Hci Group Inc (HCI) 2015 Q4 法說會逐字稿

Good afternoon. Welcome to HCI Group's fourth-quarter and full-year 2015 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 is being recorded and will be available for replay through April 3 starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until April 3 on the investor information section of the HCI Group website at www.HCIGroup.com.

I would now like to turn the conference over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.

Thank you and good afternoon. Welcome to HCI Group's fourth-quarter and full-year 2015 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, and Richard Allen, our Chief Financial Officer. Following Paresh's opening remarks, Richard will review our financial performance for the fourth quarter and full year 2015, and then turn the call back to Paresh for an operational update and business outlook. Finally, we will answer 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 the Company's business, financial conditions, and results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements.

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

Thank you, Kevin, and welcome, everyone. As most of you know, HCI Group is a holding company with subsidiaries engaged in diverse yet complementary business activities. Our principal operating subsidiary is Homeowners Choice Property & Casualty Insurance Company, which provides homeowners and flood insurance in Florida. In addition, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our Homeowners Choice reinsurance program.

We also have an information technology operation called Exzeo, which develops innovative products and services for Homeowners Choice as well as the insurance industry at large. Finally, we have Greenleaf Capital, which owns and manages a diverse and growing portfolio of real estate investments. As we've done throughout the Company's history, we continue to invest in strategic opportunities to add to and further diversify our operations.

As Richard will expand on shortly, 2015 was a solid year for HCI with record earnings per share and our eighth consecutive year of profitability.

Here are a few important highlights from the quarter. First, the fourth quarter generated $11.1 million in net income or $1.05 per share diluted earnings per common share, this despite a small increase in claims related expenses and investment losses in our equity portfolio.

Secondly, we also paid $0.30 per share in dividends marking our 21st consecutive quarter of paying a dividend. Our cumulative dividends paid since inception are now at $4.95. In addition to the dividend, our Board of Directors authorized a plan to repurchase up to $20 million of the Company's common shares.

As a side note, unrelated to the Company's buyback plan, I personally initiated a Rule 10b5-1 plan to purchase up to 30,000 shares and that plan has completed its purchases by mid-February and terminated. In short, I purchased 30,000 shares on the open market under SEC rules.

The 2015 hurricane season ended quietly on November 30. As a result, a number of things happened.

Claddaugh, our captive reinsurance division, earned net premiums of $17.6 million that otherwise might have been ceded to outside reinsurers. Two, the profit commission benefit on our multi-area service contract that we entered into years ago has now finally accrued and is beyond the loss experience period. Therefore, it is now locked in. We look forward to updating our financials in the coming months.

Now, before I go further, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the fourth quarter and full year. Richard?

Thank you, Paresh, and good afternoon, everyone. For the quarter ended December 31, 2015, income available to common shareholders totaled $11.1 million and diluted earnings per share of $1.05, compared to the same quarter of 2014 of $14.6 million or $1.30 per common share.

Gross premiums earned for the quarter were $101.9 million compared to $91.4 million for the prior period reflecting an increase of 11.5%. The increase is a result of the renewal of policies from the December 2014 and February 2015 assumptions.

Net premiums earned in the fourth quarter of $61.6 million is stable with the $61.8 million of the same period in 2014. Investment income in the fourth quarter of 2015 was $1.2 million compared with $1.4 million in the same period in 2014.

Additionally, the Company recognized net non-cash charges of $0.8 million in the fourth quarter of 2015 and $0.1 million in the fourth quarter of 2014 due to declines in the fair value of securities determined to be other than temporary.

Losses and loss adjustment expenses incurred increased $891,000 over the prior period. This increase is primarily the result of claim development in the fourth quarter of 2015.

Policy acquisition and other underwriting expenses were $11.1 million in the fourth quarter of 2015 as compared to $9.3 million same period of 2014. This increase is the result of premiums and commissions -- premium taxes and commissions on the policies assumed in December and February as was mentioned earlier.

