Greetings, welcome to the Homeowners Choice third quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. A 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. Thank you, Mr. Madhu. You may begin.
Good afternoon, welcome to Homeowners Choice third quarter 2011 financial results conference call. On the call today from Homeowners Choice, Inc. are Mr. Paresh Patel, Chief Executive Officer, Mr. Richard Allen, Chief Financial Officer. 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 similar words or 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 filings with the Securities and Exchange Commission.
Should any risk or uncertainty 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 of the obligations to update any forward-looking statements. Earlier today, we released our financial results for our third quarter of 2011. The press release and other materials are available on our website. We encourage investors to review those materials. Prior to turning the call over to Mr. Paresh Patel, our Chief Executive Officer, I will turn the call over to Mr. Richard Allen, our Chief Financial Officer, to review the financials. Mr. Patel will then conclude with some additional thoughts before we take your questions. Richard?
Good afternoon, everyone. Thank you, Jay. We are pleased to report a strong third quarter for Homeowners Choice. For the quarter, revenue was $20.1 million compared to $17.1 million during the corresponding period one year ago. Third quarter net income was $2.1 million compared to $1.7 million for the third quarter of 2010. Basic earnings per common share for the quarter was $0.30 compared with $0.27 during the same period in 2010. Diluted earnings per common share was $0.27 compared with $0.25 in the third quarter of 2010. From a financial and business perspective, through the first nine months of 2011, we are in a very strong position, laying a solid foundation for the remainder of the year and for moving forward. The third quarter contained several highlights. Gross premium earned of $31.7 million increased 8% year-over-year.
Cash, short-term, and other liquid investments are at $116.5 million. Losses and loss adjustment expenses were $10.4 million in the quarter compared to $8.8 million for the corresponding quarter of 2010. Policy acquisition and other underwriting expenses were $3.5 million for the current quarter compared to $3.7 million for the third quarter of 2010. Other operating expenses for the third quarter were $2.8 million compared to $2 million for the third quarter of last year. This increase is primarily attributable to increases in compensation and related expenses and expenses related to our real estate operations. I will now turn the call over to Mr. Paresh Patel, our Chief Executive Officer.
Thank you, Richard. This has been another solid quarter for Homeowners Choice. Despite a steady attrition in the policies outstanding, we saw significant growth in revenue attributable mainly to our April 2010 rate increases rolling fully through our book. On a different note, to follow up on an announcement from yesterday, we acquired the Florida policies HomeWise Insurance Company. The deal was approved by the Florida insurance regulators and include a transfer of up to 70,000 homeowners policies and approximately $53 million of unearned premium and approximately-
105
$105 million in premium that will go with it. We are not certain of the actual numbers until all ongoing policy cancellations and collections are accounted for. The transaction provides a base of agents from which to build our voluntary policy growth. It also serves as an example of the type of transactions we can do because of our financial strength. As we enter the last quarter of 2011, we believe Homeowners Choice is well-positioned for the future. We're enthusiastic about the opportunities that lie ahead despite the continuing uncertainty of the economy. In summary, we had a good quarter as we continue to execute against our strategic initiatives while investing in our future growth. With that, we're ready to take questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may 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 key. One moment while we poll for questions. Our first question comes from the line of Howard Halpern from Taglich Brothers. Please proceed with your question.
Congratulations on a great quarter, guys.
Thank you.
Thank you, Howard.
In terms of the acquisition of policies, how does that enhance your demographic reach, I guess, in Florida?
Howard, before we did the transaction, we sort of mapped their book of business against our book of business, et cetera. They're very complementary in almost the entire state. The only place where there is a, not an increase, but a lack of a decrease of concentration is in Broward County, which is Fort Lauderdale. We'll have to do some optimizing there, shall we say. Beyond that, the two books are complementary as opposed to overlapping.
Is it the mechanics, I guess, of the transaction that should we look at it in terms of, I know it's HomeWise policies you're acquiring, but just as a comparison on how you would eventually do a takeout from Citizens, is that a similar way to look at how the transaction will progress through your overall business going forward in terms of cancellations, possibly, and non-renewals and such?
