Nov 3, 2015
Executives
Kevin Mitchell - VP, IR Paresh Patel - Chairman & CEO Richard Allen - CFO
Analysts
Matt Carletti - JMP Securities Casey Alexander - Ladenburg & Thalmann Arash Soleimani - KBW
Operator
Good afternoon and welcome to HCI Group's Third Quarter 2015 Earnings Call. My name is Matt and I will be your conference operator this afternoon.
At this time, all participants will be in a listen-only mode. Before we begin today's call, I would like to remind to everyone that this conference call is being recorded and will be available through replay on December 3 later this evening.
The call is also being broadcast live and is available via webcast replay until December 3 on the Investor Information section of the HCI Group website at www.hcigroup.com. Now, I would like to turn the call over to Mr.
Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.
Kevin Mitchell
Thank you, and good afternoon. Welcome to HCI Group's third quarter 2015 earnings call.
With me today are Paresh Patel, our Chairman and Chief Executive Officer; and Richard Allen, our Chief Financial Officer. Following Paresh's opening remarks, Richard will review our financial performance for the third quarter of 2015, and then turn the call back to Paresh for an operational update and business outlook.
Finally, we will answer questions. To access today's webcast, please visit the Investor Relations section of our corporate website at hcigroup.com.
Before we begin, I would like to take the opportunity to remind all 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 events, these developments could have material adverse effects on the company's business, financial conditions, and results of operations. HCI Group, Inc.
disclaims all obligations to update any forward-looking statements. Now, I would like to turn the call over to Paresh Patel, our Chairman and CEO.
Paresh?
Paresh Patel
Thank you, Kevin, and good afternoon everyone. Welcome to HCI's third quarter 2015 results.
As most of you know, HCI Group is a holding company with subsidiaries engaged in various business activities. Our principal operating subsidiary Homeowners Choice Property & Casualty Insurance Company which provides Homeowners Insurance in Florida.
In addition, we have a Bermuda based reinsurance subsidiary, called Claddaugh Casualty Insurance Company, which participates in the Homeowners Choice reinsurance program. We used Claddaugh to retain selective levels of catastrophic risk.
We also have an information technology operation called Exzeo. Exzeo develops innovative products and services for Homeowners Choice, the insurance industry, and perhaps other industries.
Finally, we have Greenleaf Capital, which owns and manages a diverse and growing portfolio of real estate investments. We continue to invest in strategic opportunities to add to our existing operations and to further diversify our operations through other operating divisions.
Now turning to our results for the quarter. As Richard will expand on shortly, we reported profitable quarters for the third quarter marking our 32nd consecutive quarter of profitability.
A few important takeaways for the quarter are the following. One, our insurance subsidiary experienced increased claims activity due to a weather event in West Central Florida.
Secondly, we experienced investment losses primarily caused by a few investments in our equity portfolio in Q3. Despite this, we still generate $7.4 million of net income or $0.71 per share of diluted earnings per common share.
Also we paid $0.30 per share in dividends which marked our 20th consecutive quarter of paying dividends. Q3 is always our most challenging quarter considering our exposure to hurricanes and other weather related events.
We are very happy to finish the quarter with a substantial profit. But before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the third quarter.
Richard?
Richard Allen
Thank you, Paresh. Good afternoon everyone.
For the third quarter of 2015, income available to common stockholders was $7,371,000 or $0.71 diluted earnings per common share. For the same period of 2014, we reported income available to common stockholders of $14,052,000 or $1.23 diluted earnings per common share.
For the nine months period ending September 30, 2015, net income available to common stockholders was $54,771,000 or $4.84 diluted earnings per common share. Net income available to common stockholders for the same nine months period of 2014 was $48,106,000 or $4.07 diluted earnings per common share.
This reflects increases of 13.9% and 18.9% respectively for the nine month period. Gross premiums earned for the three months period ending September 30, 2015, were $103,842,000 compared to $88,944,000, an increase of 16.7% over the same period in 2014.
