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Edited Transcript of HCI earnings conference call or presentation 2-Aug-18 8:45pm GMT

Q2 2018 Hci Group Inc Earnings Call

CLEARWATER Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of HCI Group Inc earnings conference call or presentation Thursday, August 2, 2018 at 8:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Mark Harmsworth

HCI Group, Inc. - CFO

* Kevin A. Mitchell

HCI Group, Inc. - VP of IR

* Pareshbhai Suryakant Patel

HCI Group, Inc. - Co-Founder, Chairman, President & CEO

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Conference Call Participants

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* Arash Soleimani

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew John Carletti

JMP Securities LLC, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the HCI Group Inc. Second Quarter 2018 earnings call. My name is Tim, and I will be your conference operator this afternoon. (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 September 2, 2018, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until September 2, 2018, on the Investor Information section of the HCI Group's website at www.hcigroup.com.

I would now like to turn the call over to Kevin Mitchell, HCI's Senior Vice President of Investor Relations. Sir, please proceed.

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Kevin A. Mitchell, HCI Group, Inc. - VP of IR [2]

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Thank you, and good afternoon. Welcome to HCI Group's Second Quarter 2018 Earnings Call.

With me today are Paresh Patel, our Chairman and Chief Executive Officer; Mark Harmsworth, our Chief Financial Officer. Following Paresh's opening remarks, Mark will review our financial performance for the quarter and then turn the call back to Paresh for an operational update and business outlook. Finally, we will take your 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 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 company's business, financial conditions and results of operations. HCI Group, Inc. disclaims all the obligation to update any forward-looking statements.

With that said, I would now like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [3]

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Thank you, Kevin, and welcome, everyone.

Q2 2018 represents another solid quarter for HCI. We earned a diluted $0.92 per share, but as our earnings press release indicates, this includes some accounting noise, which Mark will discuss in his remarks.

Looking at the highlights for the quarter, we continue to deliver shareholder value through our share repurchases and dividends. We increased our quarterly cash dividend per share by 7.1% to $0.375 per quarter. We completed our reinsurance program for the 2018, 2019 contract year. The coverage and cost, excluding flood, is similar to last year, but we reduced our risk retention by almost 2/3 to $16 million.

Our real estate subsidiary, Greenleaf Capital added another property, our ninth, to our -- which is a retail shopping center, to our portfolio, and it's based in Clearwater, Florida. Our technology-based subsidiary -- insurance subsidiary, TypTap, reached an important milestone. Despite being impacted by 3 hurricanes in 2 years, it is now profitably -- profitable cumulatively since inception. Basically, TypTap has earned a profit despite the 3 hurricanes in the last 2 years. It has more than 9,400 policies in force and has over $12 million in premium at the moment.

And building on the success of TypTap, we have launched TypTap Home, which is TypTap entering the homeowners insurance business. And while we could do flood before with 2 questions, we can now offer homeowners insurance with just 5 questions. And we'll talk more on that later in the call.

But with that, I will turn it over to Mark, who will walk us through our financial performance for the second quarter. Mark?

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James Mark Harmsworth, HCI Group, Inc. - CFO [4]

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Thanks, Paresh. I know you've all read the press release, so I'll just hit some of the highlights and explain a few things going on behind some of the numbers.

In Q2, our after-tax net income was $6.4 million compared to $9.5 million in the same quarter last year. Fully diluted earnings per share were $0.92 on a GAAP basis or $1.01 on an adjusted basis, versus $0.93 in the same quarter last year. While we were happy with these results, there was an unusual onetime noncash transaction in the quarter that significantly reduced after-tax net income and earnings per share. So let me explain it.

In May of 2013, we issued a block of market-based restricted shares to certain executives and board members. May of this year was the 5-year anniversary of this grant, and because the price targets were not met, 272,000 remaining unvested shares will never vest and so needed to be addressed. This impacted the financials in a few places: First, $1.7 million of cumulative dividend paid on these shares had to be expensed. This added $1.3 million to personnel expense and $400,000 to operating expenses in the second quarter.

Second, this expense is a permanent difference when calculating income tax expense, therefore, increased our effective tax rate for the quarter. Third, a related deferred tax asset had to be written off, and this further increased income tax expense by $1.6 million in the second quarter.

