Hci Group Inc (HCI) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to HCI Group's Fourth Quarter and Full Year 2017 Earnings Call. My name is Daryn, 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 April 6, 2018, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until April 6, 2018, on the Investor Information section of the HCI Group website at www.hcigroup.com.

I would now like to turn the call over to Kevin Mitchell, 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 2017 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 year, 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'd like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan and project and other similar words and expressions are intended to signify forward-looking statements.

Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the company's business, financial conditions and results of operations. HCI Group Inc. disclaims all the obligations 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?

Thank you, Kevin, and welcome, everyone. As our results indicate, Q4 returned HCI to its normal profitability after Hurricane Irma. We earned a healthy diluted EPS of $1.14. Here are some of the fourth quarter highlights.

We work to resolve the claims from 18,000 policyholders who had damages from Hurricane Irma. The claims continue to trickle into this day. However, all but 250 claims have been closed at least once. As of today, about 2,000 previously closed claims have currently been reopened as is the normal -- as is normal in the course of claims handling process.

During the quarter, we expanded our licensing into 3 additional states, North Carolina, Ohio and California, completing our 9-state expansion that we began last June. We expect to begin selling flood insurance in some of these states later this year.

We also did a modest assumption of about 1,500 policies from Citizens to become familiar with their new assumption process. And as normal, we paid a $0.35 per share dividend, which is our 29th consecutive quarterly dividend.

And finally, in October, our real estate division, Greenleaf Capital, added another property to its portfolio. This property is a 70,000 square-foot office building on 8 acres of land. The building is fully leased to a national nonaffiliated banking institution on a long-term lease.

At this time, I'll turn it over to our CFO, Mark Harmsworth, who will take us through our financial performance for the fourth quarter and full year. Mark?

Thanks, Paresh. So as Paresh mentioned, fully diluted earnings per share in the fourth quarter were $1.14, which is more than double that of the same quarter last year. The biggest quarter-over-quarter change was a significant reduction in loss expenses. In the fourth quarter of 2016, our loss expense included a provision for the impact of Hurricane Matthew as well as average development from prior quarter -- prior years.

In the fourth quarter of this year, we had no adverse development and no weather-related losses. Our loss expense for the quarter is 26%, which is in the range of our historic loss ratio despite some positive claim trends. Claims per week, losses and incurred claims are all down. While we're obviously pleased with this trend, it's too soon to know if it will continue. And so with that in mind, we booked what we believe is a conservative loss provision for the quarter and the year, and we will monitor it as it matures.

When looking at our income tax expense, you'll notice that we have a lower-than-average effective tax rate this quarter. Normally, this would be around 37.5%, but it was 28.5%. This reflects a $1.4 million benefit from a onetime reduction in our deferred tax liabilities, resulting from enacted changes in federal income tax rates.

More importantly, our effective income tax rate will be significantly lower in the future. A number of things can impact the rate, but we have generally been around 37% to 38%. We expect this to drop to around 26% starting in 2018. This should have a significant positive impact on future earnings per share. While the impact will vary from quarter-to-quarter, we estimate that the lower rate will increase fully diluted earnings per share by about 20% from what it otherwise would have been.

Speaking of changes, you may have heard that for GAAP purposes, there will be a change in the way that equity investments are accounted for. In the past, changes in market value of equity securities have generally run through the balance sheet. However, starting in 2018, any such changes will run through the income statement. This may result in quarterly swings in net income that could be material in periods of equity market volatility.

Before turning to balance sheet, I wanted to make a quick comment on a change we made to the presentation of the income statement. In the past, we've had a line called salaries and wages. This included salary expenses, but other personal-related expenses, like stock-based compensation, employment taxes and employment benefits, were included on the line other operating expenses. Starting this quarter, we have taken these other employment-related expenses, combined them with salaries and wages and changed the name of the income statement line to general and administrative personnel expenses, which now includes all personnel expenses. This is simply a reclassification from one income statement line to another and has no impact on net income or any income statement ratios.

