HCI Group, Inc. (NYSE: HCI) Q4 2021 earnings call dated Mar. 09, 2022
Corporate Participants:
Matt Glover — Investor Relations
Karin Coleman — Chief Operating Officer and President of Homeowners Choice Property & Casualty Insurance Co.
Mark Harmsworth — Chief Financial Officer
Paresh Patel — Chief Executive Officer
Analysts:
Matthew Carletti — JMP Securities — Analyst
Mark Hughes — Truist — Analyst
Presentation:
Operator
Good morning and welcome to HCI Group’s Fourth Quarter 2021 Earnings Call. My name is Paul, and I will be your conference operator this morning. [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 April 9, 2022, starting later today. The call is also being broadcast live via webcast and available via webcast replay until March 8, 2023, 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 — Investor Relations
Thank you, and good morning. Welcome to HCI Group’s fourth quarter 2021 earnings call. On today’s call is Karin Coleman, HCI’s Chief Operating Officer; Mark Harmsworth, Chief Financial Officer; and Paresh Patel, Chairman and Chief Executive Officer. Following Karin’s opening remarks, Mark will review our financial performance for the fourth quarter of 2021, and then Paresh will provide an operational outlook. 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 this 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 events, 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’d like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?
Karin Coleman — Chief Operating Officer and President of Homeowners Choice Property & Casualty Insurance Co.
Thank you, Matt, and welcome, everyone. Thank you all for joining us this morning. 2021 was a decisive year for HCI Group with meaningful progress on key initiatives across the company. Our insurance division posted another strong quarter of growth, ending the year with annualized gross premiums of around $720 million, up 35% from a year ago. Both of our insurance subsidiaries grew while our consolidated gross loss ratio remained stable below 40%. At Homeowners Choice, we reported gross written premiums of $103 million in the fourth quarter, up from $97 million last year, benefiting from strong retention and rate increases while producing an attritional loss ratio of just 26%. At TypTap, we reported gross written premiums of $86 million in the fourth quarter, up from $42 million in Q4 last year. While for the year, annualized gross premiums more than doubled to just under $250 million, up from $100 million at the end of 2020.
TypTap started 2021 in one state, and at the end of the year was in 12 states and we have additional expansion plan for 2022. Our insurance carriers remain well capitalized with a combined surplus of more than $200 million. Looking back over two years, HCI has doubled annualized gross premiums while holding gross loss ratio flat below 40%. I’d say this is a remarkable accomplishment. These results speak to the effectiveness of our proprietary technology, its ongoing enhancements and the potential to scale our business at attractive margins as we expand market share. Moving on to Greenleaf, our real estate subsidiary, we closed the year with a strong quarter earning a profit for the full year. We’re very excited about our real estate asset, which include marquee commercial properties in rapidly growing Central Florida.
At year-end, our real estate portfolio had an appraised value of nearly $120 million with only $22 million in associated debt. We expect Greenleaf to sustain its momentum in 2022 as the team continues to capitalize on embedded value in our real estate portfolio. Now, moving to the group level. We’ve taken targeted actions to strengthen our balance sheet, reducing debt to capital to its lowest level in recent years. In the fourth quarter, we converted an additional $32 million of our convertible senior notes, reducing the outstanding balance to $24 million, down from $139 million at the beginning of the year. Together with the $100 million capital infusion from Centerbridge Partners early last year. We’ve increased our combined equity and preferred capital by more than $200 million while reducing our debt by nearly 70%.
The bottom line is that HCI Group and its subsidiaries enter 2022 on sound footing with strengthened balance sheet and the ability to grow without the need for external capital. In my closing, 2021 was a year in which we produce tangible results for our shareholders. We increased revenue, expanded our footprint and strengthened our balance sheet while growing book value per share 24% and paying our 45th consecutive quarterly dividend at $0.40 per share.
I’ll now turn it over to Mark to provide more detail on our financial results. Mark?
Mark Harmsworth — Chief Financial Officer
Thanks, Karin. The fourth quarter was another strong quarter for growth and another profitable quarter capping off a year of growth, profitability and balance sheet strengthening. The fourth quarter was profitable despite being adversely impacted by significant storm in the Northeast in late October. Gross premiums written grew by 36% in the quarter and grew by 34% for the full year. Gross premiums earned grew by 44% in the quarter and grew by 39% for the full year. While TypTap is — of course is leading the growth both of our underwriters are growing. Homeowners Choice gross premiums earned grew by 19% for the year and TypTap grew by 123% to more than double for the year. Consolidated gross premiums earned this quarter were another record for the company. And as Karin mentioned, annualized premium has grown to just under $720 million, which is about double what it was two years ago.
