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

Good afternoon, and welcome to the HCI Group Investor Call. My name is John, and I will be your conference operator. [Operator Instructions] Before we begin today's call, I would like to remind everyone that this conference is being recorded and will be available for replay through February 21, 2024, starting later today. The call is also being broadcast live via webcast and available via webcast replay until January 22, 2025, 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.

Thank you, John, and good afternoon, everyone. Welcome to HCI Group's Investor Call. On today's call is Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Before we begin, I'd 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 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'd like to turn the call over to Mark Harmsworth, Chief Financial Officer. Mark?

Thanks. Good afternoon, everyone, and thank you for your time. We've made a couple of announcements recently and wanted to take a few minutes to explain them in a little more detail. Earlier this month, we sent out a press release explaining that we've notified the remaining holders of our 4.25% convertible notes of our intention to redeem them. The holders have already begun the process of electing to convert them into common shares, and we expect that to be completed before the end of the first quarter. As a result of these conversions, consolidated total liabilities will decrease by $23.9 million, stockholder equity will go up by the same amount, the debt-to-cap ratio will decline by about 4.5%, interest expense will decrease by just over $1 million a year and book value per share will go up by about $1. There will be some dilution, of course, but the 397,000 shares issued will not affect the fully diluted share count because in this calculation, these shares are already accounted for as if they had been converted. Today, we issued a press release stating that we'd extended the term of some of the warrants held by Centerbridge. 450,000 of the warrants had their expiration dates extended. We will book a small, onetime, noncash charge to stockholder equity in the first quarter for this. Today's press release also announced that our subsidiary, TypTap Insurance Group, repaid the $100 million invested by Centerbridge back in February of 2021, fully redeeming the preferred shares that had been issued to them. We've been preparing for the potential of this repayment for a while now. As mentioned on the last earnings call, we had $167 million of cash and financial investments at the holding company level as of September 30. We earmarked $50 million of that for this purpose, and the balance of the payment came from our credit facility with Fifth Third Bank. You may recall that we recently renegotiated that facility, and it was with the potential of this repayment that we did that. $50 million is specifically spelled out in that agreement for this purpose, and its repayment to the bank is termed out over a 5-year period. The interest rate on that is floating and is currently about 7%. There are a number of significant positive impacts from redeeming the preferred shares. First, our debt-to-cap ratio will drop a further 3% even though we financed half of the repayment. Second, our earnings per share will go up because the dividends paid to Centerbridge were a reduction of earnings available to shareholders in the earnings per share calculation. Third, HCI's ownership of TTIG is now well over 90%. Lastly, the facility we use to finance half of the repayment is a much more flexible financial instrument. Because it's within the envelope of the credit facility, we can pay it off at any time or even borrow back some of the principal payments made. And so it is fully flexible. In terms of timing, the potential Centerbridge redemption was about a year away. But in February, the dividend rate on the preferred shares would have gone up from 7.5% to 9.5%. We had the money set aside, and so it made sense to do it now and avoid the most expensive year on that contract. The money for this repayment is coming from capital that we already had at the holding company and our credit facility. The new capital that we raised back in December was raised for growth, and that money is still there after this transaction. Also, today, we filed a new S-3 registration statement. We needed to file that in order to register the Centerbridge warrants and the shares underlying the warrants if exercised. As part of that new registration statement, we included the capacity for an ATM. We do not have any immediate plans to use this. And with that, I'll turn it over to Paresh.