Looking now to the balance sheet. As I mentioned on our last call, after Hurricane Irma, we had no need to raise additional capital or to put any money into any of our insurance companies. As of December 31, 2017, we have a surplus of $152 million in Homeowners Choice, $24 million in TypTap and have $100 million of cash and investments at the holding company level. The RBC ratio for Homeowners Choice is just over 480% and TypTap is just under 3,000%, both are well in excess of the required 300%.

In the fourth quarter, as part of our 2017 buyback program, we repurchased 270,000 shares for a total consideration of $8.95 million. The total shares bought back under the 2017 plan were 433,000, and the total consideration was $15.1 million.

As we've mentioned before, we have been capitalizing on our strong cash position and liquidity by investing more in fixed income, equities and real estate. During the year, we have increased these investments by just over $80 million. Continuing to invest more in cash, combining with -- combined with higher investment yields should drive higher investment income going forward.

Just a few other quick numbers here. Book value per share was $22.14, up from $21.37 at the end of the third quarter. The basic number of shares outstanding was 8,762,400, and the number of fully diluted shares outstanding at the end of the year was 12,091,900.

In summary, it was a good quarter for us, and we look forward to some of the tailwinds being provided by improving claims trends, higher investment yields as we deploy more cash and lower income tax rates.

With that, I will turn it back to Paresh.

Okay. Thank you, Mark. Looking ahead, we are very optimistic about 2018 and beyond. Why? Well, firstly, as the events and financial numbers of Q3 and Q4 2017 show, we have eliminated 2 major uncertainties about the company. First, that it can withstand the financial and operational stress of a major hurricane. And more importantly, that it can revert back to normal healthy operations promptly thereafter. Q3 was the hurricane, Q4 back to profitability and healthy operations.

Secondly, we always mention our dividend and our share buyback every quarter. Any individual quarter does not appear to be baked, but consistent steady progress adds up. Let me elaborate. We have grown book value per share to over $22 from $2.50 when the company started in 2007. In addition, we have paid $7.55 per share in dividends inception to date. And finally, over the past 5 years, we have reduced our share count by about 2.7 million shares. We don't see the numbers at any given quarter, but as you add them up, this is what has been achieved. And we do these things so consistently that it often goes unnoticed. But when you look over the long haul, the gains are very evident.

Furthermore, these gains were produced in an environment with very low interest rates and a high tax rate. Going forward, things improve tremendously. Interest rates are higher and rising, and the tax rate is much lower. And we already have a formula for success that is improving over the long term in less favorable conditions than exist today.

In conclusion, we have removed major uncertainties from the business and picked up some very positive outcomes in the last few months. This bodes well for the future, and that is why we are optimistic.

And with that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question comes from Mark Hughes of SunTrust.

Could you please talk a little more about your favorable claims experience here in the fourth quarter? Is there any impact on the lawsuits from the storms? Is some of that energy being expended elsewhere, and so you're missing some of that? Or do you think that is underlying improvement in the market that may be sustainable?

Mark, it's Paresh. I'll answer the question in 2 different parts. In terms of actual claims coming in, there has been a decrease pretty much since Irma, and this is a non-Irma claims. And that is occurring, I think, largely because the weather has been very favorable. We've had good weather. The winter has come and pretty much gone, and we haven't really had any thunderstorms or anything else that normally occurs in the winter to affect the claims count. So that's -- we can't take credit for that, and it's a weather-related event. We do see some improvement because of some of the underwriting changes we made over the last couple of years, but the biggest bulk of daily claims is because of the weather. As far as lawsuits go, it's very early days, but what we're noticing is that the lawyers are focusing their efforts more on Irma than they were before Irma in terms of daily claims. So the focus is shifting away from daily claims lawsuits over towards Irma lawsuits, and Irma lawsuits are starting to decline. But it's the numbers that we see.

And just -- Mark, just to elaborate on something Paresh mentioned about claims dropping in related to weather, the biggest -- we've had this fairly steady drop in claims per week. And the biggest drop was actually in the first quarter of 2017 versus the same quarter last year. Sorry?