Let’s talk for a minute about loss expense. While loss expense is up in dollar terms, this is driven mostly by growth. The consolidated loss ratio was actually up very little less than 1% and that was mainly because of the change in business mix. The underlying loss trends are actually improving. The attritional loss ratios for Homeowners Choice and TypTap were both lower in 2021. For Homeowners Choice, it was about 26%, which is a couple of points lower than last year. For TypTap’s Florida homeowner business, it was 42.5%, also a couple of points lower than last year. The UPC business in the Northeast had a non-cat loss ratio of around 45% which is about what we’d expected. However, when we dig deeper into the data, we see that as we have gotten more involved with this business, we are seeing a decline in the core loss ratio.
While this is a work-in-progress, it is very encouraging and showing that this expansion model can be very effective. One more thing in the income statement, notice that interest expense is about half of what it was last year. This drop relates, of course, to the decrease in long-term debt, which I’ll discuss in a minute. And going forward, interest expense should be about a third of what it was in 2021. Let’s turn to the balance sheet. As we have discussed, we have been materially de-levering the balance sheet. We started the year with $180 million in debt and a debt to cap ratio of 47% and we ended the year with about $60 million in debt and a debt to cap ratio of about 16%. That’s a drop of $120 million in debt and a huge decline in debt to cap. Most of this came from converting our convertible debt to equity in the second half of the year.
At the end of 2021, we have just $68 million of debt. About $36 million of this is secured by real estate and the balance of convertible debt is now effectively extended for another five years. I wanted to make a few comments on cash flow and liquidity. Our operations are continuing to produce strong cash flows. Cash flow from operations for TypTap was $45 million for the year and consolidated cash flow from operations was just over $96 million, up from 76 — $77 million in 2020. There are a few things that drive the delta between net income and cash flow from operations. We had about $20 million of non-cash expenses, things like depreciation, stock-based compensation. As the business grows, we are collecting unearned premiums and the actual claims paid are significantly less than claims expense as we continue to build reserves.
As we’ve mentioned many times, we have two strongly funded insurance companies with a combined surplus of $214 million. At the holding company level, we have $70 million of cash and investments and access to $50 million of our $65 million credit line for total holding company liquidity of about $120 million. Just a few other numbers that might be helpful. Shareholder equity increased from $201 million at the beginning of the year to $324 million at the end. Common shares outstanding for the purposes of dividends and book value per share are 10,131,000 and fully diluted share count is about 10,380,000, including the diluted dilutive effect of warrants options and the remaining convertible notes. Book value per share was $31.92, up from $25.83 at the end of last year.
In summary, the company continues to grow. Loss ratios are declining, debt is down, equities up, cash flow is increasing, we have strong capital and liquidity positions at the insurance company and holding company level and we have the financial capability. We’d be more aggressive if profitable opportunities present themselves.
And with that, I’ll hand it over to Paresh.
Paresh Patel — Chief Executive Officer
Thanks, Mark. Building on mark — Karin and Mark’s remarks, all of the HCI operational units are performing well. I’d like to spend a few minutes on TypTap and the maturing expectations of investors. Market conditions have changed, especially for InsurTechs. Last year and the year before, all you needed to do was show growth and there was a strong demand for these types of companies. And as everyone is aware, enthusiasm for these companies has subsided considerably. In the market today, there is an expectation the company need to deliver rapid growth with a solid capital management plan. Along with this, there also must be solid — there must be solid underwriting and a path to profitability.
If you can show all four items, then you fulfill the high expectation the markets had last year. And I wanted to take this opportunity to update you on TypTap progress on the scale. First, let’s talk about growth. We are growing in Florida, doubling year-over-year for a second consecutive year. Outside of Florida, we continue to add premium across new states and with the two UPC transactions now complete, we have really accelerated our nationwide expansion. Second, let’s talk about capital. TypTap’s growth plans are fully funded and we see no need for outside capital. Furthermore, TypTap has a very strong corporate parent in HCI. Third, we should discuss underwriting. Results in Florida are coming in as we expected.
But more importantly, early results from our UPC Northeast transaction are very positive. In the time we’ve taken over underwriting and claims, we have seen several percentage points of improvement and this book of business is well down the path towards our long-term margin targets. The Exzeo technology is proving its effectiveness and we expect the technology to provide similar success with the UPC Southeast transaction. Finally and most importantly, let’s discuss profitability. Our segment results clearly show a strong track record of profits at Homeowners Choice. Our objective is to get TypTap to a point where it is having similar success to Homeowners Choice.