The total impact of this adjustment was to reduce after-tax income in the current quarter by $3.3 million and reduce fully diluted earnings per share by $0.13. Absent this transaction, GAAP fully diluted earnings per share would have been $1.05 and adjusted EPS would have been $1.14.

Again, this is a onetime noncash accounting adjustment. While it shows up as a negative in the financial statement, it's actually a positive in terms of its economic consequences. Because these shares will never vest when they fully expire in a year, our share count will drop over 0.25 million shares, which will reduce dividend, increase book value per share and increase earnings per share.

Also, this shows good alignment with shareholders. The threshold share prices were not met, and as a result, the shares will be forfeited.

Okay, so that said, there are just 2 more things I wanted to mention from the income statement. First, loss and loss adjustment expenses. In Q2, non-cat reported claims and reported lawsuits were down significantly from the same quarter last year. As a result of this and other factors, our loss expense is significantly lower in the second quarter than the same quarter last year. Loss expense this quarter was $21.8 million and 25% of gross premiums earned versus $27.7 million and 31% of gross premiums earned last year. The loss expense in the second quarter was, however, slightly higher than the first quarter of this year largely because of some weather-related claims.

As you know, we recently announced our new reinsurance tower for June 2018 to May 2019. Based on these and other agreements, expected reinsurance should be between $31 million and $32 million per quarter, which, as Paresh said, is about the same as it's been over the last few quarters. While Paresh already mentioned this, I think it deserves repeating that while our reinsurance costs are flat, our risk has been materially reduced as our consolidated retention has dropped from $50 million to $16 million. This is a tremendous enhancement to the company's financial position.

Now to the balance sheet. As you know, Hurricane Irma struck in the third quarter of last year and we estimated our ultimate expense at $267 million. In the second quarter of this year, we've increased our estimated ultimate for Hurricane Irma to $326 million, and this, of course, had no impact on the income statement. The impact is to the balance sheet where there was an adjustment to reserves, which is offset by an adjustment to reinsurance recoverable.

The other thing you might notice looking at the balance sheet is some movement in our investments. First, as Paresh mentioned, we closed on the acquisition of a new property in our real estate portfolio. We purchased a 5-acre property with a 70,000 square-foot retail building in Clearwater for about $6.3 million -- $6.8 million, I'm sorry. We now have 9 properties in our real estate portfolio with a cost base of about $78 million and market value of just over $110 million.

Second, we rebalanced some positions in our investment portfolio. Since the beginning of the year, we have reduced fixed-term securities by about $72 million and increased our investment in short-term securities by about $110 million. This has reduced our average term to maturity from 5 years to less than 2. While the average book yield declined somewhat, that's been compensated by higher yields on cash, and the result should be slightly higher investment income with much lower risk. More importantly, as rates increase, we will have the liquidity to take advantage of that while minimizing mark-to-market adjustments.

Just a few comments on capital management. During the quarter, we bought back 175,000 shares at an average price of just under $41, bringing the total buybacks for the year to just under 360,000 shares at an average purchase price of just over $38. To the end of June, we have used $13.7 million of the $20 million committed in our 2018 buyback plan, and so we have used about 6% -- I'm sorry. So we have about $6.3 million left. As you know, our buyback program is part of a long-term strategy to reduce share count, and over the past 12 calendar months, we have reduced our share count by just over 7%.

Back in April, we announced the dividend increase from $0.35 to $0.375 per quarter. However, due to the steady reductions in share count I just mentioned, we were able to increase the dividend with very little impact on cash flow. While every shareholder is receiving 7% more in dividends, the total dollar amount of dividends paid in June was the same as it was a year ago.

So just to quickly summarize. It was a good quarter for us. We're earning around $1 a share, keeping our combined ratio in the mid-80s, maintaining our strong balance sheet and liquidity, reducing -- we're maintaining our strong balance and liquidity, reducing risk while enhancing returns in the investment portfolio and significantly reducing our exposure to a cat event without an increase in reinsurance cost.

And with that, I'll turn it back to Paresh.

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [5]

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Thank you, Mark. I wanted to note something that's probably not significant to most people but it is for me.

Last Monday, 3 days ago, we passed our 10th year anniversary as a publicly traded company. Looking at -- doing the simple math on that, this probably means this is our 39th earnings call as a public company. And in every one of these calls, we discuss whatever the issues and items are that are relevant in the quarter, and I've been through a lot of them. Sometimes, we discuss growth plans. Sometimes, we talk about how we maintain the business, but we discuss what's going on, and it's in the moment.

