HCI Group's (HCI) CEO Paresh Patel on Q2 2016 Results - Earnings Call Transcript

| About: HCI Group, (HCI)

HCI Group Inc. (NYSE:HCI)

Q2 2016 Earnings Conference Call

August 2, 2016 4:45 PM ET

Executives

Kevin Mitchell – Vice President-Investor Relations

Paresh Patel – Chairman and Chief Executive Officer

Richard Allen – Chief Financial Officer

Analysts

Matt Carletti – JMP Securities

Casey Alexander – Compass Point Research and Trading

Arash Soleimani – KBW

Operator

Good afternoon. Welcome to HCI Group’s Second Quarter 2016 Earnings Call. My name is Ben and I will be your conference operator this afternoon. At this time, all participants are in listen-only mode. Before we begin today’s call, I would like to remind everyone that this conference call is being recorded and will be available for replay through September 2, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until September 2 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, the Vice President of Investor Relations for HCI Group. Sir, please proceed.

Kevin Mitchell

Thank you, and good afternoon. Welcome to HCI Group’s second quarter 2016 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 quarter, 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 our 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.

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

Paresh Patel

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.

The newest addition to our Company is TypTap Insurance Company. Featuring tpytap.com an online platform for quoting and binding policies. TypTap currently offers flood insurance to Florida homeowners. We encourage our listeners to visit the TypTap website at www.typtap.com to experience the platform. Accessible from any internet capable device it provides a code in seconds and a policy in minutes it is the mobile future of Insurance.

Additionally we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our Homeowners Choice Insurance Programs. We also have an information technology operation called Exzeo, which develops innovative products and services for our insurance subsidiaries including the technology powering typtap.com. We expect to find other means to leverage Exzeo technologies in the future.

Finally, we have Greenleaf Capital, which owns and manages our diverse and growing portfolio of real estate investments. And 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, we reported our solid results for the second quarter of 2016, which represents our 35th consecutive profitable quarter. Here, are a few highlights from the quarter.

Number 1. We paid a $0.30 per share dividend, marking our 23rd consecutive quarterly dividend. Our cumulative dividends paid since inception now totals $5.55 per common share.

In addition to the dividend, we repurchased a total of 189,938 shares of common stock at an average price of $31.59 for a total cost of approximately $6 million. At June 30 we had approximately $8 million remaining on the $20 million repurchase plan, we had announced at the end of 2015. These repurchases demonstrates the Boards confidence in HCI’s value and prospects going forward.

Even with these share repurchases book value per share increased to $24.37 from $23.87 at the end of Q1. Also during the quarter we finalized our reinsurance program for the 2016, 2017 reinsurance year. The current program provides coverage up to $972 million for the catastrophic loss in a single event, which is sufficient to cover a 1 in 165 year U.S. firm based on the proved models from the Florida Office of Insurance Regulation. We are very well reinsured.

Lastly the second quarter marked the first full quarter of operations, for the online insurance company TypTap. We are very pleased with the results to-date and would be ramping up activity over the coming quarters. We expect TypTap and its associated technology will play a significant role in creating long term growth.

Now before I go further. I would like to invite our CFO Richard Allen to take us through the financial performance for the second quarter. Richard

Richard Allen

Thank you Paresh and good afternoon everyone. For the second quarter of 2016 net income totaled approximately $7 million, or $0.71 diluted earnings per share as compared with $22 million or $1.93 diluted earnings per share for the second quarter of 2015. For the six-month period ended June 30, 2016 net income was $13.1 million or $1.31 diluted earnings per share. This compares to net income of $47.4 million or $4.14 diluted earnings per share for the six months ended June 30, 2015.

Net premiums earned for the second quarter of 2016 were $58.5 million compared with $76.4 million for the same period of 2015. Net premiums earned for the six-month period reflect $117 million compared with $158 million for the same period of 2015. This decrease is primarily due to the policy attrition and impact of the 5% rate decrease that was effective January 1, 2016 for a new and renewal business.

Direct and gross premiums written for the quarter were $139.8 million – and $139.5 respectively. For the six-month period corresponding amounts were $215.4 million and $215 million. For the second quarter of 2016 reinsurance cost of $36.4 million or 38.3% of gross premiums earned as compared with 29.1% in the same quarter a year ago. Year-to-date ceded premiums were $76.8 million or 39.6% of gross premiums earned compared with 27.2% for the same period of 2015.

