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Edited Transcript of HCI earnings conference call or presentation 2-May-19 8:45pm GMT

Q1 2019 Hci Group Inc Earnings Call

CLEARWATER Jul 10, 2019 (Thomson StreetEvents) -- Edited Transcript of HCI Group Inc earnings conference call or presentation Thursday, May 2, 2019 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. - SVP of IR

* Pareshbhai Suryakant Patel

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

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Conference Call Participants

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* 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 the HCI Group, Inc. First Quarter 2019 Earnings Call. My name is Teddy, and I'll be your conference operator this afternoon. (Operator Instructions) Before we begin today's call, I'd like to remind everyone that this conference call is being recorded and will be available for replay through June 2, 2019, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until June 2, 2019, on the Investor Information section of 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. - SVP of IR [2]

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Thank you, and good afternoon.

Welcome to HCI Group's First Quarter 2019 Earnings Call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; and 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 Information 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 effect on the company's business, financial conditions and the results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements.

With that said, I would like now 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. As many of you know, Broward County on the East Coast of Florida via Cape Canaveral, experienced the hailstorm in late March. Our permanent losses to this were between $4 million and $7 million. Mark will discuss this in more detail in a moment. You might think that these hail storms are unusual in Florida, but we do typically get about 1 or 2 every year. This particular storm included strong winds causing hail damage, not only to roofs but to windows, siding and fences as well, and I'm calling it out as a special event.

Moving on to some of our results and highlights for the first quarter. We don't expect a profitability after Hurricane Michael. We have now been profitable in 44 of the last 46 quarters.

Also during the quarter, we paid our 34th consecutive quarterly dividend, and our Board increased our quarterly dividend by 6.7% to $0.40 per share. This is our ninth dividend increase in 9 years. In March, we repaid $90 million in convertible debt. And lastly, our real estate division, Greenleaf Capital, continued its growth by purchasing 8.5 acers of property in the Westshore business District of Tampa.

With that, I'd like to turn it over to our CFO, Mark Harmsworth, who will walk us through our financial performance for the quarter. Mark?

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

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Thanks, Paresh.

Net income for the quarter of $6.7 million was down from $10.8 million in the same quarter last year, diluted earnings per share were $0.82 compared to $1.11 last year. These results were negatively impacted by the late March hailstorm in Broward County. In March, we issued a press release giving a range of ultimate losses of $4 million to $7 million. In Q1, we booked a $5 million provision, which is our best estimate of the ultimate cost of the storm.

On a positive note, the financial impact of the storm was offset by a $5.3 million unrealized gain on our equity portfolio. This unrealized gain reversed most of the unrealized loss from Q4 last year.

Investment income for the quarter was up only slightly from Q1 last year, as limited partnership income, which can vary significantly from quarter-to-quarter was down. However, interest income with $1 million higher than the first quarter of last year given by significantly higher yield on all our income-producing assets. You might notice that policy acquisition expenses are up from last year. We had a premium tax return to provision adopting, which explains the increase. However, going forward, policy acquisition expenses will be slightly higher as a percentage of gross premiums earned in the past between 11.5% and 11.75% as TypTap becomes a bigger percentage of our written and earned premium.

If you look at TypTap, I wanted to take a minute and talk about growth. As you know, we have gone through a period of contraction in our Homeowners Choice book. On the other hand, we have been growing the TypTap book. While it hasn't had a material impact on the financials yet, growth is continuing to build in TypTap and should start to positively impact results in the future. This growth in TypTap should reveal its cash flow numbers in 3 phases: first, consolidated gross premiums in force will start to increase; second, we should soon get to a quarter where consolidated gross premiums written are higher than the same quarter of the previous year; and third, we will get to a quarter where consolidated gross premiums earned are higher than the same quarter of the previous year. We expect all of these growth indicators within the next 12 months. In fact, we have already reached the first. In March of this year, consolidated gross premiums in force were higher than they were in February. What does that mean? It means that we have started to grow a trend.

In Q1, gross premiums written in TypTap was $6.2 million were almost triple the first quarter of 2018, driven in large part by the growth in our new technology-enabled homeowners business. The growth of TypTap Home has been impressive. In the fourth quarter of 2018, we were writing about $500,000 a month in premium. In April, we had written not much before the end of the first week. We are very encouraged by the growth here, and we expect to continue. However, it isn't just about growth, it's about profitable growth, the kind of profitable growth that can be achieved through strict underwriting policies and the efficiencies of automation available through our technology platform built by Exzeo.