Salaries and wages were $5 million in the fourth quarter of 2015 compared to $3.9 million in the fourth quarter of 2014. This increase was attributable to increased staffing requirements and merit increases granted throughout the year.

Other operating expenses, which include a variety of general and administrative expenses, in the fourth quarter of 2015 were $5.6 million reflecting an increase of $680,000. This increase is primarily attributable to increased consulting and professional fees in the quarter.

For the year ending December 31, income available to common shareholders was $65.9 million or $5.90 diluted earnings per common share as compared to $62.7 million and $5.36 earnings per common share for the year ended December 31, 2014.

Gross premiums earned increased 15.8% or $57.6 million to $423.1 million as compared to the prior 12-month period. For the same periods, net premiums earned increased 12.1% to $282.5 million, an increase of $30.4 million.

Investment income during 2015 totaled $3.4 million compared with $9.6 million in 2014, which included $4.7 million of net realized gain from investment sales. The decline in 2015 was primarily due to net losses related to the Company's limited partnership investments.

Additionally, the Company recognized net non-cash charges of $4.7 million in 2015 due to declines in the fair value of securities determined to be other than temporary.

Loss and loss adjustment expenses incurred increased to $87.2 million from $79.5 million. The increase of $7.8 million is primarily the result of an increase in a number of claims reported through the year and subsequent development of prior reported claims. Policy acquisition costs increased to $42 million reflecting the renewal and commissions and premium taxes as mentioned earlier.

The salaries and wages in 2015 were $20.1 million compared to $16.4 million in 2014. This is primarily attributable to a 10% increase in staff count and the impact of merit increases.

Our combined ratio for the fourth quarter of 2015 was 74.3% compared to the prior period of 66.8%. For the year ended December 31, our combined ratio was 63.6% compared to 65.5% for the prior year.

On the balance sheet, invested assets have increased to $232.9 million from $168.8 million at December 31, 2014. Cash and short-term investments decreased to $267.7 million from $314.4 million a year ago. Total stockholders' equity increased 32.8% over the year to $237.7 million.

Included in the balance sheet and income statement, as discussed in prior calls, is the benefit of our multi-year reinsurance treaties. Recorded benefits for the year and as of December 31, 2015, were $21.7 million and $35.7 million, respectively. Book value per share was $23.10 at December 31, 2015, compared with $17.92 at December 31, 2014.

In closing, lest we remember 2015 was a strong year following the exceptionally good years of 2014 and 2013. Our loss ratios continue to set the mark in the Florida market. Thank you.

Paresh?

Thank you, Richard. We are pleased with our results for 2015. Looking at 2016, the first quarter has already been interesting. [Normally] expected in an El Nino year, Florida has been impacted by several tornadoes since the beginning of this year. The expected losses from these tornadoes for HCI are around $5 million.

We are well prepared to absorb these weather-related losses; this is the business we are in. And also, this is not the first time we have had weather-related losses.

For those who have been long-term shareholders, as you recall back in 2012, we had Tropical Storm Debby and Hurricane Isaac which also resulted in about $5 million of weather-related losses. So this is normal business, and actually we are somewhat below the expected numbers because last time there was an El Nino year, there were about 12 tornadoes; so far I think we're at about 6 to 8 and the season seems to be ending.

Having said all of those things, let's look to the future.

Looking at 2016 and beyond, we are really excited to announce our newly formed insurance company, TypTap Insurance Company, a much shorter name than Homeowners Choice Property & Casualty Insurance Company, Inc. By the way, that's spelled TypTap, T-Y-P-T-A-P. TypTap is the first insurance company licensed in Florida to specialize solely in flood insurance. It plans to establish itself as an alternatively National Flood Insurance Program, or NFIP. The NFIP has been forced to increase its rates dramatically based on the events of Katrina and Sandy. Neither one was a Florida event, by the way.