Yes. In other ways, the transaction is designed to look a lot like what an assumption would look like from Citizens. Having said that, clearly there isn't normally when you do an assumption, there's a corresponding Citizens that lives throughout the exercise, so we trade policies back and forth. That will not be occurring here because HomeWise is effectively exiting the Florida business.
And-
The Florida insurance market. Yeah.
You talked about this would enhance your base of agents. How many new agents will you be, I guess, in touch with through this transaction?
Simply, we looked through the numbers, and don't forget, we have a large number of agents already.
Right.
When we put the two sets of agents together, there were a number of agents. There are about 1,200 agents, active agents, of which 700 or so were already existing Homeowners Choice agents. We're thinking about 500 new agents in doing this. Why that is significant is that the HomeWise book is big in places that Homeowners Choice doesn't have as huge a presence, most notably in the Orlando area and some parts of North Florida. That's where we tend to be, that we are picking up the new agents.
Okay. Does, I guess, the recent legislation, does that help in your decision-making on taking on this type of acquisition, and does it provide the new legislation advantages to acquiring this book of business?
I would say from, in terms of the new legislation, that I would look at it as a non-relevant item for the simple reason that you have one company moving its existing book to another company who's taking over an existing book. I don't think either party looked at it as we should sell or we should buy because of the legislation. Yeah.
Okay. Well, keep up the good work, guys.
Thank you.
Thank you, Howard.
Our next question comes from the line of Casey Alexander from Gilford Securities. Please proceed with your question.
Hi, good afternoon.
Thank you.
Could you give us an idea of what some of the integration opportunities are in the acquisition of this book? Since it was owned by a private company as opposed to Citizens, it would seem that there might be some integration opportunities as you work this book into your network.
Absolutely. Some of the advantages we're looking for, as opposed to just taking all the numbers and multiplying by a factor of 1.8 or something, is in two areas. One is because it is in a Citizens takeoff, the profile of the book is different to what we would normally expect from a Citizens assumption. Consequently, we're getting, as I told Howard, a complementary policy set, which gives us new agents in new areas for future growth. Plus, the book that we're acquiring is in new areas. When we get around to next year buying reinsurance, et cetera, you should find a much more diversified book, which should somewhat help our reinsurance costs. The combined reinsurance cost, yeah? The % of revenue.
I know I ask this every quarter, Can you give me the basic share count and then how you get to the fully diluted share count?
Okay.
The basic share count, you want it at the end of the quarter or year to date, Howard?
End of the quarter.
End of the quarter. Basic share count was 6,108,000. The effect of the diluted securities on stock options was another 298,000 shares, on the convertible preferred stock, there's an additional 1,248,000 shares.
Okay.
We get a diluted share count.
About 7.5 million diluted?
Seven point six.
Seven point six. Great. Okay. All right. That helps. You're getting $53 million in unearned premium, and you're receiving $45 million in cash from them. Somewhere in the difference there is the commission that you would have paid Citizens?
Somewhere, too.
Yeah. Okay. In the last quarter, and you had the marina deal, one of the things that you said was going to be one of your activities was leasing up vacant properties at the marina. Is there any update on that?
Yes. Currently, the marina, we are optimizing our tenant base over here. We've been doing a lot of updating to the property. We have increased tenants marginally, not by much, because that does take some time. All in all, we're in the right direction.
Okay.
Casey, if I may, if you go by the office headquarters that we bought, et cetera.
Right.
By these things, it probably takes about one year for the thing to turn around. Lots of activity goes on, it's basically about one year before you see the results.
Understood.
Okay.
Let's see if I have anything else. That should be good for the moment.
Thanks.
Thanks, Casey.
Our next question comes from the line of Tony Polak from Maxim Group. Please proceed with your question.
Good afternoon. Could you give us what the downside of this deal could be?
Absolutely. The downside is the same downside that we would have in our current book, in the sense of clearly, it's not just you picking up policies. Along with every policy comes an attachment of risk, because you have the liability and obligations of making sure for claims, et cetera. You do have those risks that come with these policies, but that's a normal risk that we take in this business. Beyond that, the other items that are there is clearly in doing all of this stuff, we've made estimations and/or projections as to what the reinsurance costs would be and/or what the claims cost would be on this book of business. We are reasonably certain that we've done those numbers correctly, but obviously, that's a potential risk to worry about because then this is new business. It's new to us, not new to HomeWise. Yeah.
