, I guess I'll be the fourth person to congratulate you on the acquisition. Certainly exciting. I am looking at your gross premiums earned in this quarter, they obviously went up quite substantially. I look at the premiums ceded, and they've went down a little bit. Net premiums earned are up significantly as well. How should I think about how much of the premiums you cede going forward?
Very simple way of looking at this thing. Because of the timing when we did the HomeWise acquisition, we were at the far end of hurricane season. We didn't need to buy hurricane reinsurance for those policies until the next hurricane season, which starts on June 1, 2012. Basically, what you're seeing in the lines of premiums ceded, that is really our cost of reinsurance. The number you're seeing basically is just that flowing through. Obviously, that was already set at a fixed dollar value from pretty much June 1 and September 30th of 2011. That number is working itself through. As we added on the HomeWise book, those premiums obviously added to gross premiums, but there wasn't a corresponding increase in reinsurance cost. Hence, the dynamics of the numbers moving.
That will continue on that trend until June 1, at which point the whole book will be renewed with new reinsurance contracts. Yeah?
Okay.
Okay. Great. That was really the only question I had for you.
Thanks. Thank you.
Thank you. Our next question's from the line of Tony Pollock with Maxim Group. Please go ahead.
Good afternoon.
Hey there.
I saw that you had about 52, I guess it's $5 million in equities and another $6 and a half million in other investments. I was wondering if you could tell us what that consists of.
A large piece of the other investments is the piece of real estate that we purchased.
Okay.
Back in April.
Right.
The vast majority of it.
I'm just asking, you wouldn't put that as a, whatever it is, real estate investments or, as opposed to other investments? It seems a little weird. Is it not?
Well, we had discussions with our auditors, we came to a conclusion, let's put it in other investments at the present time.
The $5.2 million of equity, I mean, that's obviously up substantially from last year. Could you give us a little rundown on what's in there?
I think one of the things we've done, given the current interest rate environment we are in, we have started to put some of the investment portfolio in equities, and usually dividend-paying preferred equity, that kind of stuff. That's what you're seeing the reflection thereof. It's just things you do in this interest environment, because obviously one of the things we would like to improve tremendously, as I'm sure everybody on this call would, is the investment income side of the balance sheet.
Right.
In this interest environment, it's a pretty tough thing to do without going too crazy and taking risk, which we don't like to do.
Okay. Thank you. Great quarter.
Mm-hmm. Thank you.
Thank you.
Thank you. Our next question's from the line of Steve Rudd with USIP. Please go ahead.
Hi. Tell me what our share count is with the warrants, and the preferred converted. What would that come out to be?
At this point, it's a pretty complicated number. Instead of putting Richard on the spot with blow-by-blow kinds of things, roughly speaking, we've got 1.2 million preferred shares outstanding, which could convert into common. We've got about 2.6 million of warrants.
Yeah.
Which would translate at about 1.3 million shares if they all elected to convert.
Currently 6.2 million shares issued and outstanding.
Yeah. On top of that, there's a few.
Unexercised options.
Yeah. If you add all of those numbers together, you'll get the-
Be about right around nine million shares, roughly.
Okay. Fine. Let me just jot that down. Of the one-third of the HomeWise policies that you've rolled over so far, about what % have you converted to yours?
I think the number seems to be somewhat in the high 70s, low 80s, percentage-wise.
That sounds pretty good.
Yeah. Those all come with a slight increase too, right?
Actually, some come with an increase. Some actually, surprisingly enough, do come with a slight decrease. Net-net, there's an increase.
10%? 5%?
I'd say in the 5%-10% range.
Okay. That's terrific. As you talk about acquisitions, needless to say, so far, we couldn't be more impressed with the HomeWise acquisition. We basically gave up about a little less than 20% of the company to double our premium count, it seems to me, almost quadruple our earnings. Is that the threshold you're going to use going forward on deployment of equity?
Well, let me sort of step back on the 20% dilution.
Yeah.
What we issued was 1 million warrants. If they actually exercise the warrants, they'll be buying half a million shares at $9.10, which would reflect.
Oh, even better.
Yeah.
Even better, right?
We issued warrants, yes.
Okay. Sorry.
Yeah. Look, clearly HomeWise was a once in a lifetime opportunity, and it's one of those kinds of things where it's a win-win-win, right? Let's start in terms of public policy. The state was in a situation whereby they didn't want all of these people staying with a carrier that was about to go into liquidation and have all these policies canceled right before Christmas and Thanksgiving and all that kinds of stuff. They didn't want those policies ending up in Citizens. They were really looking for somebody to step up and keep these policies out of Citizens. One of the other issues that was there was that these people needed to, whoever did this, had to have sufficient surplus, so they didn't put a hole in their balance sheet.