Now turning to the balance sheet for a minute. As Paresh mentioned, on March 15, we've settled in cash at maturity all of our 3.875% convertible senior notes, totaling just under $90 million. This is a significant change in our financial position in a few ways. First, our debt-to-cap ratio fell from 58% at the end of last year to 47% at the end of March. Second, our interest expense now dropped by about $7.4 million a year from $8.5 million per quarter. Third, cash outflows for coupon interests dropped by about $3.5 million per year. Fourth, a fully diluted share count has dropped by approximately 1.475 million shares. Lastly, the combination of all of those things should be fully diluted earnings per share of about $0.08 to $0.12 per quarter from what it otherwise would have been.

This is a point of clarification. Interest expense this quarter wasn't impacted much by the debt being paid because it happened late in the quarter. However, going forward, quarterly interest expense should be about $2.85 million, down about 35% from where it has been for some time.

Also in the balance sheet, on the other side, reserves are down about $23 million, if you like principally the payments made for Hurricanes Irma and Michael, this is offset somewhat by the new reserves for the March hail event.

Also, we increased reserves on normal daily claims by well over $1 million during the quarter, and reserves for daily claims are about 2% higher at the end of March than at the end of December, where the number of open claims and the number of open losses are both lower.

On our last earnings call, we disclosed the ultimate loss estimate for Hurricane Irma of $411 million and the ultimate loss expense for Michael of $22.25 million, both including flood, and we have not -- and we have made no changes to either of those estimates.

Now just a couple of points on our capital management and liquidity. In the quarter, we paid a dividend of $0.40, as Paresh mentioned, up 37 -- up from the $0.375 that we paid in the fourth quarter of 2018. During the quarter we repurchased 31,789 shares, the total consideration of $1.337 million for an average of $42.06 per share.

In terms of holding company liquidity, after repaying the convertible notes, we still have about $55 million of cash and investments at the holding company level as well as the additional liquidity provided by our $55 million revolving credit facility, in which we drew $8 million on the credit facility, related to a real-estate acquisition on the west of our business district in the quarter.

Just few others things. The number of common shares outstanding on March 31, was 8,359,889, down 3% from a year ago. And the number of fully diluted shares outstanding at the end of the quarter was about 10.150 million.

Lastly, book value per share, as of March 31, was $22.37, up from $21.71 at the end of 2018.

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.

As Mark stated, our insurance business returned to profitability in the first quarter. But let's be clear, a wake up of growth in the future is TypTap. Our insurance subsidiary that is powered by software form our technology subsidiary, Exzeo. TypTap is growing at a rapid pace. Gross written premiums have doubled each year since it began writing business in early 2016, and it is accelerating. For example, at the end of 2018, we were writing about $500,000 of premium per month. Two months later, at the end of February, we were writing $500,000 of premium per week. And by the end of April, we were writing $800,000 of premium per week. TypTap's gross written premiums are now over $20 million, and it should grow to about $40 million in the next year very easily. And margins should be stable at around 20%. With that keep in mind, that $40 million of premium at a 20% margin, which is about the same profit dollars as doing $160 million of premium at a 5% margin.

As always, we focus on the bottom line instead rather than the top line numbers. We are excited about TypTap's growth because it demonstrates the power of our geo technology. We look forward to updating you on our growth in the next quarter and in the coming quarter thereafter.

With that, operator, please provide the appropriate instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Matt Carletti from JMP Securities.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [2]

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Paresh, just a few questions to start. There's recently been some AOB reform passed that -- I think it's a good step in the direction and remains to be seen the -- how it's implemented. Would you mind sharing your thoughts on the matter? And what sort of impact you think it'll have?

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

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Sure. Matt, we're, obviously, very appreciative of the legislature -- legislators and everybody who made the effort to get this legislation passed during the last session. The session isn't quite over yet, but obviously the bill is hitting on -- Governor DeSantis is expected to sign it. But a lot of effort by lot of people because it will have a positive outcome. But obviously, we need to let time play out a little bit as to how exactly it's implemented and also what happens as the deadline of July 1 approaches, but still is a positive step. But I -- it's just too early to tell what quantitative effect it will have, yes.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [4]

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Okay. And then on the upcoming reinsurance renewals, I know that your program isn't complete yet. But just any color you can give on just how the environment from holding and from your perspective and kind of the progress you've seen so far?

