HCI Group, Inc. (HCI) Earnings Call Transcript & Summary

Good morning, and welcome to HCI Group's conference call to discuss Centerbridge's investment in TypTap. My name is Kate, 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 1, 2021, starting later this afternoon. The call is also being broadcast live via webcast and available via webcast on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Rachel Swansiger, Investor Relations for HCI. Rachel, please proceed.

Thank you, and good morning. Welcome to HCI Group's conference call to discuss Centerbridge's investment in TypTap Insurance Group. With me on today's call is Paresh Patel, HCI and TypTap Chairman and Chief Executive Officer; HCI Chief Financial Officer, Mark Harmsworth; and TypTap Insurance Company's President, Kevin Mitchell. 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 risk 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. Now with that, I would like to turn the call over to Paresh. Paresh?

Thank you, Rachel, and welcome, everyone. I hope everyone is healthy and staying safe. It's an exciting time for both HCI and TypTap Insurance Group. TypTap is our InsurTech company consisting primarily of the insurance operations of TypTap Insurance company and the software development arm known as Exzeo. TypTap is like an oak tree that HCI has been nurturing from an acorn for several years. As you saw on Friday, we announced TypTap Insurance Group received $100 million investment from Centerbridge Partners, who are a leading New York-based private investment firm. The purpose of this call is to discuss TypTap and the Centerbridge investment. Matters specifically involving HCI will be discussed at HCI's next earnings call, which is on March 11. Centerbridge's $100 million investment represents about 11.75% of TypTap Insurance Group and implies a post-money valuation of approximately $850 million for TypTap Insurance Group. In a few minutes, TypTap Insurance Company President, Kevin Mitchell, will review the transaction details and share why we are so excited to be partnering with Centerbridge. The strategic infusion of capital by Centerbridge provides TypTap with the important resources to support national expansion and to accelerate its corporate mission, which is to simplify the insurance experience for agents, consumers and, of course, our own operations while generating profits. TypTap's data, data analytics and internally developed technologies have allowed us to drastically simplify the underwriting process. For example, an insurance agent answers only 2 underwriting questions for flood insurance or 4 questions for homeowners insurance. Our system then finalizes the code and if the code is accepted, binds the policy. So instead of pages of questions, TypTap's modern system greatly streamlines and simplifies the underwriting process so our agents can get a binding quote in less time than it takes to make a cup of coffee. We have revolutionized the process by pre gathering almost all of the data needed to furnish a quote and using automation, making the process quick, simple and profitable. This automated database process allows us to select policies that deliver profitable results while, at the same time, mitigating risks. Unlike other insurance companies that evaluate risk to -- on a ZIP code or a neighborhood level, we evaluate risk on a much more micro level, house by house. And since 2018 when we launched TypTap's homeowners insurance product, premium growth has exploded. Total TypTap premiums, including flood, have increased sevenfold in the last 2 years. TypTap ended 2020 with $105 million of annual recurring premium, and TypTap have achieved this level of growth organically with a very low cost of customer acquisition. I'll now turn it over to Kevin to walk us through the transaction details. Kevin?

Thanks, Paresh. It is a pleasure to speak with all of you today. We're excited to be partnering with Centerbridge. As Paresh mentioned, Centerbridge's $100 million investment represents approximately 11.75% of TypTap, and we believe the investment implies a TypTap valuation of approximately $850 million. We believe Centerbridge's investment validates TypTap's unique technology, profitable underwriting model and strong growth record. In exchange for its investment, Centerbridge received from TypTap preferred stock and dividends and other customary rights. They also received from HCI a 4-year warrant to purchase 750,000 HCI common shares at $54.40 per share. The preferred shares automatically convert to common shares upon completion of an IPO that meet certain parameters. In connection with their investment, Centerbridge will appoint 1 director to both the HCI and TypTap Boards. We have gotten to know the Centerbridge team well over the last several months and are impressed with their deep knowledge of the insurance and technology space. We look forward to working with their team and benefiting from their collective experience and guidance. As some of you know, we have begun rolling out TypTap nationally. We believe the total addressable U.S. homeowners market is $105 billion. Our growth goal for 2021 is for TypTap to surpass $200 million of recurring premiums. Our 10-year goal is to generate $5 billion in revenue with a 10% operating margin. I'll turn the back -- the call back over to Paresh for final remarks.