We anticipate ceded premiums of approximately $28 million per quarter for each four quarter remaining in 2016 and 2017 traded year. During the three and six-months ended June 30, 2016 ended the results of our multi-year reinsurance treaties as previous – as discussed on prior earnings calls. We accrued benefits of approximately $3.9 million and $8.6 million respectively.

During June of 2016, we received cash totaling $37.8 million from the benefits accrued under the multi-year agreements that began June 1, 2013 and terminated on May 31 of 2016. As of June 30, 2016 we had a total of $830,000 of accrued benefits and $277,000 of ceded premium deferred related to the new multi-year agreements that began June 1.

Our loss ratio applicable to the second quarter of 2016, which we define as losses and loss adjustment expenses related to net premiums earned was 44.9% compared with 26.9% in the second quarter of 2015. For the six month period ended June 30, 2016 our loss ratio was 45.6% compared with 25% for the six months ended June 30, 2015. These increases in our loss ratio are a result of the decrease in net earned premiums as identified earlier and the impact of weather events and reserve strengthening.

The expense ratio applicable to the second quarter of 2016 which we define as underwriting expenses, interest, salaries and wages and other operating expenses related to net premiums earned totaled 41% compared with 30% in the second quarter of 2015. The expense ratio for the six months ended June 30, 2016 was 41% compared with 28.5% for the six months ended June 30, 2015. These year-over-year increases were primarily due to the decrease in the net premiums earned.

Expressed as a total of all expenses related to net premiums earned, the combined loss on expense ratio for the second quarter of 2016 was 85.9% compared with 56.9% in the same quarter of 2015. For the six month period ended June 30, 2016 the combined loss on expense ratio was 86.6% compared with 53.5% in the same period in 2015.

As a percentage of gross premiums earned our combined loss ratio’s are 52.3% compared to 38.9% for the respective six month periods. Investment related income improved by approximately $400,000 during the second quarter of 2016 as compared with the same period in 2015. Other than temporary impairment losses in the second quarter $500,000 for 2016 compared with $300,000 in 2015. With the current market volatility and the size of our investment portfolio impairments may develop.

Year-over-year for the six month period investment related income reflects an increase of approximately $600,000. Other than temporary impairment charges $1.2 million in the six month ended June 30, 2016 compared with $2 million in the same period of 2015. Investments on fixed maturity and equity securities totaled $185.4 million at June 30 compared with $173.2 million at December 31, 2015.

Book value per share has increased to $24.37 at June 30, 2016 from $23.10 at the December 31. Our June 30, book value is based on approximately 9.838 million shares outstanding at June 30. Now I would like to turn the call back over the Paresh.

Paresh Patel

Thank you, Richard. We are pleased with our results for the second quarter of 2016 which were an improvement over the first quarter. As I touched on earlier we completed on our 2016, 2017 reinsurance program during the quarter. We expect to recognize net reinsurance cost of $113 million for the 2016, 2017 reinsurance year or approximately 32% of the Company’s estimated gross premium for the coming year. This compares with about $161 million or 40% of gross premium earned in 2015, 2016 reinsurance year.

In addition to significant savings we secured coverage improvements and reduced our overall exposure. The renewal highlights are as follows. We reduced our Florida Hurricane cat fund election from 90% to 45%. We repurchased additional private market limit with improved terms and conditions at a small additional cost. We reduced our net exposure within Claddaugh our reinsurance subsidiary by over $18 million from the prior year. We reduced our expected net spend by approximately $48 million when compared to the prior contract year.

Turning to claims the growth of the so-called AOB lawsuits appears to be leveling off. It is a little bit early to be sure while we continue to address the AOB issues through policy language changes, book optimization and reserve strengthening. Additionally we are very encouraged by March 1, launch of our newest division TypTap. The product and service has been well received by our agents and policy holders.

During the second quarter, we rolled over almost 400 new policies and the growth has continued into the current quarter. We’re confident that our superior technology will provide us continuing strategic advantage over any competitors.

In summary, we keep adding book value quarter-after-quarter even as we pay dividends and buyback stock. I’ve often said that we focus more on the bottom line than the top line. We have done that by managing our book of business and our reinsurance costs. We believe long-term growth will come from our flood product and application of our technology that allows us to connect easily with our customers. In addition our strong balance sheet provides us the flexibility and security to take advantage of any accretive opportunities as they may arise.