The key item, though, is what does it -- what things happen in the long term. Out of 39 of calls, 38 of them we reported positive results and long-term consistent profitable operation. Obviously, we had the 1 quarter, Q3 last year, where we actually lost money. But it's quite a record. And it illustrates where we are headed to and where we're going to.

From those comments Mark made about what we've been doing for the last few years while we were maintaining the business, has been we buy back shares every quarter, we look at dividends every quarter. It doesn't show up in any given quarter, but if you look back over the last 5 years, if you owned a share of stock 5 years ago, that share represents a 30% greater stake in the company than it did 5 years ago, and it's paying a dividend that is $0.60 -- 60% more. Dividend has gone up from $0.90 to $1.50 in 5 years, and the share count is down by about 30%. We can keep doing this and keep providing positive outcomes for years to come. And there's no reasons why this won't continue in the balance of 2018 and 2019 and 2020.

But we are also at a point, at an inflection point, where great opportunity now lies ahead of us. And I wanted to make sure we talk on the earnings call because some of the shareholders, the original shareholders from 10 years ago, still listen to this call. What am I talking about? It is the technology that we have been developing over the last few years has come to maturity, and this presents a great opportunity. So what am I -- what is this that we're talking -- saying about?

Let's talk about TypTap for a second. TypTap Flood and that business that we started 2.25 years ago is now profitable. Now if it were just profitable and we had never had any serious cat claims or any cat events, you could say, "Well, you just got lucky," or maybe, "How do we know you're doing better underwriting than average?" In TypTap's case, that isn't it. It's been through 3 hurricanes, and we have seen results as to what actually happens. And the results prove the technology that we have implemented works.

We have had a similar outcome on the Homeowners Choice side on the wind book. So using those items, as a mark as to how our technology is working, we have implemented the technology in such a way that we can now expand the business. So we are looking forward to now to expand both our flood business throughout the country. And oh, by the way, in the second quarter, we started writing in states outside Florida. And on the homeowner side, we are going to refocus growth in Florida in homeowners market, including Tri-County.

I know, for the last few years, everybody's looked at Tri-County and talked about it's terrible and you should exit because of AOB problems, et cetera. What our technology now lets us do is we can walk through that minefield. We can write business there, and we can do it profitably, right. This represents a great opportunity because what's been overlooked is just Dade and Broward County represent almost a $2 billion market, right. They're not that much smaller than the entire NFIP. So we are going after that market, and we are going after the NFIP market, which is a $3 billion opportunity.

We are not going to get all of those -- all of that $3 billion plus $2 billion and nor are we trying to. We are trying to get a small percentage of it but one that has more than its out share -- outsized share of profits. That is where we are headed to, and that opportunity is now being layered on top of our long-term strategy of share buybacks and dividend increases.

With that, I will turn the call over to questions. Operator, please provide the instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Arash Soleimani of KBW.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [2]

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So quick question first for -- on the numbers. I see that you guys had some, you called it, 2018 development. Was that just current accident year development from 1Q?

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James Mark Harmsworth, HCI Group, Inc. - CFO [3]

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No, we had a little bit of -- not -- it was less than $1 million, but we had some adverse in prior years.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [4]

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Okay. So that was prior years. Okay. And then in the press release, you do mention additional operations in reinsurance. So what do you mean by that if you're not using Claddaugh anymore?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [5]

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Arash, we're at a loss. What are you -- what exactly are you referring to? Can you elaborate a little bit?

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [6]

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It says -- sorry. Yes, it just says, basically, in the description of HCI where the homeowners insurance carrier with additional operations in reinsurance. So I just wanted to get more color on the reinsurance.

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [7]

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Yes, Claddaugh is still there and is still functioning. And it does have some other reinsurance contracts from the past and other things, et cetera. We haven't liquidated Claddaugh, it's just that it's not on the HCI wind book reinsurance program for the 2018, 2019 year.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [8]

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Does it have currently any operations that are material in any way to HCI as a whole? Or would you say that that's immaterial and irrelevant to current results?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [9]

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It's immaterial and irrelevant. And don't forget, Claddaugh generally gets consolidated out at the HCI Group level anyway, yes?