Thanks, Kevin. There are a few takeaways I want to leave with you before I open the call to questions. One, TypTap premiums have grown sevenfold in the last 2 years to end at $105 million. Two, the total addressable market of U.S. homeowners is $105 billion, and our goal is to capture 5% of that over the next 10 years. And finally, this Centerbridge investment represents the first step operating entity. And with that, we are ready to open the call to your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question today is coming from Matt Carletti.

Matt Carletti with JMP. First off, congrats on the deal, guys. Really, really nicely done. I'd like to ask -- I guess the first question is around some of the terms of the deal, and I understand there might be only so much you can disclose. But specifically, as it relates to the preferred shares, you mentioned in the press release a dividend and liquidation redemption preferences. Just curious kind of what that dividend looks like or what you can tell us in terms of some of those terms. And then the language around convert to common upon a qualified IPO, are there any parameters there you can tell us? Specifically, is there anything around timing or valuation?

Yes. Thanks, Matt. In terms of the question, so I think there was a whole slew of items in there. The preferred shares, I think, initially carry a coupon of around 5%. And it does change over time, but that's what it is. The IPO metrics where preferred converts to common had to do with basically the valuation of the company. They're not really time based but more valuation based. And as long as we do an appropriate IPO and raise enough capital at an appropriate valuation, the preferred turns into common stock. And I think all of the details and all of these things probably will be laid out in excruciating detail in the 8-K that we file shortly on the matter, yes.

Okay. Wonderful. And then more just strategic items. Can you help us with -- you gave us a little bit of a better picture there. You'd provided kind of the $200 million guidance into '21 before. Now we kind of have the path to $1 billion-plus by '25. Can you help us a little bit with kind of what that looks like? I mean we have the phases and then the states and so forth, but you've made some good progress along the way. Can you just help us with that path from $100 million in '20 to $1 billion in '25 and what we should be looking for in terms of the big steps that you guys are getting there as you expect?

Yes. Look, Matt, as we've been demonstrating for the last few years, TypTap is on a trajectory that's doubling in size every year, right? And it's now getting bigger and bigger. So like last year, we doubled from $50 million to $100 million. The year before, we had really grown. So as you sort of start doing this stuff, it starts adding up. By the end of 2021, we'll be over $200 million. And then you've still got 4 more years to go. And I don't think that doubling will continue forever more. But I think we might go from $200 million to $400 million to $600 million to $800 million to $1 billion. That's the kind of easy runway to $1 billion. In terms of the mix of that business, I think when we get to that $1 billion, there should be premium coming from throughout the U.S. in a number of different states, et cetera. And it might include products beyond homeowners and flood as well. It's just step by step where we -- wherever we are, we say what the next iteration is that we need to do and off we go. Does that help?

Okay. Great. And it does, yes. And then just last question for me. Are there any -- you guys have always been, I think, sitting in Florida, pretty good with reinsurance and exposure management and things like that, I think one of the best amongst peers. Can you provide us any updated thoughts on how you're thinking about -- you're going nationwide. We did see a historic frequency of windstorm in '20 that impacted a lot of your peers that had expanded quite a bit. We're now dealing with, I'd say, a pretty historic unmodeled Texas loss. How are you guys thinking about managing both kind of frequency and severity as you become a more nationwide company?

