Yahoo Finance HCI Group, Inc. (NYSE:HCI) Q3 2023 Earnings Call Transcript
HCI Group, Inc. (NYSE:HCI) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good afternoon and welcome to HCI Group's Third Quarter 2023 Earnings Call. My name is Mike, and I will be your conference operator. [Operator Instructions]. Before we begin today's call, I would like to remind everyone that this conference call is being recorded and will be available for replay through December 7, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 7, 2024, on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.
Matt Glover: Thank you, Mike, and good afternoon. Welcome to HCI Group's Third Quarter 2023 Earnings Call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the third quarter of 2023, and then Paresh will provide a strategic update. To access today's webcast, please visit the Investor Information section of 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 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 filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual results, these developments could have material adverse effects on the company's business, financial conditions and results of operations. HCI Group disclaims all the obligations to update any forward-looking statements. And with that, I would like to turn the call over to Karin Coleman, Chief Operating Officer.
Karin?
Karin Coleman: Thank you, Matt. And welcome everyone. HCI Group reported another strong quarter with pretax income of $20.1 million and diluted earnings per share of $1.43. This was a great result as a third quarter included $6.5 million of catastrophe losses from Hurricane Idalia which made land fall in Florida as a CAT 3 Hurricane. This marks the third straight quarter of pretax income over $20 million and brings year-to-tax pretax income to over $63 million. Gross premiums earned increased almost 4% in the third quarter. Our consolidated gross loss ratio was 35.4% in the quarter and adjusting for the Hurricane Adalia losses that I mentioned, our gross loss ratio saw a sequential improvement to approximately 32%. We remain on a path of continued improvement in our underlying gross loss ratio, which Mark will elaborate on in a few minutes.
Legislative reforms introduced last year in Florida have been effective. They are continuing to bring stability to the Florida homeowner's market and provide home policy holders with greater consumer choice. Similar to prior quarters, each of our business segments had a positive contribution to our quarterly results. At our insurance divisions, homeowner's choice generated another quarter of consistent earnings and TypTap Insurance Group reported its third straight quarter of GAAP profitability. In Investments, investment income totaled $9.4 million almost entirely from our cash and fixed income holdings. Our investment portfolio generated another quarter of steady income and has benefited from the current rate environment. HCI is pursuing top line growth in the fourth quarter and the company is currently adding customers from Citizens.
In total, the HCI Group is approved to assume up to 125,000 policies, which includes the recent approval by the Florida Office of Insurance Regulation for a second Citizens assumption by TypTap. We won't know for a few weeks the exact number of policies that elect to move to HCI, but our expectation is that HCI could add between $150 million to $250 million of in-force premium. Finally, HCI Group continued to deliver on its commitment to shareholders, paying a dividend of $0.40 per share, our 52nd consecutive quarterly dividend. To summarize, HCI Group delivered another quarter of solid profitability and we think there is an opportunity to build on our momentum. Now, I'll turn it over to Mark to provide more details on our financial results.
Mark Harmsworth : Thanks, Karin. So, as Karin mentioned, this is the third consecutive quarter where pretax earnings have been more than $20 million. In the first quarter, pretax income was over $20 million and included a one-time gain from the sale of real estate. In the second quarter, pretax income was over $20 million with no one-time gains. This quarter, pretax income was again over $20 million despite having a CAT 3 hurricane hit the state of Florida. These improving earnings are the result of trends we've been discussing for a while now. Higher average premium per policy, increasing investment income, flat operating costs, and improving claim trends. In the third quarter, gross premiums earned were up despite policies in-force being down, driven by rate adjustment made earlier in the year.
Higher average premium per policy both in Florida and outside of Florida has helped reduce the loss ratio and increased earnings. Increasing investment income is the second trend helping to drive improved earnings. If you look at the income statement this quarter, it looks like investment income is down, but that's because we had a real estate sale in the third quarter last year. If you adjust for that, ongoing investment income is almost double what it was a year ago and it continues to go higher. The third positive trend is that expenses have been flat. We're driving significant operating leverage by generating higher premium revenue without increasing operating expenses. The last trend is the continued improvement in the loss ratio. I should clarify one thing quickly.
If you look at the loss expense for the third quarter last year, it includes the loss expense related to Hurricane Ian of about $64.6 million. And the loss expense for the third quarter this year, it includes, as Karin mentioned, losses of $6.5 million for Hurricane Idalia. To get a clear picture of loss trends, we need to adjust for both. If we do that, the consolidated loss ratio in the third quarter last year was 41.4% and in the third quarter this year, the gross loss ratio is down to 32%. This improvement in the loss ratio is being driven partially by higher average premium per policy, but more importantly, by lower claim frequency and reduced litigation frequency, we believe as a result of the insurance reform legislation in Florida. I mentioned this before, but we are not getting to these lower loss ratios by reducing reserves.
In fact, net reserves at the end of Q3 are the same as they were at the start of the year. I should mention a few things from the balance sheet. Shareholder equity has grown by about 25% so far this year, and book value per share is up from $18.91 at the start of the year to $23.27 at the end of the third quarter. Cash and financial investments at the holding company level are just over $167 million, up from $140 at the start of the year. We're also happy to announce that we signed a new credit facility with Fifth Third Bank with significant improvements. The amount of the credit available increases from $50 million to $75 million, and the term of the facility has been extended from two years to five. Combined with cash and financial investment at the holding company level, this increases total available liquidity at the holding company to just under a $0.25 billion, which is available to support new growth initiatives.
We give new opportunities, as Karin mentioned, we're in the process of assuming a number of policies from Citizens, which we expect will increase premiums and, more importantly, substantially increase earnings starting in the fourth quarter. To summarize, this is another great quarter for the company, and we are positioned for even better results. Revenue is going up, investment income is going up, the loss ratio is coming down, policy acquisition and operating expenses are flat and earnings are growing. With that, I'll hand it over to Paresh.
Paresh Patel: Thanks, Mark. Karin and Mark walk everyone through our solid financial position at the end of the third quarter with approximately $750 million of in-force premium and both of our insurance divisions being GAAP profitable and cash flow positive. But looking forward to Q4, we're building on this space by assuming policies from Citizens. We expect to close out 2023 within a stone's throw of $1 billion of in-force premium and we expect to cross that mark in early 2024. And while reaching this milestone will be an accomplishment, we are already planning for what comes next. There are several initiatives that we are looking at and each is in different stages of development. But one item of note is that we are in the process of forming a new reciprocal carrier in Florida.
The new carrier is going to be called Condo Owners Reciprocal Exchange and will mark our entry into commercial residential insurance space. Our application is currently pending regulatory approval and we hope to commence operations in early 2024. Beyond that, we have additional plans and we will stay, we'll disclose them as we go forward. Please stay tuned. And to summarize where we are, we had a solid quarter in Q3. In Q4, we will have additional growth in Florida by adding additional policies from Citizens and we are looking forward to a very bright 2024. With that, we'll open the line for questions.
Operator: [Operator Instructions] And our first question will come from Matthew Carletti with JMP Securities.
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