Thanks, Mark. I wanted to take a few moments to elaborate on some of Mark's comments. But before I talk about our relationship with Centerbridge, I wanted to provide a quick update about TypTap's January assumption business from Citizens. The assumption is pretty much complete and results in the addition of a further 9,500 policies and a premium of $53 million. So in total, between TypTap's December and January assumptions, we have added approximately 16,500 policies and over $83 million of in-force premium. Moving on to the converts. We've already begun the process of converting them and [ $14 million ] has already been converted as of this call. So in terms of cleaning up the balance sheet, we are making very good progress. Finally, moving on to the bigger item, which is the transaction with Centerbridge that we've announced today. Many of you may be wondering about the purpose and timing of this. Well, we are seeing an opportunity to unlock the value of the different assets under the HCI Group umbrella. But in order to unlock the value, we must maneuver and rearrange a few items. We all thought it would be beneficial if we have full autonomy and the flexibility to pursue these strategic objectives. So we thought it was a good landing point for both parties if we were to remove Centerbridge -- if we were to remove the Centerbridge ownership from the equation and at the same time, extend some of their warrants. So as we unlock the future value of the company Centerbridge, we're able to get some participation in any upside value that we may create. This new arrangement puts HCI and Centerbridge in direct alignment for the future. We are very excited about the future and -- that is now in front of us. With that, we will open up for questions.

[Operator Instructions] And our first question will come from Michael Phillips with Oppenheimer.

I want to ask a couple of questions, if I could, around this round of depop. You got the 9,500 policies you mentioned. It implies a higher average premium that we've seen in the past round. So I wonder if there's any reasons for that or anything we can take away from that.

Good question, Michael. So the TypTap takeout was always a more complicated one than the earlier November one where it was Homeowners Choice. And really, fundamentally, what had happened was we originally anticipated taking 25,000 selections in December. But because of the popularity of depopulation, a number of policies that we wanted had been removed from the pool that we could select from for the month of December. So we had then selected what we could in December and then waited for other policies to come back in the month of January, which they did, which is what our January selection looks like. So it doesn't surprise me that the January selection is performing better than the December one because that was just part of timing and how Citizens works and the intricacies of how takeouts work and what's available and what isn't. So overall, between the 2 takeouts, we have achieved what we originally set out to achieve in one single takeout, which was about 16,500 policies and about $80 million of premium. So we've accomplished the mission. It just was a little bit more complicated than we would originally have anticipated. Hopefully that helps.

It does. One more maybe related to the depop but kind of just broader on if you can provide any updates on how the new business -- the condo, the CORE business is tracking, kind of where that stands today.

Yes. So that is a February depop. It is also underway as we speak. And so far, it is looking like on track with our expectations. We're sort of trying to get that business up to the appropriate scale, and we will be doing this until we get it to that point, yes? But it's going well.

Last one, Mark mentioned well over 90% ownership of TypTap now. If we use the numbers from your last Q, it was around 93%. I guess I'm trying to figure out how much -- can we get an exact number what that is, more so than 93% from your last Q?

It's between 90% and 93%. I think it's pretty close to 93%. The portion that is not Homeowners or HCI is employee ownership, and that's less than 10%.

The next question comes from Mark Hughes with Truist.

Mark, you said that the EPS will go up. Any ranges or any additional detail on how much accretion you could see from this?

Yes. So the biggest change, Mark, is if you think about the EPS calculation, for example, in the third quarter of 2023, you had that reduction in income available to shareholders when you do the EPS calculation. And it was a steady reduction of about $2.4 million every quarter, which is about $0.25 a quarter. So there was a 25% -- sorry, a $0.25 EPS reduction as a result of the Centerbridge preferred, and that goes away after this.

And then the offset would be whatever investment income you were generating on the $50 million in cash as a whole. So [ then you're incurring ] interest expense on the...

Yes, exactly. So it's not a huge lift, Mark. I mean the bulk of the stuff that we're doing here is balance sheet management. Debt-to-cap is going down. Book value per share is going up. It is accretive. If you take the lost -- the investment income that you otherwise would have on the $50 million, you look at the expense on the other $50 million, you get about $5 million, $5.5 million of a change there. Tax effect of that, that's about $4 million. But then the $9.5 million dividend on the Centerbridge preferreds was not tax deductible. So you get about a $5.5 million net difference there every quarter. Does that make sense?

Yes. The onetime noncash charge for extending the warrants, how do you do that calculation? Is that some sort of Black-Scholes...