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [10]

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All right. But there's no third-party kind of transactions that Claddaugh has engaged in?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [11]

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No.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [12]

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I guess that's what I was trying to -- okay. And can you talk about potential rate increases in the pipeline for this year or how you look at the rate environment?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [13]

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Yes, obviously, we can. The -- we obviously do annual rate filings. We had a rate filing last year, which resulted in a rate increase that started September of last year. Obviously, we are at the back end running that through our book. At this moment in time, we are collecting all the data, et cetera, for our rate filing for the 2018 -- for late 2018. And obviously, when that is done, our actuary will have some opinion as to what rate adjustment we may need. We will provide the data to their sort of IRR, who will also review it, and they will have an opinion as to what the rate adjustment we may need. And then we will discuss from there, and there'll be a rate adjustment made. But at this moment in time, if you are -- we don't have an opinion or a strong statement as to what that number would be, up or down, and how much, yes?

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [14]

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Okay. And in terms of Irma, did you guys see any gross loss creeps this quarter?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [15]

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I think Mark just said we're...

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James Mark Harmsworth, HCI Group, Inc. - CFO [16]

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We bumped up the ultimate, Arash, from -- yes, from $267 million to $326 million.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [17]

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Okay. And has there been any -- you guys mentioned, I think, last quarter interest in buying FedNat. Has there -- have there been any further developments on that front?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [18]

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Are you asking specifically about FedNat or M&A in general?

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [19]

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I guess both. Maybe we could start with FedNat and see if there is anything else to report on there. And then maybe you can talk about any appetite you have to combine with the carrier in Florida if FedNat does not work out.

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [20]

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Okay. So the FedNat part -- piece is easy because, even when I mentioned it in the last earnings call, I did say the conversations were -- had been terminated at that point. So it was over then, and it's still over. There have been no further discussions between us. As far as other M&A, opportunities come along. I know there are some conversations that have been had, et cetera, sometimes involving us, sometimes not involving us.

But at the end of the day, I think there still seems to be a gap between what sellers value their companies at and what, I think, any rational buyer is willing to buy the companies at. And so I don't think any transactions are imminent, at least, that I'm aware of. That doesn't mean they aren't there, just what we're aware of.

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Arash Soleimani, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP [21]

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Okay. And Mark, I think you did mention this, but can you repeat the gross premiums written?

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James Mark Harmsworth, HCI Group, Inc. - CFO [22]

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Gross premiums written total were $132.4 million.

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Operator [23]

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Our next question comes from the line of Matthew Carletti of JMP Securities.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [24]

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Can you guys give us -- maybe start with Irma and just kind of give us a little bit of color behind the not huge numbers but a little bit of increase that you had on the gross. Is it that kind of the reopening and AOB-related stuff has kind of caught pace a little faster than you expected or is there -- there's something else being the main driver of it?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [25]

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Matt, it's Paresh. I think we have analyzed what's causing this, et cetera, and really where it's coming from, and I'm just thinking about for our policyholders, right, I am not speaking for this industry as a whole. So at least what we are seeing in our case is the claims that we originally got in the Keys and in like the Marco Island area, basically, where Irma made landfall as a cat 4 and a cat 3. And those are the places where we are picking up the additional development, not in the form of new claims but, actually, the total expense it takes to settle those claims.

And to illustrate what I mean by that an example, imagine there's a house with a roof that's severely damaged. Back in October or November, our adjuster went there, looked at the house, measured the roof and said this roof -- and they probably used what the cost of roofs had been pre-Irma, and said that roof is going to cost $20,000 to replace. What is now developing is there is a shortage of labor and materials to get people's roofs fixed in -- all through the Keys and places like Marco Island. So that $20,000 roof is now maybe costing $35,000. And that's the best price an insured can get. Obviously, at that point, we stand behind our insured. And the cost of that claim will go up, [that and probably a lot other stuff], yes?

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [26]

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Okay, so it's demand surge, not anything litigation related?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [27]

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No.

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Kevin A. Mitchell, HCI Group, Inc. - VP of IR [28]

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Yes, I mean, we -- there is litigation coming in, Matt, but we anticipated that, and we -- when we built our original estimates, we assumed litigation should never be a surprise, we assumed that there would be some, and that's coming in. But as Paresh said, that demand surge is sort of driving it. There are some new claims coming in, but it's not a lot. And...