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

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I think the overall item that everybody seems to agree on is the reinsurance placement for the whole industry is much behind schedule compared to previous years. So I think it's early May, and I'm actually here about program that is done. In fact a lot of them still haven't got their quote back. So it's going to take a little while. We're, obviously, in the middle of those conversations as well, but the good news is in 4 weeks, it'll all be done one way or the other.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [6]

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Okay, great. And then one last higher-level question. I guess you mentioned in your opening comments, Greenleaf bought -- I think it was 8.5 acres in the Westshore area, do you have any plans for that 8.5 acres currently?

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

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I don't think that we have plans for -- at this very second, but, obviously, we usually buy properties with a -- with an eye to the future as to what it would be. So again, having just bought it few months ago, we are trying to -- I'd just say, overall harder to -- let's see what's possible before we actually make concrete plans.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [8]

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Okay. I'll just stay tuned. And last quick number for Mark. Do you have a net written premiums in the quarter handy?

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James Mark Harmsworth, HCI Group, Inc. - CFO [9]

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Yes. Sure. It's a $36.197 million.

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Operator [10]

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Our next question today is coming from Mark Hughes from SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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The issue on the policy acquisition cost, what was the driver there? Again, I'm sorry, I know you said it but I didn't get it.

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James Mark Harmsworth, HCI Group, Inc. - CFO [12]

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Yes, sure. It was up a bit, you'd expect it to be down a little bit. There is a couple of things in there. First of all, not all of it varies directly with gross premiums earned. Some of the -- some parts of those are flat. But the big thing, Mark, was we had a thing -- what we do every quarter is we estimate the premium factors and that's obviously part of that expense. And then at the end of the year, we probably return and true it up, and we had a -- in the first quarter of last year, we had a positive adjustment for that. And in the first quarter of this year, we had a negative adjustment for that. And I guess $300,000 swing or something like that because that was a big factor there. And then just -- as I mentioned, it's generally as TypTap grows because it's a voluntary business, the cost of acquisition is a little bit higher. And so that as a percentage of gross premium earned is drifting up a little bit. So it's really, sort of, all of those things.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Then the TypTap, is that still largely Florida? I think you're making some progress on the homeowners as well. Could you talk about the mix there?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [14]

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Sure. So obviously the flood business in TypTap had a 2-year head start or a 2-year -- 2.5-year head start to the homeowners business. But the homeowners business is really taking off at this point. So I think it's within a quarter or 2 -- within 1 quarter or 2 quarters, the homeowner business is probably going to be much larger than the flood business in TypTap. That's the trajectory we're on.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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And could you just elaborate that in a little bit more -- what the -- what is really the cost -- I don't know if costs higher, but what's created the momentum in that business? And where you're really seeing the good strength? What is the -- what's driving that?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [16]

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Well, a couple of things. One is -- and I'm going to give you slightly long answer here. The technology that we built a -- few years ago, initially we deployed it to the flood insurance, which is a much simpler product than the homeowners' insurance. It comes with all the data points you need, et cetera. Having said that, it's also a much more tough market because given the NFIP and everything else, not all business is profitable. So to be very careful, which risk we select. So it does limit grow.

When we then apply the technology to a much larger, a much more complex part within homeowners, we suddenly found 2 things: One, what's even better; and secondly, you're now playing in a much larger market, a $10 billion market place. And what -- that has helped tremendously in terms of -- that's why homeowners takes all quicker, much bigger market, much more need. And secondly, you have -- because of all the stresses over last few years, the competitors have basically backed off in terms of trying to pick up market share. So all of those things all contribute, but the key item that we have, which I think a lot of folks want is technology, makes a huge difference.

And to give you an idea, there was a day last week where we've got 1,000 quotes to buying 50 policies, which shows you the quality of our underwriting standards, but we don't take every policy that comes in. But against that, we had only a handful of people supporting it because most of that was done without a tuck-in human hands, yes.

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James Mark Harmsworth, HCI Group, Inc. - CFO [17]

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And Mark, I gave some of these numbers on -- in my prepared remarks that TypTap consolidated gross premium written tripled over first quarter last year, so they went from about $2 million to a little over $6 million. So -- and of that $4 million increase, the majority of that was from the homeowner -- the new homeowners product.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

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Was there -- very good. Was there any reserve strengthening in the quarter?