First quarter 2018.

Q1 '17 versus Q1 '16. So we have had a drop out since Irma, but it's been going on throughout the year.

Right. Okay. The 2,000 that have reopened, is that -- I think you described that as sort of normal course of business. Does that trend pretty consistently? Or is it more reopen this time around, but presumably the reinsurers, that's going to be their issue?

Yes. So look, the early reopens -- and this is the in the situation we're in at the moment, occur in normal course of business. So for example, we paid a claim and closed it, we usually pay (inaudible) or when they do the repairs and they get the final bill. They usually send them in. There may be some additional payments that are due, so we have to reopen the claim, make additional payment and reclose the claim. So there's a lot of that activity going on because these 18,000 claims, there's work being done on those houses individually. So a lot of that goes on. Other times, we get the claims reopened because when homeowners go to actually make the repairs, they may find the additional damage that wasn't evident until they start doing the repairs. So there's various reasons like this that occur. Of course, they also open if somebody sues us and lawsuits and things start that as well. So there's various reasons they start. But the early numbers we are seeing are what we would have expected to occur at this point in time.

Could you give us some thoughts here on how you think reinsurance costs will trend once we hit June 1? What do you think the impact is going to be year-over-year?

Mark, our reinsurance program restarts in June 1, and it's just too early to tell us to what the eventual outcome would be. I would easily presume that the rates will be going up. The question, obviously, is how much, and time will tell, I guess.

You don't care to venture a range, perhaps?

I'm really bad at the speculation part of it, but I suspect what's going to happen is going to be a lesser number than the reinsurers want and a greater number than the insurers want, right? So pick a range between 0% and 20%. Yes?

Yes. Okay. And then how do we think about the top line in 2018? First, I'm curious, you're sort of testing of Citizens, testing the waters there to understand the new process. What's your result there? And then do you think -- do you pick up a little bit of share maybe because there's some capital constraints among your competition? How is that going to net out with the top line here in 2018?

From a top line perspective, I think we are hoping to have a flattish 2018, at least that's the initial plan. It may change dramatically if an acquisition or something of that nature gets done, or we get a book of business, something of that nature. But short of that, we are being reasonably cautious in the matter, because obviously, our current book of business is performing well. Before we go and add lots of new policies that may or may not perform as well, we have to be mindful of how well our current portfolio is performing. I say that because there are a lot of people who expanded a lot over the last few years, and I think are now regretting some of that expansion because of their loss ratios and combined ratios and leverages.

Then how about the new Citizens...

We kind of don't want to repeat the mistake. Yes?

Yes, I hear you. How about the new Citizens process? Any early observations there?

Yes. And actually, I should elaborate as to what we were trying to do. Citizens had a major re-overhaul of their assumption process at the end of 2016, so starting 2017. We had never participated in the new process, so we thought it would just be prudent for us to be familiar with it. So Q4, we did a very small take-out, and we got even fewer policies just to learn how that process works. It wasn't that we were suddenly passing any opinion as to take out, so suddenly great or anything else of that nature. It was just us planning that should an opportunity come in the future to do a large Citizens depop, we want to be familiar with the process. So that's all it was, and we now know the process and how it works. And it's -- from our perspective, it's much more streamlined and efficient. Citizens, I think, does a lot more of the work in the new process, but it's by their design.

Our next question comes from Brian Hollenden of Sidoti.

Can you give us an update on flood? Where you stood at the end of '17? And now with 9 states approved, what can gross rate and premium grow to by the end of '18?

Okay. So I'll give it to you aside a different time frame. Last week was our 2-year anniversary of TypTap being in business. We are well over 7,000 policies and over 9 million premium in force. We've written more policies and all the other kinds of things that go on with it. But it's done very well over that time frame. Obviously, we have 0 policies in the other 9 states at this -- as of this moment. But the expectation is that if we can keep this going, we're trying to set for the next milestone, which is how to get to 20 million in business, 20 million of premium in force, obviously, across multiple states. The big debate is obviously in which time frame will we achieve that. And some of that is dependent on other things beyond us, such as what the NFIP does, et cetera.