Great question, Matt. The -- look, most people when they expand -- actually, 2 things. A lot of large carriers don't like doing business in Florida because they just can't figure out how to make it work. TypTap obviously is associated to making Florida work. The other thing is a lot of our other Florida peers expanded beyond Florida as a means to sort of diversify and take -- move away from Florida. We are not expanding with that frame of mind. We are expanding -- we like Florida. We like the business we have here, and it's going to keep growing. We're adding other states to Florida, and that is an important distinction that we're adding other states as opposed to we are moving away from Florida. What I mean by that is that each state that we approach, we look at it and say, "What does it take to -- for that business to be profitable as a stand-alone business?" We're not trying to just bolt it on onto Florida. That distinction, while it may seem subtle, is extremely vital. So when we expand, for example, in the Northeast, which we're supposed to do later this year, we will probably be buying a separate tower for the Northeast business. It will have to stand and be profitable by itself. We are not trying to say it leverages Florida's size and scale to be profitable, and that applies throughout the rest of the expansion as well. So that is a major difference to the model people have followed in the past.

Our next question today is coming from Mark Hughes.

It's Truist Securities. Kevin, you had mentioned 10%. Is that -- I didn't hear it clearly. Was that a 10% underwriting margin was the target? Is that what you said?

Yes, that's correct.

And then, Mark, if you wouldn't mind, remind me on the capital situation at TypTap maybe at year-end versus Homeowners Choice at year-end and how much at the holdco.

Well, I can talk about TypTap. We'll talk about HCI holding company on the earnings call next week. But in terms of statutory capital for the end of the year, there's about $38.5 million in TypTap Insurance company. And as the guys mentioned, that's supporting about $105 million of premiums in force. So the insurance company is pretty well capitalized at the end of 2020 before the...

Understood. And then Exzeo, I wonder if you could give us a few thoughts at this point, whether that was central to the investment, how you see that from a value-creation perspective on a go-forward basis.

It was always part of TypTap Insurance Group, and we -- because TypTap Insurance company does nothing but utilize Exzeo technology to do all the wonderful things I talked about in my prepared remarks. Exzeo built the technology, TypTap utilizes it. And so it makes the 2 pieces, one's insurance and one's tech, that belong together, and that's why we put them together in TypTap Insurance Group. So there's no separation there, yes.

Understood. Just so we can think about valuation, as we think about it today, you'll talk about Homeowners Choice on the call, but how do you foresee that legacy business developing over time? Once we presumably separate TypTap or do so in the future, what -- how do we look at Homeowners Choice?

Again, Mark, not to be difficult, we will be discussing Homeowners Choice and HCI's prospects on the March 11 call, right? The key thing here that we want everybody to walk away from is that TypTap is now -- as we had sort of said, our goal was -- many months ago, was to be looked at and to be separated out and valued and is designed to be a separately both capitalized and a separately operating entity. And we have just taken a huge leap in making that happen today, yes.

Yes. Yes, I agree. I'm just trying to do sum of the parts, just thinking about it that way now that we've got a new kind of valuation marker on this one. Can you talk about -- I know you...

Mark, if I could help you with that one, right?

Yes, please.

So one of our shareholders actually called up over the weekend and was congratulating us kind of thing. But that sort of pointed out that I think TypTap is now being valued collectively with the Centerbridge portion of it, et cetera, at about twice the market cap of HCI -- the entire HCI Group was, let's say, on Thursday night, right? That -- the comment about we've sort of been growing an asset from an acorn and it's been hidden from you until it suddenly springs into life like it does today, so that's roughly the scope of what has just happened, yes.

Yes, yes. And then I know you're going to give us some details in the 8-K. I'm just trying to understand the nature of the preferred Centerbridge's investment here. To what extent is this -- they're clearly getting a coupon, a moderate coupon but they do have a coupon. What sort of protections do they have? I just want to understand the nature of this as an equity investment rather than kind of a debt-like investment. If you could amplify on that, it would be helpful.

Absolutely. Look, because -- the nature of these deals, what people do is it's a preferred -- it initially comes in as a preferred investment. And a preferred investment has a coupon. Like I said, initially, I think it's around 5%, which isn't that much different to the kind of dividends we already pay our common shareholders. So you have that. The other part of it is in terms of rights that you have as a preferred shareholder. It's basically a 4-year preferred share issuance. And 4 years from now, if -- in the worst-case scenario, we have an obligation to repay their $100 million with interest, should we come to that point. But obviously, neither Centerbridge nor us are going into this deal thinking that if they ever get paid that money back with interest, that is -- that was a desirable outcome. So that's the downside protection that you normally get in these kinds of preferred share issuances. And of course, should we complete an IPO at an appropriate valuation, as we sort of talked about earlier, the preferred shares convert into common, and then everybody is in the same playing field.