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [29]

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And they're [going to where] anticipated.

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James Mark Harmsworth, HCI Group, Inc. - CFO [30]

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Yes, and they're smaller dollar claims. So it's a fairly sort of finite problem.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [31]

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Okay, great. And then the other kind of topic I was hoping you could give us some color on is just focusing on TypTap and both just kind of the success you've seen to date, kind of lessons learned in kind of the 2.5 years and where you've got it to in the growth. And then I understand it's probably competitively a little bit of a sensitive topic, but just, Paresh, you mentioned the refocusing a bit on Tri-County and being able to use the technology to, I think, you said, kind of tiptoe through the minefield and find the good risks.

Can you just give us a little bit of color more on kind of maybe even just the attributes and things like that that you're looking for that clue you into maybe one house being a good risk versus the one next to it not being a good risk when it comes to things like that in Tri-County?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [32]

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Okay, so first of all, on the flood side, right. And one of the things that's happened, clearly, when we started getting into the flood business several years ago, we were a lone voice in the wilderness. And we said that it could be done, it could be done profitably and at competitive prices, which wasn't a popular opinion at the time. What's happened is, at this point, I think there are lots of companies talking about getting into flood. And I guess, they agree with us at this point, which is good.

But what we know from how TypTap has gone through the 3 hurricanes it is a good business. You can do flood business, and there's bad flood business, which will cost you a lot of money. Case in point, TypTap is still here. It's healthy and not been bailed out by the U.S. Congress despite the events of last year. And the NFIP with all their vast experience, and they needed to be bailed out because of what happened in Harvey, in homes that they felt were good risks, right. That's where you get into different outcomes.

So we know from experience what actually works and what's long-term good versus it's great until a cat comes along. That's the flood side, so we are getting increasingly confident in both the business that we want to write as well as the business that we don't want to write. And we speak about that from experience, having lived through the hurricanes.

On the wind side, it's the same thing in Tri-County, et cetera. We have been watching and monitoring and building data and tools and systems for the last 4 years as we've been maintaining the business to see if we can get an idea as to how best to do this, how to make it a profitable book, et cetera. And having gone through Irma, 1 quarter making a loss actually turned out to be very good because it completed the last piece of the puzzle for us, not only how does our book perform when the wind doesn't blow but also how our book performs when the wind does blow.

So yes. And that's been a big value in terms of telling us how to go about writing and assembling a profitable portfolio. Obviously, with TypTap, life is made so much easier for the insured and the agent. And because we can apply -- bring all of these things together, we think it's time to grow business, including in Tri-County. Because while everybody always talks about Tri-County in a negative light, we do know there are a lot of people who write -- who live down there who are decent, hard-working people, and they need insurance. Just like 5 years ago, decent, hard-working people needed flood insurance. We've never been shy to offer a good product to our -- actually, a great product at a good price when others thought differently.

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Operator [33]

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(Operator Instructions) Our next question comes from the line of Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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On the South Florida, the Tri-County, is it that pricing has come up enough to make it worthwhile? Or have you spotted something in there that is presumably of -- there's something proprietary that you're going to take advantage of?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [35]

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I don't know whether pricing's come up makes a difference or not. Really, all I can say is that where we've got good at being able to predict stuff is instead of looking at it and saying this area is good or bad or a zip code is good or bad or whatever, we can almost go down and look at it on a house-by-house, a rooftop-by-rooftop level and be able to separate what is profitable business from what is potentially unprofitable business. And just getting that edge give you an advantage that builds over time.

Looking back on it all these years later, we actually applied the same logic when we were doing takeouts out of Citizens. We used to do takeouts out of Tri-County. We were doing that when nobody else would in 2012, '13 and so on. We stopped in 2014, and there was still lots of business there. There's still lots of business in Citizens right now in Tri-County. Why did we stop? It's because we have tools that told us -- that identified the good business. And when we ran out of good business to take, we stopped.

Others didn't have those tools, so they just see a number of policies and PIT counts and premiums, and that's what attracts them. It's the ability to be able to distinguish between good business and any business. And we now have the same capability on a rooftop-by-rooftop basis throughout the state. So we can underwrite a policy almost instantaneously from when the policyholder expresses interest at whatever the premium is, yes?