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James Mark Harmsworth, HCI Group, Inc. - CFO [19]

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Yes. We actually -- we increased reserves by about $2 million. Just again, sort of out of caution, we actually bumped up our total reserve. I mentioned how they've grown in my prepared remarks. Just, sort of, out of caution continuing to watch the litigation environment. So we actually, yes -- we increased by about $2 million.

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Operator [20]

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Our next question is coming [Freddy Piper] from KBW.

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Unidentified Analyst, [21]

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Just quickly to follow-up on Mark's question about the adverse events, what accident year this -- did this come from? And was that just homeowners?

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

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It's a little early to say out hearing it by accident year. That's the question you can ask me at the end of the year.

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Unidentified Analyst, [23]

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Okay. And then just coming back to the premium decline. So it was close to 4% this quarter. Do you expect this to persist, the homeowners choice premium declines? I know TypTap has grown well, but is there anything you are doing to curb this?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [24]

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The funny answer is sort of said about this stuff, right? We are really focusing on the growth of structure not on where homeowners is gradually contracting year-over-year, or it has been for several years at this point. And the key takeaway from this is TypTap is now large, $20 million, and getting larger doubling the price every year, so its growth is starting to overpower any contraction that might occur in the homeowners choice side.

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Unidentified Analyst, [25]

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Yes. Okay. And then just a follow-up on that a little. What is the implication for your expenditures going forward, because you have the premium decline from the homeowners choice that's sort of driving it upwards? And then, I think, Mark mentioned, the high acquisition cost for TypTap, is there an expense ratio range that you target? Or something that you want to achieve?

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James Mark Harmsworth, HCI Group, Inc. - CFO [26]

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I think it's going to be small. I mean both are fairily high margin businesses. The TypTap book is running about 20% pretax margin, which is not similar to homeowners in it. The numbers from TypTap are growing but as a percentage it's still fairly low. So I don't think in the foreseeable future, we're going to see anything significant. The only real thing worth mentioning is what I've mentioned about, policy acquisition expenses, I probably mentioned that, but that's not a big number.

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

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Fair. And look, the bigger overall takeaway from this is that the growth -- the business that is growing TypTap has similar margins or better than the business that is turnkey. So we're not replacing high margin business and low margin business. We are actually replacing with similar or better margin business.

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Unidentified Analyst, [28]

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Okay. Got it. And then I think, Matt already touched on the insurance a little, but I think there is some rumors going around about some of your competitors seeing 20% to 30% rate increases on proxy by power. So I was wondering if you could give some color around what you are maybe expecting in terms of pricing. And also, if you are considering making any changes on sort of structure of your power?

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

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I've heard those rumors, too. And that's all of comment I have on the rumors from -- regarding the other people in the market. As far as our -- where we are, we're obviously at a key juncture in the negotiations for reinsurance at this point. And as I said earlier, it'll be done in the next 4 weeks. This will not be a good point to expect the rate as to what the rate would be, whether it will increase or not, et cetera. Again, it's already grown up.

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Unidentified Analyst, [30]

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Okay. And then just finally -- just a quick follow-up on the AOB reforms, do you think that the -- once just the legislation is passed, your product offerings seek out policies that prohibit the AOB? And also does this impact a little higher thinking about buying for agencies? And do you -- I mean, I forget, do you have one pending with the regulator right now?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [31]

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Okay. So let me just answer those questions in some -- in reverse order. I don't think we have a rate increase pending with the regulators at the moment. As far as, let's say, policy that restricts AOB, et cetera, this is part of the reason why we're saying we got to let it play out because I am sure the OIR will pass through with the high implemented, what the cost of it is, et cetera. And I'd say we see your things -- because we don't speculate whatever we offer, it's just policy or not. That's how the legislation is implemented by working beside that. And what was the third part of the question?

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Unidentified Analyst, [32]

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It's AOB reform changes, how you're thinking about rate increases?

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Pareshbhai Suryakant Patel, HCI Group, Inc. - Co-Founder, Chairman, President & CEO [33]

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Yes. So it doesn't necessarily change anything for us. It's too early at that. But for a lot of quotes, we are sitting there looking at choppy waters because you have reinsurance costs going up, hopefully, with AOB loss ratios should be going down and the numbers will become what they were, right? Again, I think it's a little bit too early to tell.

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Operator [34]

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At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing remarks.

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Kevin A. Mitchell, HCI Group, Inc. - SVP of IR [35]

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On behalf of our entire management team, I would like to express our appreciation for the continuous 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.

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Operator [36]

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Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.