All right. And then just switching gears a little bit. Are you seeing anything interesting on the acquisition front? And what has been maybe the biggest impediment to getting a transaction done?

Well, the second part is easy. It's the same problem that's always been there. The difference between what we think is a fair value for the business and what the current owner of the business wants to be paid for it. Deals get done when people come together on price, so we've been very disciplined about not overpaying for stuff. So that's always the issue. The other item that's there is, I think we're going through an interesting phase at the moment where there are a lot of people who I suspect will eventually exit the business, but they haven't come to that realization yet. And I say that because how many years do you go without earning serious income before your shareholders ask you to do -- look at alternatives. Some management teams believe they have a lot more time to do that than they will have in reality, I suspect.

All right. And then last one for me. Can you talk a little bit about the expense ratio? I guess is a 40% sort of annualized rate the right way to think about that ratio moving forward? And then just on premium pricing, can you just talk where you are now versus where you were a year ago?

I'll just talk about expenses for a minute. I mean, if you see for the full year, our expenses are actually down a little bit other than the interest expense. The expense ratio, I think, is up a little bit just because net premiums earned are down. I tend to think more in terms of the -- sort of the total combined ratio. And if you look at that in the fourth quarter, that was about 80%. If you normalize some of the noise for the full year, it's about 82%. And that's sort of in the range of what I would see going forward, absent any really crazy changes in reinsurance costs. But that's sort of somewhere between 80 and 85 is what I would see going forward in terms of the combined ratio.

And what was the nature of your premium question? Are you asking about rate changes or premium in force or what?

Yes, just rate changes.

Okay. So our basic philosophy is that we run the business expecting no rate changes whatsoever, especially not rate increases. It just makes us very healthy in terms of what policies we take on or which ones we don't. Going forward, at least our plans are that we will do our annual rate filings when they are due over the course of late summer and early fall. And the actuaries and the OIR will help us decide what our rates are going to be going forward. We are not rushing to file for rate increases or anything else of that nature. Because at least as far as we can see, AOB has been around for long enough and we've already sort of reflected that in our rates. And Irma was a hurricane that should have been expected because we were in a hurricane-prone state. So we are very much comfortable with exactly where we are at the moment.

Our next question comes from Arash Soleimani of KBW.

Was there any -- the prior year development in the fourth quarter, either favorable or adverse?

No.

And was there any current accident year development?

No.

Okay. In your statutory financials for Homeowners Choice, it looks like there was an adverse development contract between Homeowners Choice and Claddaugh. So 2 questions there. One, is it correct to assume that on a GAAP basis, it's as if that transaction never happened, it's just completely eliminated? And then the second part of the question is...

Yes.

Yes. Okay. And then the second part of the question is what was the purpose of that transaction?

Yes. So just to be clear on the first one, there is no impact on the consolidated GAAP statements because everything is eliminated on consolidation.

Okay. And the second part of the question is, we pride ourselves with the conservative nature we run Homeowners Choice. Case in point, after Irma, we -- it didn't need any capital contributions, et cetera. And we looked at what's going on, and we are very comfortable with the AOB and where we are in our reserves, et cetera. But a little bit of additional insurance wouldn't be all bad, and we can afford it. But we think we've got reserves correctly. We didn't want to do that with a third party, so we have plenty of capital, and we did it with Claddaugh. But it's just to make sure that the Homeowners Choice financials stay

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Ladies and gentlemen, please standby we appear to be experiencing some technical difficulties. Again, please standby, we're experiencing some technical difficulties.

Sorry about that. Something seems to have gone wrong here, but we are back online. Arash, are you still there?

Yes, I'm here.

Okay. So hopefully, did you get my answer to the question?