TypTap’s result — recent results include the full cost of our continued investment in Exzeo and also all the added cost of operating it as a separate company. Despite this, we think periods of profitability will be achieved in 2022. This will give us a very solid base from which to build from. And please note that I’m talking about actual profits, not just the path to profitability. As the months go forward, we think the market is going to clearly see and appreciate that TypTap is delivering on the actual promise of InsurTech. I am confident that over the time market will realize the full intrinsic value of TypTap which is not doing so at this current valuation. So, understanding where we sit operationally puts the status of the TypTap IPO into context.
When the market can — when market conditions change, we’ll re-evaluate, adapt and continue. From the beginning, our job has been to make sure we execute on our plan and yield maximum value for existing shareholders. And we are committed to that plan because we are in the early innings of maximizing TypTap’s full potential. In closing, TypTap’s top and bottom line results are on track and we continue to deliver our nationwide expansion plans. Our technology continues to be our differentiator as demonstrated by our track record of being a top performer in Florida and we are now excited by the results we are demonstrating outside of Florida. Because this proves that our technology works on a national basis.
And with that, I will open up for questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] And the first question is coming from Matt Carletti from JMP. Matt, your line is live.
Matthew Carletti — JMP Securities — Analyst
Hi, thanks. Good morning.
Mark Harmsworth — Chief Financial Officer
Good morning, Matt.
Matthew Carletti — JMP Securities — Analyst
I wanted to ask you an expense ratio question whether just if you could help us unpack the consolidated expense ratio. I know that there is some pressure on it from the investments you need to make to expand TypTap into more states before the premium ramps there and also the first year business that TypTap writes with the increased commission. Can you help us understand kind of what we’re seeing reported the numbers whether for the quarter or the year, just rough order of magnitude, what impact those couple of items are having on the expense ratio and where you might expect it to run once TypTap’s more scaled?
Mark Harmsworth — Chief Financial Officer
Hey, Matt, it’s Mark. Yeah, I think a coup — there’s a couple of things that are driving the loss expense, the loss ratio a little bit higher. I talked about loss expense earlier. Loss expense, I think, is trending in the right direction. On a consolidated basis, that’s pretty flat in the high 30s, that’s trending down which is helpful in terms of the overall expense ratio. What’s been trending up a little bit in 2021 on the expense side is operating expenses and the labor expenses and that’s largely been driven by scaling up TypTap separating the companies in sort of the expenses that go along with that. But we expect those numbers to come down a little bit going forward in 2022. A lot of professional fees that type of thing in 2021. So we expect the expense ratio to come down and to get closer to a longer-term target of 90 to 95 in the longer run.
Matthew Carletti — JMP Securities — Analyst
Okay, great. Very helpful. Just one quick one and then one last one, just on the numbers while we’re on it. You mentioned the more than $200 million of surplus. How much at year end we’re sitting at TypTap?
Mark Harmsworth — Chief Financial Officer
So $214 million is the total and for TypTap we’ve got $93.5 million or $93.4 million and then, Homeowners Choice is the balance.
Matthew Carletti — JMP Securities — Analyst
Great. And then last question, Paresh, just as we think about legacy Homeowners Choice, I mean, Florida, it has been a difficult market which historically for you guys has created opportunities over the years. Homeowners Choice has shown many different ways to take advantage of that. Can you just give us an update on how you’re viewing the Florida market broadly and what opportunities that might portend for Homeowners Choice going forward?
Paresh Patel — Chief Executive Officer
Sure, Matt. Two things. One is the Florida homeowners market yet again seems to be in free fall. I think a low — we have two companies go out of business in the last two weeks. There is various other pressures out there. I should note despite all of that stuff, Homeowners Choice on a stat basis actually made a slight income last year and we live in the same state with the same issues that everybody else does. It just shows you the power of the technology and once we stabilize the portfolio, how it can keep going through very adverse conditions which we currently have. So that’s me advertising the value of the current portfolio of Homeowners Choice.
Now let’s talk about future opportunities. Yes, because of how we always handle this on a long-term basis, we see a large and growing opportunity in Florida for those people that know how to do this, right? And I state that because it’s very easy to get involved, it’s much more difficult to exit successful years, the two recent liquidations show. Having said that, the other item that you need to get right is timing. And we are aware of both items. So we’re sitting here waiting and planning for the opportunity to be maximized and the timing to be correct. And that’s when we will take advantage of it. Hopefully, that answers the question, yeah?