Okay. Is there an actual book value on this company that you're acquiring?
We're not acquiring a company. We're just acquiring the policies.
Okay
Out of the company.
Okay. Okay. Thank you.
Yep.
Our next question comes from the line of George Zerman from JP Turner. Please proceed with your question.
Good afternoon, gentlemen. As usual, congratulations on another great quarter.
Thank you, George.
Thank you, George.
Last year, you alluded to the fact that you would declare a special dividend depending on the outcome of the hurricane season. Are there any plans to do that this year as well?
We are coming up to the time of year where we would have the review and consideration of such a thing. Clearly, as you can appreciate, given what we were doing here in terms of the acquisition of the HomeWise book. Again, we just acquired the policies, not the company. We've been a little bit distracted from actually coming up with numbers on that stuff, but I'm sure it'll be discussed within the next few weeks.
Okay, great. The acquisition here, let me understand this. You did not acquire the company, just their insurance policies.
Just their Florida-based homeowners insurance policies.
Yeah. Was this company sort of made to sell those to someone? Were they closed down by the regulators, or did they just not want to write this business anymore?
It was a number of reasons that led to this stuff. We really don't like commenting on what the motivations are for people on the other side of the deal. Yeah.
Uh-huh. What I'm trying to get at is you didn't issue any stock or pay any cash compensation for this, or did you?
The transaction itself is actually got multiple pieces to it. Clearly the biggest piece being the acquisitions of Florida policies. Amongst other pieces and stuff, there is some other compensation that is going out. Most notably, it's going to be 1 million warrants. I've talked about HCIW-
warrants basically of the same caliber as those, that will be issued to the parent of the selling company.
Home.
Of parent of HomeWise, yes.
Yeah.
Obviously beyond that, we also have various transaction costs and legal costs, and all of those things need to get paid, et cetera.
Yeah.
There is compensation.
You didn't issue them 2 million shares or $4 million cash to acquire those policies?
No.
No. Okay, great. Now you're going to just transfer them over to your system and give the people a choice, just like with Citizens, to either stay with you or go somewhere else.
Essentially, that is correct. Basically, we will now try to provide those former HomeWise policyholders the same great service that the Homeowners Choice policyholders already come to expect.
I can attest to that.
Yeah, of course, they have the right and the freedom to go with some other insurance carriers, should they so choose.
Right.
We are confident that they won't do that because we tend to have a 90% retention rate amongst our customers.
Right. At least on paper, you just increased your insurance policies from what, 70 to 150,000?
I think the number we were looking at is somewhere 110 to 120,000. It's somewhat fuzzy at the moment because of these issues about people staying, going, that kind of thing.
Yeah.
Yeah.
Okay. Last question. Do you plan on looking further at Citizens to maybe in bulk acquire more policies at the turn of the year?
At this moment in time, I don't think that's on the cards just because we have to assimilate and digest what we've just done.
Okay.
Okay. Much.
You recently raised how much money on those preferred shares?
I think the gross proceeds were 12 and a half million, roughly.
You're still very well capitalized.
Very much so.
Yeah. In the press release, it says you have $53 million in unearned premiums. In your earlier notes, you said you were taking on about $100 million, that was the already earned premiums, yeah?
Yeah.
The $100 million would be the in-force, the annualized premiums.
Yeah.
If everybody stayed, you would collect about $100 million in premiums.
Correct.
Okay, great. Look forward to your next call.
Thank you.
Thanks.
As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Ron Bobman from Capital Returns. Please proceed with your question.
Hi. Thanks a lot. I have a couple of questions.
Thank you.
Congratulations on the transaction and the quarter. I have a couple of questions relating to the HomeWise deal. I was curious what your estimates are really on the rate adequacy of those policies that you're assuming. Do you think they're sort of close to in line as to where your book is? Do they need more rates? Any thoughts on that?