I (inaudible) basically that it's not that you needed to add any capital to the statutory entity. It was where it needed to be to make the regulators and everyone happy, but just to be extra conservative. You did this to make it look even that much stronger from a capital perspective. Is that more or less correct?

That is correct, yes. Same reason we're buying (inaudible)

Okay. But I guess you just want to have like an extra cushion basically. Like is the -- like was there anything that gave you just maybe a little bit of -- I guess, was there anything that pushed you to say, hey, like I want to be a bit more conservative. Because it looked like when you said the RBC number for Homeowners Choice, it was, like, 480%. And I think you said 300% is the minimum. So I guess, what like -- what would it be without this adverse development cover? Like would you be -- go to 350% or something? Like what (inaudible)

No, no, no. It will be higher. We actually paid a price through the adverse development file cover, because we pay premium for it to do that, right?

We had a huge surplus in HCPC. So the RBC ratio would have issued higher than it was. It was -- it didn't have anything to do with trying to make the surplus look higher or make the RBC ratio look higher, nothing like that. It's really just to deal with where huge or adverse development was there, but it actually reduced the surplus of HCPC.

Okay, so basically, you're saying the whole point was just in case there would be more adverse development in the future from, let's just -- like let's say, AOB gets crazy, even crazier than it already is, this was to protect HCPC in that situation?

Yes, because Claddaugh will take the lawsuit, not HCPC.

Okay, okay. That makes sense. And...

Yes. And ours to really drive home the point. That's why when you ask a question to Mark at the holdco level, the answer to everything was 0. You just -- and we did that in the quarter where that was absolutely the case. So it doesn't appear that we were doing this to -- for any other reason, yes, than just safety.

Right, right, right. And for TypTap, I think that the 300% that you mentioned, so would you need to put any more in there because if it's right at 300% once you writing -- you know what I mean, is there...

Arash, it's 3,000%. So...

Oh, it's 3,000. Okay. I thought you said 300%. Okay.

I apologize if that didn't come through clearly. We've got more than enough surplus in TypTap.

Yes, no, I just -- I misheard. And the -- this isn't stuff that you mentioned, so can you break out for the quarter just direct written premium and assumed written premium?

I hate to tell you this, you're going to get really -- the assumed written premium wasn't that much, and the direct written premium is also affecting the fourth quarter because that moratorium that have gone on in terms of nontax and policies. So I think you're going to see some volatility in written premium -- direct written premium, because you're going to get the reversal effect from Q3. But let's see if we can parse out the numbers.

Yes. I don't -- yes, assumed was very, very low. Gross written premium is 46.6. And assumed, I think, was, like, 2 million. So the balance...

But you -- okay. But you said on a gross -- let's say gross, like direct plus assumed was 46.6?

Yes, yes. And assumed was like 2.1.

Okay, okay. And then on the expense ratio and looking at it on a gross basis and taking out policy acquisition cost and not including interest expense. So I'm just looking at basically the other operating or the other expenses that you have broken out and the personnel and general wages, you get something in the neighborhood of -- it looks like 8%. And the rest of the year was probably closer to 11%. And so was that just seasonality? Like if we look -- if I look back in the fourth quarter of 2016, I seem to see that same trend. So on a gross basis, should it be kind of in the 11% range, 1Q to 3Q? And then 8% 4Q?

Yes. I mean, when you talk about percentages, I think it confuses a little bit. So let me take that apart. So the fourth quarter, you're trueing up expenses. The main one you're trueing up is bonus expense, and so that will often end up with a lower expense in the fourth quarter. That's why it's lower in the fourth quarter than the first 3 quarters. But if you look at it on a go-forward basis, that 10% to 11% is probably closer to what you're going to see. It comes out to typically about 10 -- if you combine those 2 together, it's always in the neighborhood of about $10 million a quarter for personnel expenses and OpEx. And that -- I mean, that's been fairly consistent over time. It's dropping slightly, of course. It's lower this year than last year. But if you're assuming that $10 million range a quarter, you're probably not surprised.