Right. Just as you say there, 5% dividend is not -- that doesn't hit their hurdle rates, so their assumption is better things will happen clearly.

[Operator Instructions] Your next question is coming from Bill Broomall.

Dowling & Partners. I just had a quick one first on the mechanics. Looking at the statutory filings, I saw that in Q3 and the beginning of Q4, in November, you made a change to this statutory structure of the firm where you form TypTap Insurance Group. Just so -- for my benefit, is Centerbridge making the investment in TypTap Insurance Group, the new formed, which now kind of sits as its own separate kind of tower in your organizational structure?

Bill, it's Kevin. Yes, the investment is in TypTap Insurance Group, the insurance company; and then, obviously, the Exzeo technology.

The money is coming at the insurance group level, yes.

Okay. Got it, got it. And then the second one I had was in Q2 -- your Q2 earnings call when you were first talking about nationwide expansion, kind of left the door open to a lot of different options to help facilitate you to get you to your goals. And at the time, you talked about outside investment, joint ventures, a lot of different things. I was wondering what made Centerbridge a great partner for you and going this route to help support your aspirations.

Great question. What I would say is that we found kindred spirits in Centerbridge. And those of you that have followed us for years know that we'll extend ourselves to look at things and we see opportunities where people just see obstacles. We found in Centerbridge people who view the world very similarly, and they looked at TypTap and saw opportunity. Everybody else -- just everybody else -- a number of other people looked at it and said, "Oh, it's part of a public company. How do you break it out, et cetera?" And they saw nothing else. But Centerbridge did their homework and saw opportunity. And they were the first guys to do it, and that made them simply wonderful to us, yes. Okay? And they're like, basically, the combination of both a tech and an insurance capability that we have, yes.

Got you. And maybe just one last one for me. I know you're getting licenses and approvals in all these different states, and it's moving along quite nicely. And the Northeast will quickly ramp up given what you announced at the end of the year. But outside of that type of unique transaction, how has the agent response been outside of Florida, to what extent you've had them so far in terms of your technology and getting up to speed on your TypTap story and what you're trying to accomplish?

Bill, it's Kevin. We've received a lot of outreach from agents across the country, specifically with a lot of the franchise models out there that deal with us in Florida. And right now, they're just interested to know when TypTap is going to enter their specific state. And the reason they're interested to join TypTap is they see the true efficiency that it brings their respective agency.

Got it, got it. That's helpful. And maybe one last one, I guess. In the InsurTech sphere of companies that are out there, universe, we've seen examples of companies that are growing for growth's sake and trying to ramp up the premium really quickly and then "We'll fix pricing later and get -- that will come with time, and we can kind of earn cash." But can you maybe elaborate on how you think about cash burn or -- for lack of better word, and growth and how you might compare those or weigh those when you're thinking about the state expansion and how quickly you might want to ramp it up or what targets you need to see that you'll maybe -- you'll start out slow and then you'll see something -- you'll see the numbers will show up where they do and you'll think, "Okay, we can grow a little bit more?" Can you just help us think about that? Because obviously, there's -- Centerbridge has aspirations for growth in there, but I'm assuming they don't want their money just to be burned into new states. There's got to be some profitability standpoint on stock -- from that standpoint. Can you maybe help us think through that?