With approximately 2 million residential Florida policies generating about $1 billion in annual premium, we think there is an opportunity to compete in Florida. We've stated that in the past. What makes TypTap different is the technology.

TypTap uses technology developed by Exzeo making quoting and binding a policy simple, convenient, and fast. I encourage you to Google flood insurance Florida and find a flood quote that you can do online from any other source. It's not easy, but please try. Only after you have tried, then visit www.typtap.com. That's TypTap.com. And follow the instructions. Your customer experience will be vastly different.

All TypTap will do will ask for an address and if you're not lucky enough to have a Florida address, try 1808 West Hills Avenue. It's a Tampa, Florida, address and I believe the zip code is 33607. Sorry, 33606. Answer three quick questions and you will get a quote. Slide your finger on the slide bars to select your level of coverage; it only takes seconds. Give it a try and tell us what you think. We welcome your feedback.

The early result from this are not only is this easy for consumers, but insurance agents like this because they need fewer personnel to bind policies. Gone are the day of complex elevation certificates, understanding how to read them, and need a PhD in base flood elevations. Real estate agents like it because they can get a quote from their iPhone or Android device or any other device that they want to use, day or night, weekends, too. Incidentally, TypTap has 24 by 7 customer service as well.

Over time, our technology can serve as a platform to offer additional products and services both within Florida and allow us to expand from state to state to state. TypTap.com went live on March 1, 2016. Obviously, we are excited about the possibilities. There will be challenges ahead, but this is only the first step. We see a clear path and a bright future ahead of us.

With that, we are ready to open the call for questions. Operator, please provide the operator instructions.

(Operator Instructions)

Our first question comes from the line of Casey Alexander of Ladenburg Thalmann. Please proceed with your question.

First of all, in relation to the weather events in the first quarter, do you have a guideline for a range of where you expect the loss ratio in the first quarter to fall in, given the extra losses from the storms that landed in Florida?

Yes, Casey, I can tell you very simple ways of doing this. And just to go -- because I think it covers the model, et cetera.

The way I would do it is, you could just look at the fourth-quarter losses in absolute dollars, add about $5 million to it. You have to do that because it's $5 million pre-tax; it would be a lower number after tax (multiple speakers) taxes. That would very quickly take you to where you need to go in your model.

Okay. Great.

Secondly, assignment of benefits has become a real hot button in Florida. Can you give us, first, a view from say 50,000 feet of the assignment of benefits -- what the issue is, and how it's affecting your Company's loss and loss ratios? And how the Company is strategically dealing with the assignment of benefits issue?

Okay. Casey, I will take that as three questions, so let me start with the first one.

Yes, that's fine.

For those of you that are not familiar with assignment of benefits, it's actually a catch-all phrase which results from -- drives increased litigation, primarily in southeast Florida, which is, think of Palm Beach down to Miami area. Really what's -- while assignment of benefits is used, it's either driven by assigning benefits to third parties, or it's driven by the policyholders themselves getting involved in a lawsuit with the company.

What's driving it is a Florida insurance code requires insurance companies to pay plaintiff's attorney's fees if in litigation, if the plaintiff is awarded even $0.01 more than was originally offered by the insurance company.

The intent is noble, but the reality is the plaintiff's lawyers use this statute as a weapon to exhort higher settlements in small cases. In some litigated cases, the fees gained by the attorneys dwarf the actual money collected by the plaintiff by tens of thousands of dollars, compared to the actual amount of the disputed amount.

And the reality of this is -- this results in higher rates paid by all, especially in south Florida, because those costs then get transferred into our rate-making formulas, and will result in increased rates in the areas where these litigation cases occur.

There is some conversation that legislation needs to be done -- passed to fix this; I don't know if it's going to pass this year. But it may be required to eliminate this problem.

Again, as a benchmark thing, I think Citizens is talking about doubling or tripling their rates in southeast Florida over this matter, because of how bad the crisis has gotten for them.