This increase was primarily due to the renewal of policies resumed in December of 2014 and February of 2015. Premiums ceded for the current three months period were $41,070,000 compared to the $27,684,000 reported for the same period in 2014.
The shift recognizes the increase in costs of our reinsurance program for the current treaty year that was impacted by rate increases from Florida Hurricane Catastrophe Fund and an overall increase in the units of reinsurance purchased for the current hurricane season. Losses and loss adjustment expenses incurred for the third quarter of 2015 were $26,200,000 or 41.7% of net earned premiums compared to $21,991,000 or 35.9% of net earned premiums for the same period of 2014.
The increase in losses and loss adjustment expenses in the quarter is a result of the extended rains in Florida and from development in prior year loss reserve. Operating expenses increased by approximately $900,000 quarter-over-quarter primarily the result of increased policy acquisition cost on renewal of the policies assumed from Citizens in December of 2014 and February of 2015, and an increase in salaries due to an increase in staff count.
Minimal increases are partially offset by a reduction in other operating expenses resulting from a reduction in our stock-based compensation expenses. Our investment portfolio generated a loss of $800,000 for the quarter compared to investment gains in the same period a year ago of $4,507,000.
In the current quarter, we recognized losses from limited partnership investments of $2,400,000 offset by approximately $1,900,000 in interest and dividend income, as compared with the same period in 2014, in which we realized gains of $3,294,000. During the current quarter, we recognized other than temporary impairment losses of $1,886,000 on two fixed maturity and five equity securities.
Our combined ratios pertaining to losses and loss adjustment expenses and operating expenses to net premiums earned are 78.6% compared with 72.1% for the quarterly periods of 2015 and '14 respectively. For the nine months period of 2015 and 2014, our combined ratios are 60.7% compared with 65.1% respectively.
Our combined ratios to gross premiums earned improved both quarter-over-quarter and for the comparative nine month period. On the balance sheet, stockholders equity has increased to $229,140,000 from $182,585,000 at December of 2014, an increase of 25.5%.
Invested assets have increased to $233,216,000 from $168,799,000 over the prior year end. Cash and cash equivalents at September 30, 2015, are $331,542,000 compared to December 31, 2014, of $314,416,000.
As has been discussed in prior earning calls, the benefit of the multiyear reinsurance treaties had been recorded in other assets of $31,836,000. Net book value per common share has increased to $22.32 as of September 30, 2015, as compared to $17.92 at December 31, 2014, an increase of 24.6%.
Our balance sheet continues to present a solid financial base for growth opportunities in the future. Paresh?
Paresh Patel
Thank you, Richard. We are very pleased with our results for the third quarter.
As the 2015 hurricane season comes to a close, we want to update our shareholders on a number of important initiatives. On January 1, 2016, we are implementing a rate decrease of 5% for Homeowners policies, 8% for our renters' policies and 2% for condo owners policies.
Rates for the dwelling fire policies will remain unchanged and our wind-only rates will remain unchanged until the fire rates in early 2016. We review these rate changes as a proactive customer retention tool because rate changes become effective upon policy renewal, it will take 12 months for these rate reduction to roll through our entire book of business.
Exzeo, our technology division continues to develop software products that helps drive efficiencies within our insurance division and creates future opportunities for both business and margin expansion. Greenleaf Capital, our real estate division has completed construction of the empty tenants at two separate retail shopping locations in Q3.
We continue to evaluate additional opportunities and expect more from Greenleaf in the future. Finally, Homeowners Choice has filed with regulators to expand its product offerings to include flood as a standalone product.
Additionally, we have a number of other exciting opportunities across all four divisions and we look forward to updating you on these developments in the future at the appropriate time. With that, we are ready to open the call for questions.
Operator, please provide the appropriate instructions.
Operator
Thank you, sir. This time we will be conducting a question-and-answer session.
[Operator Instructions]. Our first question comes from the line of Matt Carletti from JMP Securities.
Please proceed with your question.
Matt Carletti
Just had a few -- number of questions actually. You mentioned kind of the range and I guess some unfavorable on prior claims running to the loss ratio.