Matthew Carletti — JMP Securities — Analyst
Yeah. Very helpful. Thank you for the answers and best of luck going forward.
Operator
Thank you. [Operator Instructions] And the next question is coming from Mark Hughes from Truist. Mark, your line is live.
Mark Hughes — Truist — Analyst
Yeah. Thank you. Good morning.
Paresh Patel — Chief Executive Officer
Good morning, Mark.
Mark Harmsworth — Chief Financial Officer
Hi, Mark.
Mark Hughes — Truist — Analyst
Paresh, you talked about periods of profitability for TypTap this year. Could you talk about what is driving that? I think that’s sooner than what you had communicated previously?
Paresh Patel — Chief Executive Officer
Yeah. Matt — sorry, Mark. The way things are going as these opportunities are mounting in Florida and elsewhere, we are starting to see the benefits of it. So one of the items, as I alluded in my opening remarks, was the Florida business is growing faster than we had even anticipated and obviously you’re now amortizing your expenses over a larger revenue base. So that gets you better margins. On a different note, as was also stated by both Mark and myself, on the Northeast business that we acquired, it’s improving at a much greater rate than we — even we had anticipated, right? Putting it in a different way, how effective our technology is even shocks us sometimes, just how quickly it gets things improved, right? And we continue to see the benefits of that. That’s what’s made this thing accelerate a lot quicker than we had originally anticipated, yeah?
Mark Hughes — Truist — Analyst
Okay. And just on that, the improvement you’re seeing in the Northeast, could you flesh that out a little bit? Is that — are you identifying the policies that are less profitable and non-renewing, is that the claims or the pricing actions making the difference, just a little more would be helpful there.
Paresh Patel — Chief Executive Officer
Yeah. And Mark, the simple answer to that is it’s all of the above. It isn’t that there is one item that suddenly makes the numbers improve. It’s better pruning of the book in the correct way, better pricing of the book, better expense management whether it’s on the admin side or the loss ratio side or the reinsurance side, all of those things coming together is what’s coming to — adding together and giving us a better combined ratio. So to my other comments that I had said, in InsurTech that is working.
Mark Hughes — Truist — Analyst
Understood. You, in the past, have been generous enough to talk about growth goals, especially at TypTap. I wonder when you think about 2023, 2022, if there is some broad strokes you might give us in terms of your top-line expectations.
Paresh Patel — Chief Executive Officer
Absolutely. Mark, what I will tell you is obviously with all the geopolitical events and everything else that are going on out there, the world is getting to be a choppier, noisier place. So we are — I think growth will be lumpy in our case at this point, but we — what I can clearly see is a path to that $1 billion of premium we talked about in 2025. So we will get there. It just is going to be in steps as opposed to a ramp if you get — if you see what I’m getting at, yeah?
Mark Hughes — Truist — Analyst
I do. And just to be clear, the $1 billion is consolidated or the $1 billion is TypTap?
Paresh Patel — Chief Executive Officer
No, I’m thinking $1 billion in TypTap might be possible.
Mark Hughes — Truist — Analyst
Okay. And then the — on the real estate, you — the appraised value is $120 million, I think. What’s the carrying value on the balance sheet?
Mark Harmsworth — Chief Financial Officer
It’s about $30 million less than that. I’ll give you the exact number in a second. But — so the — Karin mentioned appraised value is about $120 million, carrying value is about $83 million. It’s in a couple of different spots in the balance sheet but total carrying value for both values is about $83 million. One thing to just keep in mind about that, though — so Karin mentioned the appraised value, I’ve talked about the appraised value, we’ve talked about the delta between those two of about $35 million.
But one thing to just keep in mind, that is a very conservative estimate, because that appraised value is bank appraisal, right? And so those are typically fairly conservative and if you were to look at the market value of those real estate assets, I think it’s considerably higher than that. The appraised value is very, very conservative estimate of the full value of those asset or market value, sorry. Just something to keep in mind, we talk about appraised value because it’s the only thing you can verify, but it’s still pretty conservative.
Paresh Patel — Chief Executive Officer
Yeah. And Mark, building on what Mark just said — the other Mark just said, appraisals get done looking at previous comps and all those kinds of things. In a inflationary environment that we’re in with the real estate prices, especially here in Central Florida, as Karin alluded to in her comments, increasing of the rates they are, I think that portfolio of real estate that we’re sitting on is going to be worth considerably more than the $122 million or whatever the appraised value is when all is said and done. So — and the one thing everybody has known about us over the years, we were very patient in maximizing value. But we clearly see the opportunity, yeah?