While it's become a big item now, I think it's been in the works or slowly percolating up for several years. It's just reached a -- starting to reach a crisis mode here in the southeast area. So, that's what this stuff is.

In terms of the things that we are doing to combat that -- well, first of all, we like the fact that we know our policyholders well, and we have kept a very consistent book that doesn't churn over -- refresh very often. We know who our policyholders are, and the policyholders know us. That helps a tremendous level because what's going to happen is that -- what's already happened is -- people's loss ratios are up 50% from where they used to be, say, two years ago. So, if two years ago your loss ratio was, in the case of Citizens, around 40%, 45%; it's now sitting at 70%.

Luckily for HCI, we spend a lot of time underwriting and picking the right policies [out of] Citizens, and sticking to underwriting discipline. Our loss ratios in south Florida were much lower. So, while they're up 50%, they're actually still lower than Citizen's loss ratios from two years ago. So, we're feeling the pain, but it is not fatal or any great level.

Other things that we have done that I can talk about -- some things I can't talk about -- but other things we have talked about is the nature of these claims is obviously to do with lawyers and litigation fees, and obviously, not only the litigation fees paid to the plaintiff's lawyers, they drive litigation expenses on the defense side as well. We did what would be a normal reaction to this. Almost two years ago, we started hiring attorneys on to staff in south Florida. At this point, we actually employ five attorneys full time in south Florida that are HCI employees.

This ensures that we keep our litigation expenses down. In fact, that is more important than -- because most of the claims when they come in have already got adjusted and lawyers attached to them in this kind of category. So, the fact that if you had [crops driving] around south Florida, it wouldn't help much. Having lawyers down there does, and we have them. So, that's what we've done.

A second thing we've done, because we've seen this thing coming for years, and, Casey, this goes to conversations that have gone on for years about PIF count and premium and premium growth and PIF count growth and all of those things. What is now coming into clear focus across the industry is -- while growth is good, along with growth comes risk. Nobody ever talks about exposure growth -- risk exposure growth.

Every time you write a new policy, you get more risk that comes on board. I think a number of people who have grown rapidly in south Florida in the last couple of years, especially in the HO-3 section of the business, are finding this out. Conversely, if you look at our QUASR report for HO-3 policies, the numbers we had in tri-county in -- at the end of 2012, was 46,500 policies. As of the end of last year, we're down to just over 36,000 policies.

The important thing about this is, by reducing PIF count, you reduce the exposure to litigation. And until we find legislative relief, and when we do, we will obviously expand again. Until that point, we are in a defensive mode, as we have been for a couple of years, and it is keeping this pain point manageable for us.

Did I miss any part of your question?

No, that's a very good summation of it.

In relation to the 30,000 shares, was that a 10b5 for you, personally?

Yes, it was. There were two buybacks that got initiated in the fourth quarter. The Company started its own, and that's been press released, et cetera, but I just wanted to make sure, because people have asked questions about it, that everybody be aware that I initiated, personally, a 10b5-1 program.

Once you do that, you hand over a pile of money to somebody, and they execute in a blind trust mechanism buying these shares. And so, over the course of something like 70 days, ending in mid-February, I bought 30,000 shares at a cost of, I think, approximately $1 million or so.

All right. And how many shares did the Company buy back in the fourth quarter?

I don't think the Company bought any back, because I don't think its buyback activated in sufficient time for anything to be done before the end of the quarter.

Okay. Now as it relates --?

Sorry, Casey, but I do want to make sure that I'm clear on this. The Company's buyback did activate after the start of the year. There has been a buyback in process from the Company.

We usually give out the numbers for the quarter when we report the quarterly numbers. So, the next earnings call, we will tell you what the first-quarter numbers were.

Right, that's fine.

Now, as it relates to TypTap, you mentioned that this is open to agents as well. So, agents will be getting a commission on policies that they refer to the Company through TypTap?