Could you kind of split that out as we look at the loss ratio kind of versus prior period? How many points for that is can you allocate to the rain and how much were you talking in terms of prior period adjustments?
Paresh Patel
Matt, roughly may be about two-thirds, one-thirds being -- two-thirds being the rain side of the increase, yes.
Matt Carletti
Right the delta versus kind of a cleaner quarter, yes.
Paresh Patel
Yes, so and the adverse development that Richard is talking about just to provide some color to it's the pick-up in all this AOB and the litigious society we live in, that's sort of coming back through the book here.
Matt Carletti
Got it.
Paresh Patel
So that's what's causing that.
Matt Carletti
Okay. Then on the investment income, I mean, I think Richard touched on the numbers, I apologize for not being able to jot them down fast enough.
But it was negative in the quarter and what again was driving that, what is flowing through is that the limited partnerships that's flowing kind of the volatility in the quarter flowing through net income as opposed to being a more below the line realized gains sort of market realized losses?
Paresh Patel
Yes, Matt. Really it's more of two pieces that are coming together.
One is obviously we have an OCCI Committee as has been discussed in previous quarters and they view and review all the holdings and mark them down when they see it as appropriate. And by the way they only go in one direction, they only mark them down, if it's comes back up again then they'll have to mark it up, okay.
Matt Carletti
Of course, yes, I see it, Paresh, yes.
Paresh Patel
Yes, this is how it's done. But so there is -- two-thirds -- are in that sense, so there were some markdowns coming from the OCCI.
I think it involved a total of eight security or six of them.
Richard Allen
Yes, eight.
Paresh Patel
Eight securities and a couple of bonds that's what it was. But it is then doing a job.
And the other thing was one of the limited partnerships which is more of a equity-based partnership. Q3 wasn't a good investment period and still we marked down mark-to-market.
So it isn't out of the fund or anything else but we mark-to-market.
Matt Carletti
Great. So, both of those in terms of the actual net investment income line, I see where often LPs would flow through but is the OTTI flowing through there too?
Because usually that's a -- I want to think of that as an income statement or a bit operating income sort of item.
Richard Allen
The OCCI is a separate line. There is two lines there on the statement, Matt, just below investment income and realized gains.
Paresh Patel
So simple answer to your question is yes it is going through the income statement.
Matt Carletti
Right. Through the income statement.
But I'm trying to get at what's going through the -- when you report a loss of $519,000 on net investment income, what piece is flowing through that net investment? Essentially what I'm trying to get at is absent the volatility in the quarter how should I look at net investment income on a more normalized basis?
Richard Allen
The net investment income includes the loss from the limited partnership.
Matt Carletti
Okay, perfect. I think I heard you say that was about $2.4 million?
Richard Allen
Yes.
Matt Carletti
Okay, perfect. That's very helpful.
And then, lastly, I know I didn't scribble them down quick enough. I know, Richard, you gave at least one of them.
Could you just repeat the gross written premium and net written premium in the quarter?
Richard Allen
Gross written premium in the quarter was $105,787,000.
Matt Carletti
Perfect.
Richard Allen
Net written premium for the quarter was $64,294,000.
Matt Carletti
Okay, great. Thanks very much for the answers.
I'll let somebody else get in the queue.
Operator
Our next question comes from the line of Casey Alexander from Ladenburg & Thalmann. Please proceed with your questions.
Casey Alexander
I'm interested in the strategy around the rate decrease first. There has been sort of a pretty regular 2% to 3% sort of premium attrition on a quarterly basis.
Is it your hope that the rate decrease will stem that policy attrition?
Paresh Patel
No, Casey. I don't say no that given how high our retention numbers are that they can go much higher.
So it isn't necessarily from that type. The other part of that is that, so it isn't to make them to go higher.
But I think you're looking at it, looking forward. You're looking at a much more competitive and softer insurance market, primary insurance market.
And better take a few preemptive steps than reactive steps when your retention starts moving in the wrong direction.
Casey Alexander
Okay, great. That makes some sense.
As regards the rain and also the settlement of the -- and development of older claims, do you expect any spill over into Q4 on either of those events?