Absolutely. Look, actually, this is one of the things that made the partnership happen, was we had a long conversation about that. We've gotten the way we have because we tend to be very good stewards of capital. Just because we have money, it doesn't mean spending lots on advertising and rapid growth. It has to earn a return, and we have a 14-year track record of doing that in the public domain. So we have that discipline. And where we really sort of looked at it the right way was that what we do and what we've always done is we'll do 5 things, some of them will work, some of them won't. The ones that work, we'll do more of, and the ones that don't, we said we tend to shut off very quickly, right? We are not sort of shy about turning off things that don't work. It has always been in our nature. For those of you that have watched our track record over the years, there have been years when we actually shrunk the business because we're not getting paid to take the risk. And I think when we had those discussions with Centerbridge, I think it was one of the attractions of the deal that you're looking at an InsurTech company that worries about economic viability and growth as opposed to just growth at all costs. I'm paraphrasing your question back at you, yes.

Our next question today is coming from Bill Garvey.

Hilton Capital Management. Kudos, Paresh and Kevin, for this great transaction. I have a couple of questions and then just a comment. So currently, how many states are you -- is TypTap operating in? And how many additional licenses would you expect to have by the end of the year?

Yes. Bill, this is Kevin. Right now, we operate and write business in Florida. We've received certificates of authority in 11 other states, and we're busily working to get onboard and writing policies in those respective states. The rest of the states, the initial 20 will come online this year. In addition to that, we have the Northeast states that we're working with regulators right now, the UPC transaction, which is Massachusetts, Rhode Island, Connecticut, New Jersey.

Okay. And when you sat down with Centerbridge and you started to have this discussion, where there -- a lot of times, the reason people make money is because they don't go invest in something, they have a void there. Are there areas in the country that you have said -- because you guys have operated where the risk matrix is, as Paresh pointed out, as important, if not more important, than writing business, so are there places where you have decided -- Texas was mentioned, maybe California, where you said, "Listen, the risk is greater than the potential premium?" Is that a decision that will be made, I assume, by the TypTap Board in conjunction with Centerbridge? Or what's the protocol that's going to be in place for further expansion with this partner that you have going forward?

Great question, Bill. The part of this whole thing about separate operating and capitalized entity is we have formed a separate TypTap Board. The only overlapping Board members between the TypTap Board and the HCI Board are basically myself and the Centerbridge representative, a gentleman named Eric Hoffman. So we are the only 2 Board members that overlap. Everybody else is separate. And the second part about that is, as you would expect any Board to do, they will look at the business case of why a state should be expanded into. But equally well, the same Board will also look at this and say, "Unless there's a profit opportunity, we don't just go into a state just for the sake of it." Currently, as you've seen our expansion, we have not yet applied for licenses in Texas, California, New York, Louisiana. And it is nothing against those states in particular. It's just for various reasons, it doesn't make sense for us as a business to be there yet. Who knows over the -- a decade is a long time. Over that time frame, we probably will end up in all those places, but just not yet.

Okay. Paresh, you mentioned that the money -- that $100 million is going in on the insurance. So it's going in on the HCI side for them to own that 11.75% or 8.75% and with the warrants. So will -- are -- those dollars that HCI is receiving, are those slated to only be utilized on the TypTap side? Or are they slated to be used over the whole entity on the insurance side?

Bill, sorry, I think we were trying to communicate that the $100 million came into the TypTap Insurance Group. It is basically under the control of the TypTap Board, yes.

So it's strictly for the TypTap operation, has nothing to do with the other parts of HCI, whether it be on the holding company side or on the Florida insurance side. Well, Florida...

Correct, yes. Oh, the other Florida insurance carrier, Homeowners Choice. The only other item I would tell you is because of the timing of the transaction, HCI Group had loaned TypTap Insurance Group $22 million at the end of last year. And part of this transaction -- that's the only money that's going to leave the TypTap Insurance Group, is the repayment of that $22 million loan. But everything else stays in the TypTap Insurance Group and will be allocated by the TypTap Insurance Group Board, yes.

Okay. And just as a comment, obviously, as a longtime investor in HCI, whether it be on the equity or the debt side, we're thrilled with this transaction. And I think your expectation that this is only -- supports the company growing 200%, maybe you may be sandbagging some investors out there because I think, long term, with the way you're going in fintech and just the overall ability to take those 2 things, insurance and technology, and blend them together, I think the sky is the limit. And once again, congratulations for such a great job.