Actually, I think they will sell and bind it just like they do for any other insurance carrier.

Okay. How do you see TypTap onboarding and affecting the Company's gross written premiums over the course of 2016? Do you have any feel for that?

We have some feel for it. The item that is really here is, seeing that it's all of three days old, it's a little bit early.

The other part of this is, given that you are comparing this against a $400 million premium-in-force book, it is not the significance of what is written in TypTap, but it's the nature and how it's done and how the system works. And by the way, in every policy, there is always an agent involved because when you are buying the policy, you do have to pick an agent that you want to be agent of record.

Is it -- are you hopeful that TypTap in writing flood insurance exposes you to new customers, with which you can then potentially convert to homeowners' policies?

Yes, some of that in due course will occur. TypTap isn't licensed for homeowners at the moment.

But the key item in this is -- here is the initial feedback we're getting, and this is why we're encouraging people to actually go try it. Go try buying flood insurance with something else, and then try it with this. Most people, after they do this, go -- hey, can you take my homeowner's policy as well, because it's so much more convenient and easy to do than how it's been done in the past. So, please, go ahead and try; if you get a chance tonight, do try it out.

Okay. I've asked a lot of questions, so I will let somebody else jump in here. Thank you.

Thank you.

Our next question comes from the line of Dan Farrell of Piper Jaffray. Mr. Farrell, please proceed with your question.

I apologize if I missed this in the prepared remarks. Do you happen to have the gross written premium and net written premium? I think you provided earned, but if you have the written, that would be helpful.

I think Richard is looking it up as we speak.

Okay.

That's one item I didn't --

I can -- let me ask another question, and you can come in when you have it. As TypTap premium ramps -- and I guess I'm thinking more intermediate to longer term -- how does that change the profitability component of the Company, and the margins that you are generating? I realize reinsurance is a factor in that, but is there anything that you can give us to think about that?

Yes. Given TypTap, how it works, and also the product mix because product mix will be a big issue in the scenario. The expectation is that the margins would actually improve.

Okay.

We're doing things that could actually increase margins further from where we are.

Okay. And then, can you give us a sense of how you see your reinsurance buying evolving as you go forward? I realize we're heading -- I'm sure you're having early discussions now, and we will move through the year, but how do you see your buying taking shape this year, and maybe even long term how you think about it strategically?

Let me answer the second part, first -- how we think about it strategically. The idea of reinsurance, and I'm going to make a slight comment here, and it's a joke, so that when people take the context, please appreciate that. We have bought reinsurance now for nine wind seasons, and we have never yet filed a claim; we never had one degree of reinsurance rebate coming back the other way from a loss.

That isn't a bad thing. It actually is good because in order to get losses back, you've got to have bad events happen; it's bad for us, it's bad for our policyholders, it's bad for everybody concerned. So, we look at reinsurance as something that you buy to adequate levels, so that you can rest at night.

And should anything happen, any kind of cat event happens, one, our policyholders are protected, and that they can sleep at night. And secondly, our shareholders are protected, and they can sleep at night. So, we buy reinsurance to levels that are sufficient to ensure the Company withstands the next cat event, whatever it may be.

Once you get past that, then you sit there and say -- what is the most cost-efficient way of doing it? What is the best use of capital, et cetera? And that's what we do. And obviously, we do try to negotiate favorable rates as we can with our reinsurance partners.

So, I think, having said that, going forward, generally the viewpoint that is coming out right now is that insurance, reinsurance costs, further reinsurance cost reductions, are probably closer to the finish than the start. Because rates have come down tremendously over the last few years, you just can't imagine them continuing going down at those rates. So, that's a general consensus.

Obviously, once we get our reinsurance finalized, we will update all of our shareholders at that point. We're in the middle of those negotiations right now.

Okay, great. That's all I have, unless you have those premium numbers. That's it. Thank you very much.