Paresh Patel
The rain event, I think, we already are seeing normalized claim activity before the end of the quarter already -- before the end of Q3 because the rain events occurred in -- from mid-July to early August --
Richard Allen
Those should be settled by now.
Paresh Patel
Yes. So that that stuff has fairly passes by.
The second part about the adverse development, so this is increasing losses and that kind of activity reopening old claims activity. So that one, I would tell you -- I would like to hope it isn't continuing on.
But history tells me otherwise, yes.
Casey Alexander
Lawyers will be what lawyers will be.
Paresh Patel
Yes.
Casey Alexander
There was a pretty fair sized drawdown in the fixed maturity portion of the investment portfolio. Is that a strategic decision and it led to a pretty broad increase in cash on the quarter-to-quarter basis?
Is there a strategic decision being made? Is it in regards to the management of the portfolio?
Paresh Patel
Casey, I wouldn't necessarily talk in terms of strategic stuff but I could tell you what that drawdown is. In hindsight things look differently but going into midway through the quarter et cetera, the investment committee felt you may be looking at your upcoming time of rate increases.
Remember how certain everybody was about that September rate increase?
Casey Alexander
Right.
Paresh Patel
As a safety mechanism we went more to cash in the event that rates were increased which may have a -- had a negative impact possibly on the bond portfolio. So you needed to rebalance a little bit in that -- in those lines and that's all what went on.
So I don't think you can infer from that big strategic changes going forward, it was a time and a place.
Casey Alexander
Okay. And you said that I believe Greenleaf was working on sort of code development of a shopping center which they had an option to acquire at the end of the development period.
Has the company decided whether they're going to exercise that option and acquire that property? Or just finish up with the co-development of it?
Paresh Patel
Okay. So let me give you a appropriate answer.
What we will be announcing at this point is two of those co-development ventures have actually now opened for business which is great progress. And, yes, we have an option to purchase both of those properties, there is some delay in the time, the timeframe at which we can exercise our option, but we do have option on both properties.
As to what we will do, it would be inappropriate for me to speculate right now as to what -- which direction we're going to move on that. So we will make comments on actually pull the paper or pass on the figure.
Casey Alexander
Right. So you've finished the construction but you still have time to make that decision?
Paresh Patel
Yes, and that is the way it works is that the decision is made at some future point, not necessarily that time, not too distant in the future, but there is a point at which point we either say yes or no. And we're not at that point yet.
Casey Alexander
Okay. And lastly, I know several of the properties that the company owns are also in the Tampa area where you had the excess rain.
Was there any impact on the owned properties as a result of the -- I mean tremendous rain that fell? It was unbelievable.
Paresh Patel
Yes, actually I guess it speaks to how well we maintained our properties. So, no, there was no impact whatsoever on our properties.
Operator
Our next question comes from the line of Arash Soleimani from KBW. Please proceed with your questions.
Arash Soleimani
Thank you and good afternoon. A few questions here.
Was the increase in the seeded premiums percentage; was that from the wind-only policy? Was that the major driver there?
Paresh Patel
Good afternoon, Arash. You're talking about the premium ceded and the reinsurance, basically the reinsurance cost, right.
Arash Soleimani
Yes, premium ceded as a percentage of growth.
Paresh Patel
Yes, we are seeing a couple of things flow through there and just to provide color, we had released an 8-K talking how much reinsurance we're buying and you would have noted that we were buying a much taller tower than we have in years past. Part of that was because it was our first year with the wind-only book.
We wanted to be overly cautious of a single big event taking it to top of the tower. So we were increasing the height of the tower obviously that comes at a cost that you got some of that flowing through there.
The other item that's flowing through there is obviously a bigger book. And the third item is the cat fund, the Florida Hurricane Cat Fund changed couple of its allocations and the rate online that they charged for various reasons that we can go into if you're interested but I think most people are aware of them.
And the net result of that was that increased our reinsurance cost as well and that happened very late in the renewal cycle. So those are the three factors that increased that ceded premium.
But I think it will get better into 2016 season because obviously they're better handling with all those items going forward.