With that, we’re ready to open the call for questions. Operator, please provide the appropriate instructions.

Question-and-Answer Session

Operator

Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Matt Carletti of JMP Securities. Please go ahead, Matt.

Matt Carletti

Hey thanks, good afternoon.

Paresh Patel

Good afternoon.

Matt Carletti

Just had a few questions. First I guess first question is just kind of some of the numbers, so 45% loss ratio and you mentioned that there was some cat impact as well as some PPD related to AOB. Are you able to break those two numbers out, so I can get to more of kind of underlying level to work off of it.

Paresh Patel

Matt, it’s Paresh. I don’t think we said there was any cat, but there was tropical storm Colin, which is that, what you maybe recurring to.

Matt Carletti

Yes, the press release referenced a weather related events.

Richard Allen

Yes. We had. If you remember in the first quarter, there were several severe weather related events.

Matt Carletti

Right.

Richard Allen

Tropical Storm Colin went basically insignificant in our…

Matt Carletti

Okay. So the Q2 really didn’t have weather as more the AOB development that pushes up is that right?

Paresh Patel

Yes, Richard did mentioned Tropical Storm Colin, which I think other people are talking about as well. To us it was business as usual.

Matt Carletti

Okay.

Paresh Patel

We did have about 120 claims from Tropical Storm Colin, but where a Florida insurance company had an occasional tropical storm going through in during hurricane season should not be an unexpected event. Yes.

Matt Carletti

Right, exactly. How much was the PPD in the quarter related to AOB.

Paresh Patel

I think we strengthened in reserves by about $3 million.

Matt Carletti

Right, okay, okay.

Paresh Patel

And I think we should stress as I said during the initial commentary that we see this thing leveling off at this point, but out of an abundance of caution we’re strengthening reserves.

Matt Carletti

Got you. That my next question was I caught your comment and should we expect, yes, absence of new development things to trend in a better direction on a loss ratio and it sounds like that wouldn’t be a bad assumption.

Paresh Patel

Matt, we’re seeing a low in the increase of AOB, maybe even a slight decrease, but we don’t know, it’s too early to tell whether it’s a permanent trend or whether it’s a temporary respite, yes?

Matt Carletti

That makes sense. Okay. And then my other question just related to you mentioned a little bit about TypTap, but I was hoping how you wrote – I think you mentioned to have 400 policies during the quarter. Can you update us on what your plans are moving forward, do you have an idea of when it might move beyond flood into broader homeowners and have you kind of looked anymore at using it as a vehicle to potentially enter neighboring states?

Paresh Patel

Yes, all of the above. It’s work in progress and we’re moving down that path. Clearly doing this as a admitted company with filed rates, et cetera takes a little bit of time plus not to mention we’re doing two things at a same time, we’re developing for that expansion at the same time, we’re actually marketing and getting the world more familiar with TypTap. So we’re stretching in both directions as we speak, yes.

Matt Carletti

Great. I’ll leave it there and let somebody else jump in. Thank you.

Paresh Patel

Thank you.

Operator

Our next question comes from Casey Alexander of Compass Point Research and Trading. Please go ahead.

Casey Alexander

Hi, good afternoon.

Paresh Patel

Good afternoon, Casey.

Richard Allen

How are you doing, Casey?

Casey Alexander

Good. I actually have gone through the Florida financial services going back over the last couple of years and as from what I can see, the lawsuits filed at the Tri-County area for HCI have declined in the last two quarters by 16% and 23%. I don’t see one peer-competitor that saw declines anywhere near that magnitude, I somehow continue to see increases. So first – what is the lag between the filing of the suit and when you actually either settle it or bump reserves and it appears to me as though HCI has had some success turning the corner on AOB that the competitors have it. So how do you explain that, I mean is it indicative of a trend that has legs, or is it more of an anomaly? I’d really like some more color on that please.

Paresh Patel

Okay. So I think it’s about four questions in there…

Casey Alexander

Yes.

Paresh Patel

…answers, yes. So, first of all, in terms of how long it takes to figure out whether the lawsuit is going to cost, et cetera, while they trouble with these things they have a fairly long tales. It could take quite a while. The other side troubled with the lawsuits also is the – it might pertain to a claim that was settled and closed couple of years ago. So you end up with prior year reserve development, all kinds of other things. So that’s of course a little bit all over the map. I think in terms of what you are seeing in the number of lawsuits as you rightly pointed out that we’re seeing versus say some of our other publicly traded veteran are seeing. And yes, we are aware of the same numbers, but I think this all of this goes back to some other things and some of the moves we’ve been talking about for the last two years.