Bill, thank you, and it's good to hear such support from one of our long-term shareholders, yes. Thank you.

Our next question today is coming from Ray Cabillot.

I'm with Farnam Street Capital. Paresh and Kevin, congratulations. This seems like an awesome transaction. I was wondering if you could discuss the economics of your customers a little bit. My understanding is Internet and app-based and specifically, property and casualty insurers tend towards renters and kind of lower premiums, and it's a little bit harder to generate profitability. And I was wondering if you could discuss your customer base, if it kind of fits more into that category. Or is your average premium a little bit higher than kind of a renter or a starter home type of customer?

Yes. Ray, this is Kevin. We really focus on the middle market. For us, it's a middle market homeowner, and in Florida, on average, the annual premium is approximately $3,000. Now that's going to change as you embark on other states, but that's where it sits right now in Florida. And that's where we see the opportunity is. And as Paresh and I mentioned during our opening remarks of the $105 billion TAM, a huge chunk of that is the middle market space, and that's going to give us the opportunity to underwrite and select the profitable risks across the country.

Yes. And Ray, building upon that, the other side of this, if you think across different products, we aim -- where we think the homeowner market is -- or the property market is in the U.S., which is homeowners market -- homeowners category, we are not aiming at somebody who's renting today and will eventually get to buying a house. We are aiming at the people who already own a house and providing them a good product -- or a great product at a good price. And the rapid growth of TypTap in Florida sort of just puts up the numbers that shows that, and we're going to now take that to the rest of the country. But the neat thing, what we're doing is once we acquire a customer, we don't really need them to do anything. We just want them to be there, go about their daily lives and continue doing what they're doing, and we'll do just fine. So that gives us a very different model to some of the aspirational other business models that are out there, which expect to have a customer evolve with the carrier over multiple years and multiple life transitions. We're not counting on any of those things, yes.

And as a bit of a follow-up, in Florida, you grew rapidly from 0 at very profitable levels, surprisingly profitable levels. And I know every state will be different, growth rates will be different, economics will be different. But is the expectation that most of the states -- or as you're entering states, you're turning to a profitable level at a relatively quick rate?

We always hope for that, right? But I would tell you that you should step back and think about it this way, right? TypTap -- actually, by the way, today is the 5-year anniversary of the first policy that TypTap ever wrote, right? It was 0 revenue this time 5 years ago, and we've grown from that to this. And obviously, as Kevin mentioned earlier, that's entirely been done in Florida. And people sometimes look at them and say, "Oh, you sit in Florida." But let's put Florida into context. Florida is such a tough market that most of the large national players curtailed their operations in Florida 1.5 decades ago because they said it's difficult to make money here. Most of the industry, over the last 5 years, hasn't really had a good outcome. And in the middle of all of that, TypTap with its technology has grown from $0 to $100 million and done so with very good economics. So it's almost like as we go to these other states, we're kind of paraphrasing that New York line, right? If you can make it in Florida, you can make it anywhere, yes.

That helps a lot with the understanding. Again, congratulations. Just -- this is an awesome transaction for the future of the company and your growth opportunities.

Thank you. We feel the same way, yes.

Our next question today is a follow-up from Mark Hughes.

Just curious on the timing of the need of the capital, kind of what underwriting leverage you anticipate with TypTap. If you've got $38.5 million there, what's the leverage ratio target? And it sounds like some capital will be sitting on the sidelines at least for a little bit. Is that fair?

Yes. Mark, simple math. $38 million, $105 million of surplus is -- you could sort of say 3:1. You could probably stretch it a little bit from there as well. I think we have enough capital on hand to probably -- and we'd have to do some positioning correctly and everything else, but we could probably grow this business with the capital on hand to easily north of about $400 million, just with the capital on hand from the Centerbridge transaction, yes. So we have a lot of runway ahead of us, yes.

That's all the time we have for today's call.

We want to thank everybody for participating in the call today, and we look forward to updating you on future developments.

Thank you all.

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.