Arash Soleimani
Can you remind us what the reinsurance load is for the wind-only policies versus I guess a traditional homeowners policy?
Paresh Patel
We don't necessarily break it out separately and it is very difficult to break it out separately just because rates are lower but then the number of perils that you're covering is also lower. So you end up with lots of different moving parts.
But I think we are very well satisfied with the margins that we're making on the current wind-only book.
Arash Soleimani
Okay. And how was the October takeout progressing?
Paresh Patel
That just for the record the official date for the October takeout was October 27. I think Citizens will eventually publish a letter of who assumes what et cetera.
I think they've already sort of put out something about 48,000 policies in total were taken out across all the carriers. I think our portion of it was around 2,700 policies.
So I think the takeout of business is not bad yet, is sitting in ICU and there's like priests in the room.
Arash Soleimani
Okay. Thanks.
And in terms of I think Casey had asked about the adverse development, what basically was the year-over-year increase in the loss ratio, just to be clear? Two-thirds was from rain, one-third from adverse development?
Is that the right way to think of it?
Paresh Patel
Yes. I think -- if I'm not looking at that number in front of me, I think it's about 4 points, and I said about a point and a third would be adverse stuff and two and two-thirds would have been the rain.
Arash Soleimani
And was that -- was it a frequency or severity issue and --
Paresh Patel
Rain.
Arash Soleimani
Not more than that?
Paresh Patel
Let me talk about the rain may be that will clarify this for everybody. About a third of Homeowners Choices book is in the Tampa Bay area, which is mostly Pinellas and Hillsborough counties.
We have very little in Pasco County but that was affected across all these three counties. It sort of rained for around 20 days straight.
So much so that, you could -- you had places that was under a couple of feet of water not from any other than the rain was coming down faster than the drains could drain the water out. And we picked up increasing claim activity for this.
The claim activity that we pick up isn't some -- what happens is when you have that maturing that consistently, where some when a roof has a slight hole, in a normal rain event, windstorm, they may get two or three drops of water that comes to and it's usually absorbed by the insulation in the attic. Getting 20 days straight of rain and there are lot of inches of rain as well, you don't get the two or three drops, you probably end up with 200 drops.
Now the insulation gets soaked, the water comes through to the ceiling and et cetera, so you pick up claim activity from roof leaks and your internal damage from water running down walls et cetera those kinds of things. And that's what we saw in those three weeks of solid rain.
Obviously, it hasn't been raining since then, so those claim activities have reverted back to normal. So it's a one-time event.
But I don't want to make it seem like that's what we're in the business of. Losses occur.
And we're just pointing out what it was as opposed to, its unusual, though we -- three years ago, we were discussing -- three years ago we were discussing tropical storm Isaac and Debbie, there is always something. That's what it was this quarter.
That's why we liked -- we love getting out of Q3 with profit.
Arash Soleimani
Okay. And were there any water mitigation issues?
Richard Allen
Not really in the third quarter.
Paresh Patel
No more than that normally any other situation, the rains and the water mitigation issues were slightly different and it was also in different parts of the state.
Arash Soleimani
Okay. And I guess, in terms of your flood opportunity, there was a -- I guess NIFT rate change that went into effect.
Any greater opportunity there that you're seeing? If you could, can you talk a bit about that?
Paresh Patel
Absolutely so the flood opportunity and this is why we would -- to us it's getting better and better. And it's getting better and better for two reasons.
Obviously, when we originally got into a couple of years ago there was a massive rate changes the NFIT was pushing through but then they got dialed back. And so that changed the dynamics quite a bit.
But now, as the rate increases are going through, we are seeing increasing activity people are saying somebody could be moved to Homeowners Choice. So that is moving in our direction, it's a slow increase, but it's starting to increase in that fashion.
The other thing that is working in our favor is, in the interim two years with the small number of policies that we have et cetera. We have gained experience and developed better underwriting capabilities et cetera.
So we are actually more poised to take advantage of the situation as well. So both items are working in our favor.