Luckily, we had the preferred offering earlier in the year, which allowed us to contribute surplus which let us do this. That's why the state did this for us. It was a winning thing for the state. It was a winning thing for the policy holders. I just want to get that clear before I talk about what the winning thing it was for us.
Sure.
From our perspective, why this was a how can you get this better kind of deal, was the acquisition occurred right at the end of hurricane season. We have plenty of time to assimilate the books before we go into the next hurricane season. That worked out well. The books were very complementary to each other, which tremendously helped. HomeWise was headquartered probably about 10 miles away from where we are, so we could not only take over the business, but we could take over a large number of their employees, which helped the growth. Seeing that we just built a new corporate headquarters with space, all of those things worked themselves out. Right? If you had wanted to script an ideal acquisition that you could get, and oh, by the way, you're getting this with virtually no dilution to the shareholders.
If you wanted to script a perfect acquisition, this was it.
Having said that, would we like to get lucky twice? Absolutely. How we typically look at acquisitions is that we need to make sure that anything we do either strengthens our balance sheet or our income state, our EPS to our shareholders, is how we typically look at this. Ideally you want to do both, which is what happened in the HomeWise case. Usually you look to do one or the other because the selling party will want the other half of the deal, yeah?
Does that help?
Yeah. Partially. Obviously I asked you a loaded question, and you handled it well, which I'm not surprised about. The caution here is that with patience, positioning yourself right, and doing it the right way, you actually can do an ideal acquisition. To do one that's not ideal, you probably just shouldn't do. The proof of the pudding is in what you've gotten so far with HomeWise and hopefully what will reflect itself in the share price very shortly. You've been in the business now five years or so, and you hit a grand slam acquisition. You do that once every three to five years, you'll be a gigantic, profitable company that's trading at exponentially higher than where we are today. You do something else, and you could be a different type of company. That's the caution. In other words, you got it.
Now, let me ask you, on the Alabama thing that you're contemplating, I take it that you're going to do something very, very small, because right now we're doing a little bit of running downhill, and I want to be sure we don't trip ourselves up.
Absolutely. Look, what we are looking to do in Alabama is start out there, make sure what we do there is profitable before we go gung ho over that. That is not our strategy or our style. I don't know how long you've been following us, but while-
Three years.
Okay. You've also seen that we've walked away from deals as well.
Right.
Yeah? While we are happy to do deals, we are also equally happy sometimes not to do a deal. We've had opportunities expand into multiple states, and we have passed on all of them. The Alabama one is the only one that at least met the threshold of us attending to seriously do it.
Okay.
Yes.
All right. Well, Paresh, the caution is, listen, you're seeing another opportunity now with Citizens. The politics is lining up very right with it. Stick close to home. Stick close to home, perfect it. It's a gigantic market, and you're going to do better there. I'm not wild about Alabama, but I can't stop you. That's about as far as I would go on it. Stick close to home. Hey, lastly, it seems to me we've only had two-thirds of HomeWise taken into this quarter. Okay, we're going to have to factor in the reinsurance rates when we re-up. It seems to me that our EPS should, we basically hit a baseline here. Did I analyze this incorrectly? Then I have one more after that. Sorry about that.
Yeah. We don't give guidance, as you know. I can't say I disagree with you.
Okay. Lastly, to your credit, you haven't done that much of a road show so far, and I think the idea was that you wanted to be a bigger company and have more to say. It seems to me you've got a lot to say right now, and you sure are a bigger company. How much are you going to start pushing that? I think you should.
Actually, I think we have been attempting, and I've got Jay, who also does investor relations, sitting across the table from me, looking at me. We have, ever since the day we went public, trying to do the appropriate things from a public company perspective because we pride ourselves on being shareholder friendly, and therefore doing road shows and talking to any investors that are interested, et cetera. Having said that, for most of our public life as a company, people have said, "Well, you're too small, or too illiquid, et cetera, and too new," and basically not wanted to. They haven't been listening. We've been talking all the way through. The marked change we've seen in 2012 is we are now giving the same presentation and the same conversations, but there seems to be a lot more people listening.
Okay. All right. If you want.
We will continue to do that.
That's good. If you want to, you can reissue your fourth quarter press release because you got a typo in here. Not a big deal, but where it says fourth quarter 2011, third paragraph down, it refers to the same period 2011. It should say 2010. You can get another bite at reissuing it if you like.
Thanks.
We'll pick it up later. Yeah. No, hey, listen, Madhu, let us get on the board again tomorrow or the next day.
There we go. Excellent.
All right. Thanks for your hard work. Really appreciate it.
Thank you.
Thank you. We have no further questions in the queue at this time. I'll just turn the floor back over to Mr. Madhu for closing remarks.
That concludes our call. We once again would like to thank you for listening and look forward to a bright 2012. Thank you so much.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time.