Dan? Dan?

Yes.

This is Richard. Gross written for the year is $396.338 million. Net written for the year is $255.724 million.

Great. That's for the year. Okay, great. Thank you very much.

Our next question comes from the line of Matt Carletti of JMP Securities. Please proceed with your question.

Casey and Dan covered a lot of the questions I had. I just had a couple others, going down the list. A couple numbers questions: How is policy retention running, and what are you seeing in terms of pricing?

Policy retention -- I think the PIF count at the end of the year would be around 162,000 policies. So I think it is much better than people have been speculating about. Retention, if you look for the year, for 2015, is actually slightly better than 2014 was.

Having said that, our retention rates are so high at this point that we really only got one way to go, which is down. That doesn't mean the world is ending; it's just that we've had an extraordinary run of our customers not wanting to leave the Company. So, it's actually a good thing.

As far as rates and everything else, as you know, our rate reduction of 5%, give or take, went into effect on January 1, 2016. But I think if the assignment of benefits issues and those kinds of things do not get handled very quickly, and it doesn't look like they will, I think the days of reduced -- rates being reduced in Florida are at least over in the short term. I think people may be looking at increased rates, especially in southeast Florida.

Okay. And then only other question is going back to TypTap. In terms of flood, and this, again, is a medium- to longer-term view -- I realize it's only three days old at this point. Would you look to potentially expand that into other states?

I would imagine there's some work technologically to get all the data ahead of time that goes into that. But it seems that once you have the portal, are those risks that you would look to add in other coastal areas, or is there something about Florida that would want you to keep the book there?

No, I think, when you look at this thing and you see how it works, it's almost inevitable that you will probably expand into other states. Probably you would expand into other states with both a flood product and a homeowners' product as well. Because if somebody uses this, and is so enamored with how you buy flood insurance, why wouldn't you sell them a homeowners' product as well?

This finally gets to this point that we've been talking about for several quarters, where we have been talking about wanting to expand into all these other states. And we said we would wait for the right moment, and we wanted the right vehicle in which to do this. Try out TypTap, and I think it's almost like, wherever you live, if you worked in Florida, you can't wait for it to get to your state. It's almost that kind of product.

And so, we think, on the back of that, we should be able to expand into other states. And have a different selling proposition to everybody else.

Right. Makes sense. Great, well thanks for the answers and congrats on launching TypTap and best of luck.

Our next question comes from the line of Arash Soleimani of KBW. Please proceed with your question.

So just want to touch base on the comment you made. You said that you would be willing to go into homeowners' in other states also, with other joint products with TypTap. Do you think that the rates that you can charge on homeowners' would be more attractive than they would have otherwise been, since you're offering a bundled product, or would the TypTap product, to some extent, subsidize the homeowners' product? I just wanted to get some more color around that.

Arash, it's a great question, but I think that what TypTap does is opens things to a different dimension. TypTap is stuff that people buy because of convenience, not because it's slightly more expensive or slightly cheaper.

Again, I encourage you to go try it out, because what we're seeing in just a few days of this -- the launch of this -- is that people are walking around with this thing, a few insurance agents, a couple of realtors -- any time question comes about how much will the flood insurance be on this house, they have a number, right? And the convenience makes people -- as long as the price is reasonable, which it is -- makes people want to do it that way because who wants to go through the hassle of the valuation certificates and 25 other questions?

I really encourage you to try and buy flood insurance on that address I gave you, 1818 West Hills Avenue. Try to buy it any other way, and then try to do it on TypTap. Imagine that was your house, which would you rather do?

Right. My other question is, with TypTap, and you may have mentioned this, I apologize if I missed it, why put it into a new company rather than the way you were doing it before? Why not offer the kind of Exzeo technology for flood through HCI, the way you have been in the past?