Mark Hughes — Truist — Analyst
Yeah, yeah. And then, Paresh, you mentioned the timing to maximize the opportunity. Could you maybe flesh that out a little bit to what developments you’re going to want to see in the state, maybe regulatory development or financial development at the — among competitors, what’s it going to take to make it more likely that you can act with the capital you’ve got?
Paresh Patel — Chief Executive Officer
Yeah. Mark, I would tell you that while we always welcome regulatory action and legal action and everything else that would improve conditions of state and mainly because it would be beneficial for all policyholders, whether they’re ours or somebody else’s throughout the state, it will keep down insurance rates. We have never conducted ourselves in a manner whereby we hope that that’s going to happen because hope is not a strategy. Our — looking in the opportunities and timing of it is really fundamentally based on being patient and noting when the market is sufficiently pricing the risk and when we see that, that’s when we act upon it. Sometimes things look to be very favorable. But there is enough sure for — sure fire path to profitability.
And I think somewhere and some of our presentation materials, we talk about having made a profit 53 out of 57 quarters, right. That should basically tell you that we really value the fact that when we take on a book of business, we want — we needed to be profitable. It is what makes companies healthy and it is good, not only for the company, it’s good for its shareholders. And more importantly, it’s also good for its policyholder because that means you would be around for the long haul. So the short answer to your question is that I don’t have a calendar in mind as to when that they will occur. But we sit here and watch every day to see when that day arrives. And when it arrives, we will act upon it. We’re just getting ready for the day when we are called into action, yeah?
Mark Hughes — Truist — Analyst
Yeah. That’s right. And if I might ask, I think you’ve made the point that you should see TypTap improve over time that the goal is to get it to the level of HCI. Presumably that’s the 26% type attritional loss. How much progress you’re going to be able to make on that in 2022? Obviously, you’ve got a lot of growth coming on board and that influences it but should that be a number that we see improvement this year?
Mark Harmsworth — Chief Financial Officer
Yes. Hey, Mark, it’s Mark. So to keep in mind, though, I think we’ve talked about this before that the loss ratio for Homeowners Choice is a blended loss ratio of homeowners and wind [Phonetic] only, right? So if you look at the loss ratio for the homeowners’ piece of that, it’s more like 30% to 35%. So I think that that’s probably the more realistic target for where TypTap is headed rather than the 26% and we’re definitely making progress on that. I mean the attritional loss ratio last year — 2023 on TypTap HO was 45%. This year, it was 42.5%. It’s definitely trending in the right direction. And that I would say 35% is probably a better target for that and that’s definitely insight.
Paresh Patel — Chief Executive Officer
And Mark, building on what Mark just said, you look at those numbers, right, in a deteriorating market and also growing rapidly, which tends to give you some adverse selection, the loss ratio actually improved by 2.5 points. Pretty remarkable when you put that perspective insight, yeah?
Mark Hughes — Truist — Analyst
Yeah. Appreciate it. Thank you very much.
Mark Harmsworth — Chief Financial Officer
Thanks, Mark.
Operator
Thank you. And this concludes our question-and-answer session today. I would now like to hand the call back to Paresh Patel, Chairman and CEO at HCI, for closing remarks.
Paresh Patel — Chief Executive Officer
Thank you. I was going to start with just thanking the entire management team — on behalf of the entire management, we thank the shareholders, employees, agents and most importantly, our policyholders for their continued support. I also know that there are a lot of shareholders in this call and everybody is anxious about the share price and the stock price and everything else. So I just thought a few comments might be helpful. Given all the operational results we are talking about and we’re seeing, my simple opinion, we have a fantastic opportunity that’s in front of us and the run-up in the stock price last year was merely a preview of the of the future prospects of HCI Group.
And putting it simply, HCI’s best day is still ahead of us, not behind us. But I can also appreciate that you might just look at that and say, those are just talking points and platitudes. Let me talk about walking the walk. Even when the share price run up just last year all the way to $139.80 which I believe is the all-time high, you will note that none of the insiders, myself included, especially myself, sold a single share, right? We are putting our commitments in our actions that our best days lie ahead of us and the true value of HCI has not yet been realized. So stay-tuned for us to take actions on those behalf going forward. Thank you and see you in the next quarter.
Operator
[Operator Closing Remarks]