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [36]

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How material will that be to the top line? Just sort of roll that into the broader question of, last couple of quarters, your gross premiums written have been down about a point, call it flat, but down slightly. You've gotten the question before. When does that transition sustainably to top line growth? So I'll ask that in the context of whatever help you might get some of these Tri-County policies?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [37]

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Yes, so Mark, 2 things about that. Yes, one of the reasons we brought this up on this call is that we are thinking differently from maintaining our book to now we're talking about growth again. And it's because we now feel confident that we can write business because, otherwise, we could have grown the top line. But unless it helps the bottom line, it seems a wasted activity. It's one of the reasons that we haven't expanded into multiple states to write homeowners policy because unless we could see a profitable way of doing it, it didn't make sense. It just creates a lot of activity.

We don't like -- we are more in the business of once you write a policy, we'd like to keep it in our books forever if we could. And where we are now is, we do see that opportunity throughout the state but especially in Tri-County that you can add business profitably. Obviously, it's early days, so whether that would mean a little bit of incremental business or a lot of incremental business, time will tell. But we expect that we would start growing -- the earned premium will start growing either by Q4 or early 2019, to answer your question, yes.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [38]

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Understood. About the -- on the AOB front, have you got any sense whether you're getting a respite here as the plaintiffs' lawyers are going after the storm claims, and so, therefore, you're not feeling the direct effect? Do you -- is there any way to judge that situation?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [39]

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I don't know if there's absolutely a mathematical way of judging that, but I can give you some color. Yes, on the short term, there is some respite as the plaintiffs will tell you, they are more focused on Irma than daily claims. So there is some numbers there. Having said that, what we are also picking up, which is slightly concerning, is that new plaintiffs law firms are setting up throughout the state because of Irma. And the concern is that, when Irma is dealt with somewhere down the road, these law firms will then be looking for other forms of revenue, and that could spread AOB throughout the state.

So in the short term, while it might be a respite, in the long term, it could be a detrimental thing if it's not taken care of in time. And none of the things that we've talked about up to this point in the call should in any way be construed of us believing that the AOB problem is diminishing or is not a major concern to us and to the industry as a whole.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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The commission ratio was up this quarter compared to premiums. Was there anything unusual?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [41]

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Not that we can think of. The only reason it could have been is our book does have some perkiness to it. But Q2 tends to be when large sections of our portfolio -- our policies renew. It's one of those legacy things from days gone by that we had because we wanted to go into wind season with the max amount of cash and unearned premiums on the books.

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James Mark Harmsworth, HCI Group, Inc. - CFO [42]

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Mark, it's Mark. You're thinking of the relationship between commissions and then gross premiums earned. Is that right?

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [43]

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Correct, yes. Policy acquisition expense.

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James Mark Harmsworth, HCI Group, Inc. - CFO [44]

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Yes, so you've got to remember that there's a bunch of things that we capitalize there, and then they get amortized in different ways. So there's never a direct connection to gross premiums earned. There's some things in that are straight-line amortized. There are some that are based on gross premiums written. But operationally, there is nothing different there. It's just the way that some of those expenses are treated that they won't necessarily go up or down exactly in correlation with gross premiums earned.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [45]

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What's your latest thinking on tax rate for the back half of the year, for next year?

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James Mark Harmsworth, HCI Group, Inc. - CFO [46]

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Yes, so I said on the last call that we expected our effective tax rate to be about 27%. And if you look at our cumulative tax rate for the first 6 months, it's just under 27%. There is that kind of weird accounting treatment that I went through in my prepared remarks. But it was 27% for the first half, and I would expect it to be in the similar range for the second half. Nothing much has changed since we developed those expectations. So I think 27% is still about the right number.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [47]

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And then I know it's early and you may not have a view, but the weather so far in 3Q, has it been raining very much?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [48]

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It has been a rainy summer and claim volumes, compared to the first quarter, especially, are up a little bit but nothing dramatic or overly concerning. It's Florida. It rains in the summer. We get most of our rain in the summer. It's within expectations.

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Operator [49]

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There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to Mr. Kevin Mitchell for closing remarks.

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Kevin A. Mitchell, HCI Group, Inc. - VP of IR [50]

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On behalf of the entire management team, I would like to express our appreciation for the continued support we receive from our shareholders, employees, agents and, most importantly, our policyholders. We look forward to updating you on our progress in the near future. Thank you.

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Operator [51]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.