Good question. A couple of things: We wanted to make sure -- and by the way, why did we call it TypTap? One, it's much easier to type in TypTap.com than it is to type in Homeowners Choice Property & Casualty Insurance Company.

Also, TypTap is not your typical insurance company. We wanted to make sure people understood. This is different; this is the future, not an online version of the past.

It's for a lot of those kinds of reasons, and especially also because we're talking about doing the flood-only product to start with. It made sense that we put it in a separate company. And we had long talks with the department; they agreed with us, they seemed to like that as well. So, that's why we did it this way.

Okay. That makes sense.

Does the -- so I know in the past, when you bought reinsurance, you had a separate tower that I think protected against flood. Is that program likely to change with the new company -- with TypTap?

I think it's inevitable that, over time, there will be some changes. By the way, just so that we could make it convenient for Homeowners Choice customers, and we didn't forget them either, they can buy flood insurance from Homeowners Choice at the same prices as they get them from TypTap. They might want to do it with Homeowners Choice because then everything is with one company.

We made sure that alternative was available to Homeowners Choice customers, because we like them a lot as well. So, that is what's going on in terms of the flood tower, which is the reinsurance program that protects policies that have flood coverage. It will obviously change and expand and grow along with the growth of the flood business.

So, just to be clear then, the legacy flood premiums that you have -- those aren't going into this new entity? It's going to be separate?

We're leaving it to the customer policyholder to choose what they would prefer. What we're finding is that we have lots of customers in Homeowners Choice who really like the Homeowners Choice brand. And if they're going to buy flood insurance, they'd rather buy it from Homeowners Choice versus TypTap.

That isn't anything against TypTap; it's just that they love Homeowners Choice so much. So, we cleared an avenue for them to be able to do that. Homeowners Choice does not sell flood insurance to people who are not Homeowners Choice customers, whereas TypTap does. See the distinction?

Right -- no, I do. You had mentioned that, if you go into other states with TypTap, you would pair it with a homeowners' product, so would that homeowners' product also be through TypTap, or would that be through HCI?

It would be through TypTap. Because again -- I think the item is how easy this is to do.

I think TypTap is that whole -- if you want to think of the difference between TypTap and Homeowners Choice -- before an iPhone came along, nobody wanted to -- nobody said, I miss cell phone technology, and I wish somebody had invented an iPhone, but once an iPhone came along, everybody wants to switch over to that; they don't want to use the old flip phones. That is the distinction between how Homeowners Choice does things, and how TypTap does things.

Okay. So, could TypTap offer homeowners' in Florida in the future, or will it be flood only in Florida?

In the future it could do a lot of things, and that's what we are saying. We're excited about what -- all the possibilities that it could do, both in Florida and elsewhere? Obviously, even expanding into other states, we have to make sure we get -- this is a regulated business, so we have to get regulatory approvals and sign-offs and all those kind of things before we can do it.

The capability is there, but there are other people who also have to sign off on this. It's not going to happen overnight.

Sure. Timeline-wise, then, the other states piece of TypTap, is that something -- again, sorry if you mentioned this already -- that would be down the line, we're talking three, four years, or is it something that's nearer term than that, just to get a sense of how you're thinking about it.

I think the way to think about it is that it is about the technology. Think about the technology. The technology is going to make people, if it works, want us to enter into other states. It opens markets.

We're not going into markets and battling for one policy with 100 other carriers. We will be into places where hopefully people want to do business with us, because we think different. Right?

Again, I will use the iPhone example. Before iPhones came along, you used to walk into a phone store and the guy would sell you a phone, whether it was a Nokia or a Motorola or whatever. Once Apple came onto the scene and they changed the way the game is done, people now walk into an AT&T store or Verizon store and say -- I want an iPhone. They're not sold a phone; they walk in there and they say -- I want this product. TypTap does that for the insurance business; try it out.

I definitely will.