And is the reason it's lower in the fourth quarter, is that just because of the storms we had this year and last year?

Yes.

Okay. And just back on to the reinsurance question. I know you put out a range of -- I mean, you said 0% to 20%. And it looks like most of what we're hearing these days is that it's considerably below the levels that market participants were talking about a few months ago. So I mean, like realistically speaking, does it seem like we're probably more in the maybe 0% to 5% range? I guess, why are you going as high as 20%? Like is 0% to 5% more realistic based on like what you're hearing more recently?

Arash, I was putting a wide range out there so that I wouldn't fall outside the range. If you've talked to people and stuff and you embedded numbers, I'm very happy to go with your numbers. But it's the outcome -- it's early in the season. And until things get done, you always worry about what the final outcome will be.

But is it fair to say -- go ahead. Sorry.

It is early days. Look -- and the reason I'm being cautious is years of experience in some of this stuff. In -- back in 2011, the Japanese earthquake changed reinsurance rates. It isn't like rates can be agreed to right now. It's what you do when you do it. So I'm optimistic like you are in the 5% range, but I like to do it when the numbers have been signed.

Sure, sure. That makes sense. What was the -- did you mention -- I know you said you expect to start writing flood this year, but did you say like roughly what quarter you expect to start in?

No, we haven't. There's a few steps we have to go through, and we want to -- we're doing this more as a marathon than a sprint, so we're trying to make sure we are comfortable when we start writing these policies.

Sure, sure. And what are the current, I guess, policies in force and premiums in force for TypTap?

I think we said over 7,000 policies and -- but over 9 million in force.

Okay. And with the AOB stuff, do you have like a percentage of the 18,000 that have an AOB associated with them?

Arash, I think when you ask AOB question, you -- it's not really just the AOB part, you're probably thinking of litigation and everything else, which is also going to occur. That stuff is just starting, okay? So we know it's just starting because every month, we're getting -- we're seeing the numbers tick up. So what that number is going to be is nowhere near peak yet, and we are watching it or we expect that, that number will peak some time mid- to late this year.

Okay. Do you -- like on the ones that did reopen, was 2,000 the number you said?

We eventually expect -- yes, there's 2,000 that have reopened, yes. But these reopens, what happens in the course of one of these events is that you get the claims, you close them. They will reopen. That first reopen wave is because of normal work being done, et cetera. We are now anticipating the second wave of reopens, which should be much smaller numbers but much more significant, which is when the lawsuits and all of that AOB stuff, et cetera, arrives. And that, like I said, we are expecting to peak in mid to late this year. So we received a little bit over 100 Irma-related lawsuits so far, but it's a meaningless number because you have to extrapolate a lot further out as to what the ultimate number is going to be.

Right, right. When you say the first wave is more, I guess, legitimate, so you're saying that, that first wave of 2,000 is not really AOB and litigation-oriented. It's more reopened because it actually makes sense to reopen it or for non-shady reasons?

Yes. I have one comment on the last part of that. But yes, those claims are opened. Not reopened and have very little to do with AOB or [PAs] or litigation, the bulk of them.

Okay. So the 100 Irma-related lawsuits that you mentioned, are those associated with those 2,000? Or not necessarily?

Well, they're part of the 2,000, but that also just illustrates the same point again, right? If you got 100 that have been reopened because of those lawsuits we see today, that tells you 1,900 of them have nothing to do with lawsuits, right? That mixture was changed over time.

Right. Sure, sure. And when -- just back to the Citizens process change, so are you just trying to be ready in case there's another storm in 2018 and it knocks some of the more thinly capitalized companies out? Are you just kind of being prepared? Or do you have any other reason to believe Citizens might get bigger again and provide that opportunity?

Arash, yes, we -- look, when Citizens puts its process in place, it tends to start to ripe for about a decade or so. We had the old process dialed in very well because we've been using it since 2007. It's just seem prudent that they have a new process, we should be familiar with it should we need it sometime over the next decade. We weren't doing it because we were anticipating something imminent that we're going to do with the new process. But we just want to be familiar with it.