We tend not to comment on other companies' rate methods and thoughts, et cetera. Part of the transaction is that just like we do with the Citizens assumption, when these policies expire and renew, they will renew onto what those policies, HCI paper, which basically means the renewals offered to these customers will be issued by HCI on HCI paper at HCI rates. Those we feel we have a very good handle on as to the profitability of that and the adequacy of that.
Any sort of measure of relativity between where those renewal.
Yeah
rates will be as to where these people are expiring at?
In this particular case, it gets very difficult to do that because they've had various rate increases that they were in the midst of, plus some of the coverages between our policy offering and the current policy offering don't quite translate. As you get by different territories, the number moves up and down all over the place.
Right.
there's going to be a change, and it's difficult to make a generalization as to what the number would be.
Okay. Well, how about the $100 million that was cited earlier as sort of the full one-year premium volume? I assume that reference was for these acquired policies. Can I use that as a guidepost for what the going forward premium might be, or if I understand the comment right from before?
Yes. I'll tell you what. You raised a very interesting point, and just want to make sure that I emphasize this for clarity for everybody in terms of doing projections, et cetera. Both the policy count number and the premium number, and the unearned premium number actually, are going to move around as they always do in one of these deals because policyholders are just finding out about this deal. Some people may choose to go elsewhere, et cetera. Conversely, as policies renew, and they will be either getting the rate increases that were pre-built in on everybody's side. You could get premiums changing a little bit because that tends to move premiums up. At the end of the day, I would look at both the 70,000 policy count-
plus the $53 million of earned premium and the $100 million of premium in force. All of those numbers with a margin of error of plus or minus 10% at this moment in time. We wanted to put the numbers out there so you get an idea about the magnitude of the deal. These numbers are not the exact numbers of the deal. Yeah?
Understood. Thanks for highlighting that. I appreciate it. I had a question about reinsurance. Before I move on to that, when are these policies sort of losses on your company's books? So sort of, God forbid, there's a fire tomorrow in a house. Is that on Homeowners Choice's books now, basically, I think from this point forward?
Actually, let me make it even more specific. There was a fire yesterday, and yes, it's our liability. Okay?
Well, sadly there'll be one tomorrow, I guess.
Yeah. All losses after November 1 belong to us.
November 1, okay.
All losses before November 1 still stay with HomeWise.
Okay. Thanks. On reinsurance, what does this deal do for, I guess you had to sort of buy supplemental reinsurance incepting November 1, or at your next renewal, how much more reinsurance are you going to buy, or presumably need to buy?
Answering the question about at the next renewal. Because of all the activity and work that will go on between now and that point, I can make one statement that's going to be true and one statement that we're working very hard to make true. The first statement that will be true is that clearly being a bigger company, there will be more reinsurance that we will have to buy next year in terms of just coverage.
Right.
That's clearly going to happen because this is a significant increase. The second statement, which we are going to spend the next 6 months making sure happens, is that we want to make sure that the reinsurance that we have to buy next year is at a better % of premium than we did this year because we'll have, hopefully, a better diversified book, et cetera. That's our goal, and we'll be working towards that. That one's less certain, as you can imagine.
If the book was static and you owned this book this past June 1 or July 1, what would it have done to your one in 100 PML? Can you sort of frame it that way?
Yeah.
As a last question.
Yeah. Putting it differently, I think it would have made our one in 100 go up about 70%-80%. It's about 10% less than how much the premiums would have gone up.
Than on a straight line basis.
Yeah.
Okay, thanks.
Okay.
Best of luck and congrats. Hope it goes well.
Thank you.
Our next question comes from the line of Alex Oksanen from Hilton Capital. Please proceed with your question.
Hello, Paresh. Good evening.
Good evening, Alex.
Could you comment on how this deal might affect your dividend policy on the common stock and possibility of a special dividend?
The first part of the question, as far as our regular dividends, if the concern is that we will be reducing the regular dividend, we haven't been thinking along those lines, and that doesn't seem to be on the cards. The special dividend is a board matter that's going to be discussed in the upcoming weeks.
Okay. Thank you very much.
There are no further questions. I'd like to hand the call back over to Mr. Madhu for closing comments.
Ladies and gentlemen, thank you for taking the time to listen in. These are exciting times, and we're glad that you're all part of it. This concludes our call for today. Thank you, and God bless.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.