On the underwriting side, obviously there's been a lot of talk about privatization of flood insurance, but a lot of the concern is around the ability to understand the risk and price it appropriately. I wanted to get a sense of how do you think about that, and what makes you a little bit more comfortable than others in that regard?

Well, the thing that lets us do this is one of our other wonderful divisions, Exzeo, and the level to which we have data and research on almost 5 million homes in Florida. We have taken several years to put all this stuff together.

While this is easy for the consumer, it doesn't mean that we will take anybody and everybody who wants to buy flood insurance. The TypTap technology automatically figures out whether the risk fits our underwriting appetite or not, and takes appropriate actions, all automatically. So, yes, this is not by any means a mechanism that we will insure everybody across the piece.

Sure, and did you mention earlier, I'm sorry, what margins you expected on this business?

We did. We said -- we are hoping that the margins are actually better than the existing business.

Okay, so, better than legacy Homeowners Choice homeowners' premiums? Okay.

We're hoping to improve on those, yes. (multiple speakers) [There will be part of expenses] initially, but over time it could be better.

What drove the change from -- I guess maybe it was over a year ago at this point, that you had expected flood at HCI to be margin-neutral? What makes you more optimistic on the margins today?

Try it out. It's the technology. When you see it, you can see the amount of [redundant] paperwork and headaches and reviewing of documents and all those kinds of things that have been cut out by the way this technology works. The efficiency is stunning.

Did you mention how much capital you have put into TypTap? Could I get that (multiple speakers) --?

No, we hadn't mentioned it, but it is $25 million -- initial capitalization.

Okay. And those premiums -- the surplus for flood, how does that compare to Homeowners from the way you would think about it or the regulators would think about it?

I think most often the regulators are coming to grips with what all of these things mean, et cetera, and how we go about doing it. You can go with the industry standard of 4 to 1, but obviously we are nowhere near that. Some of this is a brave new world for everybody.

Right. Okay. My very last question, so in terms of the glide path with the rates, and I know this is a little bit different because you're providing a more attractive technology platform that policyholders will like, but how many more iterations of the glide path rate increases do you think we need for something like TypTap to really start to gain traction?

You mean like -- which glide path are you talking about? The NFIP glide path or (multiple speakers) --?

Yes. The NFIP glide path, that would I guess make a private market alternative to the NFIP attractive to a policyholder. I know the technology piece of TypTap helps with that as well, but just wanted to get your (multiple speakers).

Actually, Arash, you're asking me a question that we disagree with a lot of people about. We think the rates as they were pre-Biggert-Waters were more than adequate, for a select group of people. I'm sure, collectively, they are not adequate, but I think the people in Florida have been hard done by, by the rate increases that have gone on.

So, we think the rates are more than adequate for most of Florida, and our rates are set accordingly. Obviously, with time, as loss experiences and the book matures, rates will be adjusted in conjunction with the Department and rate filings. But for now we have built the business model assuming that the rates stay exactly as we've got them right now, which is well below the NFIP for the people that we're targeting.

Okay, that makes sense. I will definitely go online and try the West Hills Avenue address. Thank you very much for all the answers.

You have a follow-up question from the line of Casey Alexander of Ladenburg Thalmann. Please proceed with your question, Mr. Alexander.

I'm sorry if I missed this: I heard your commentary related to -- we've probably bottomed out as far as we can, in terms of reinsurance rates. But it occurs to me that three years ago, and two years ago, that HCI wrote multi-year reinsurance contracts. And in the time that they had those multi-year reinsurance contracts, rates did subsequently come down while you were locked in at a level. Is there any opportunity as -- when do those contracts run off, and is there any opportunity for reinsurance savings as those contracts run off?

Casey, well remembered, well noted, stay tuned. We are in the midst of our reinsurance renewal, as we speak, and lots of moving parts. But by the time the next earnings call, or the one thereafter, we will keep you updated once we have it finalized. Yes?

Okay, great. Thank you very much for taking my question.

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.

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 our continued success.

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