No, that makes sense. Okay, I think that's everything I have.

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

To the extent that you do have higher reinsurance costs, I assume you'll refile and incorporate those costs into your rates. You have made the point that the rates already sort of contemplated that the wind would blow eventually. So just wanted to clarify, if reinsurance rates are up 5% or what have you, will you refile your rates or incorporate that 5% into your new rates?

Mark, I think it's a difficult question to answer for a simple reason. If the rates go up, hopefully, just 5% or something, we probably will just absorb that. If the rates go up 20%, that might require a rate file, so it's just a question of where we are in the scale.

And then I think at least in one rate filing, I thought some policy language would seem to restrict water damages to the extent that the -- a policyholder didn't have it inspected or use a contractor. I can't remember precisely the language, but am I right that there is maybe some policy language that has some limitations around water damage? And if so, how prevalent is that in the policies? And is there a strategy to roll that up more widely? And also, what impact on rate, if you're able to get out some kind of language like that?

So Mark, that's a very insightful and complicated question that requires that kind of an answer. We had contemplated and we had got the rates approved and filed for the question that you just asked. But as Irma has developed and as we looked at our business, et cetera, and watching the claims trends and the lawsuit trends, we are trying -- and we're in the process of trying to see if we can just remove that rate file, so that there would be no change to our portfolio. And part and parcel of this stuff that we're doing is, given all the effects that Irma has had on our policyholders, it just seems prudent at this moment in time to add more uncertainty and change to our policyholders. Because on these calls, we talk about what's there for the business, et cetera, but we're always very mindful that we have 135,000 customers and it's their single biggest asset that we are providing them peace of mind on. So at a time when people have gone through some trauma, we do not wish to create further uncertainty if we can avoid it. So we are trying to work with the department to repeal that rate filing, if you like.

Am I right in recalling that the associated rate was unchanged, given what's that policy language? Or was there a reduction?

There was a reduction because when we do these things, they -- actually, they have to make it actuarially neutral in making that change. So there was some rate adjustment in that course of doing that. But it would have created a lot of angst that doesn't seem appropriate, given that we've just gone through Irma. It's a statewide event, yes?

Understood. What was the magnitude of the rate offset?

Well, and actually we will tell you. It was flat because they expected that the language will reduce lawsuits by a certain amount, and we were passing that -- those savings in reduced rates. And that's the premium. A premium kind of thing, yes? But that doesn't necessarily -- so it's neutral.

Right. Neutral from a, I guess, loss ratio perspective, but what was the impact on premium?

I think the premiums would have been in the high-single digits, maybe low on a 10%, plus or minus a couple of points. And (inaudible)

Did that strike you ...

Right? It wasn't entirely, of course, our entire portfolio. It's one particular type of policy, which is a portion of our overall portfolio.

Did you think that was a reasonable reduction for the change in coverage and you just didn't want to be disruptive? Or did you think that was too much of a reduction?

No. We thought it was reasonable and everything else. It was -- we had started the process long before Irma kind of showed up, and we were walking through it. When it came time to implement it, we sort of looked at all the daily stuff that we see. And obviously, with 18,000 claims, et cetera, we are quite in constant contact with our policyholders and our agents. Because when we started making these coverage changes, it creates additional work for our agents as well. And it just didn't seem to be appropriate to do it at this moment in time. That doesn't mean, at a future point, we won't bring it back. But at the moment, we just said, let's not try to do anything to disrupt the steady -- how steadily we treat our policyholders.

And the final question. Mark, you had mentioned I think that claims trends have been improving since Q1 of last year. Did I hear that properly? And so the fourth quarter was just maybe a continuation of what was a pre-existing trend other than what's on, obviously?

Yes, it's been something that's been going on throughout the year. I think our claims per week have dropped about 12% from 2016 to 2017. The biggest drop was in the first quarter, as I mentioned, but it's been something that's been going on through the year.

We have reached the end of our question-and-answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing comments.

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