And just to illustrate something that kind of do work in our favor. In the rains in Tampa early in the summer, we did generate our first two flood funds, which actually is very, very good from a learning and a systems and processes development perspective.
They weren't materially big, but it made sure that all of -- everything was we could see what we do in those cases et cetera. So I think we have a huge and growing experience base from which we can really expand on the flood opportunity, stay tuned for more developments.
Arash Soleimani
Thanks for the thorough answer. And I know this is your favorite question.
Can you tell us the policy count at the end of the quarter?
Paresh Patel
It is my favorite question. And I basically had an answer already so that I figured somebody would ask.
Quarter three and policy count is about 153,000 and that compares to about 148,000 last year, so it's up about 15,000 year-over-year.
Arash Soleimani
Okay. And numbers question, what was the GWP; I'm not sure if somebody asked what gross written premiums were?
Richard Allen
Gross written premiums for the quarter were $105,000,371.
Paresh Patel
Compared to --
Richard Allen
Compared to $86,085,000.
Arash Soleimani
Okay. And did you say what the actual dollar amount of the adverse was already?
Richard Allen
No. We did not.
Paresh Patel
No, we did not. Because part of what we're trying to mop that into is -- baking it out and make it appear that we think it's unusual one-time that kind of thing.
This is the business we are in. When you write insurance and reinsurance events occur, things occur and we generally just roll them into our earnings.
It's not exceptional.
Arash Soleimani
All right. But it was basically lawsuits in such system that ordinary course of business, I guess?
Richard Allen
We are in the business of insurance and it happens.
Paresh Patel
Yes. Just like the rain event, yes.
We didn't --
Arash Soleimani
All right.
Paresh Patel
Yes, we didn't break it out as a separate dollar item either, yes.
Arash Soleimani
Okay. And I guess, some of your competitors have been seeing some of their take out premiums return, I guess largely because of higher opt out rates.
Is that something that you're seeing as well?
Paresh Patel
Yes. We are.
I think different people will -- have different numbers in terms of what percentage are people are opting out. But we are seeing -- but we can all agree that we are seeing higher opt out levels.
Arash Soleimani
Okay. And what about retention?
I know you talked about the recent rate decreases to boost your attention. What is the retention you're seeing now in your policies?
Paresh Patel
Yes. Sorry, let me just correct you on that just because I did that with Casey.
We're not doing the rate things to increase retention. I think we're doing it to maintain retention.
The retention is already at such a high level that I don't think there are many things you can do to increase it. But we are reducing it -- partly retention, but partly also given our loss history and how things have worked out, rate decreases warranted.
So we're doing that. But where our retention rates are and I did look into that just before I came in here as well, year-over-year, if you compare first nine months of this year to the first nine months of last year especially policy books that were consistently the same.
Retention rates are consistent with last year. So we're not seeing a drop off in retention, it's staying at the same high level that it has stayed.
And I think that's --
Arash Soleimani
Was that 88% of that -- is that's the number you've thrown out before?
Paresh Patel
Yes. It is very high 80s approaching 90 kind of number, yes.
Arash Soleimani
Okay.
Paresh Patel
And we are staying consistent with that.
Arash Soleimani
I'm sorry, what was the last part?
Paresh Patel
And we're staying consistent with that. I think it reflects hopefully the satisfaction our policyholders have with us being their insurer what usually the largest assets I think just like when the rains came, a lot of people were happy that we were the carrier of choice.
Arash Soleimani
Okay. And did you -- I apologize if somebody had asked this already.
Did you say what the share count was, weighted average diluted shares outstanding?
Paresh Patel
No, we hadn't, but I think Richard is looking it up.
Richard Allen
The weighted earnings per share as for the quarter, it was $11,371,000 and for the year -- for the nine months period, it was $11,347,000.
Operator
Due to time constraints, this concludes our question-and-answer session. I'd like to turn the call back over to Kevin Mitchell who has a few closing remarks.
Kevin Mitchell
On behalf of the entire management team, I would like to express our appreciation for the continued support we received from our shareholders, employees, agents, and most importantly our policyholders. We look forward to our continued success.