What tends to happen is, once you have an established book, it takes about within about an 18-month lag, to fill the full brunt of – nearly five losses and everything else for it to get to that point, at least that’s our experience. So if you look back over the last two years, we’ve been taking our foot of the accelerator in terms of growth, especially in Tri-County we’ve talked about this in previous quarters and previous calls, whereas everybody else was still expanding rapidly in Tri-County.

So I think at this point, at this juncture what you are seeing is everybody who expanded rapidly in Tri-County in the last 18 months, shall we say? Are seeing the penalties and the catch up for that stuff. On our own part for the last 18 months we’ve been steady and/or slowly decreasing our policy exposure in Tri-County. Hopefully that’s the trend you are seeing in the numbers. Time will tell, but that’s as close to a explanation as we’ve managed to rationalizes this things at this point, yes.

Casey Alexander

Okay. What does – I mean HCI has been a company that for years was characterized as having a lower loss ratios than the peer group, but since 2015 has been kind of creeping up towards peer group multiples. Should we expect it to kind of settle in here at peer group multiples or do you think it can be managed back down and how do you expect the TypTap to factor into your loss ratios as it grows.

Paresh Patel

Okay. So the last part of the question, TypTap loss ratio factoring into this, TypTap at this point on a weighted basis that’s a small part of the business. The TypTap loss ratio doesn’t really move a needle one way or the other at all. Down the road it might but we’re still several quarters from it becoming material. As far as the loss ratios creeping back to industry multiples, et cetera. Yes, we are aware that the loss ratio is going up and we see that, but some of that I think I would characterize that we play, we play to our own to what we actually see on the ground as opposed to would be fashionable thing to do is – so. What I am glad to say in this situation, as Richard said earlier, despite the fact that we’re seeing leveling off and or even slight decrease and losses in AOB claims, et cetera, we chose to take the conservative path of strengthening reserves that we’ve put aside for those things.

So we’ve been trying to catch this thing early and stay ahead of the curve, I think there may be people who are slightly lagging in catching up to playing – getting the reserves adequate. So I think you will see that as we go forward as to whether that statement is correct or not. But I think we will continue over time to have loss ratios that are better than the bulk of the industry on a measured and on a long-term basis, yes.

Casey Alexander

Yes.

Richard Allen

Any given quarter, it can move up or down, because everybody can move things around shortly, but that’s what we’re going to see over the long-term, yes.

Casey Alexander

Right, okay. That last quarter, there is some discussion there perhaps by the end of the year, TypTap might be absorbing the premium attrition from the homeowner’s book. When I reverse engineer the numbers from the reinsurance contract, they come up with 350 million plus gross premiums expected through the coming reinsurance contract here versus about 400 in the most recent one. Now if I use that as a guideline, is it a safer bet that TypTap won’t be absorbing the premium attrition until sometime in 2017, I mean are you guys taking a more conservative approach to how you’re letting that grow?

Paresh Patel

Yes, Casey, two items. I think when I talked about this in the last call, I was hoping to do it more in terms of head count as opposed to premium count, yes.

Casey Alexander

Okay.

Paresh Patel

I think if you read back to that transcript, that was what the question was about is that you are losing X number of policies, will you replace some kind of it, yes. So that’s partly a different thing. The second part of this is that as you are aware that as we add these policies on, it takes a while for it to become earned premium and offset the depression that we’re seeing currently, yes.

Casey Alexander

Right.

Paresh Patel

So even though you succeed as that replacement saying is going to take a while and in the next fiscal year, the number we are conservatively projecting it to be down. And as another thing that you’ve known about us over the years, we project these numbers based on the current book, we don’t project the numbers based on current book and also hope to what we expect to grow, et cetera, yes.

Casey Alexander

Right.

Paresh Patel

Right. So, we didn’t want to sort of say when you’re putting these numbers out, 32% was a number that we wanted to put out to give market some yardstick by which to go through this, but when you – because the item of that is we didn’t want to, we could have said it was 30% and your numbers would have worked out beautifully, right.

Casey Alexander

Right.

Paresh Patel

Right. And I’d rather that gives a lower premium number and make 32% than. Have somebody back into a higher premium number that may or may not happen, yes.

Casey Alexander

Right, okay. My last question is the TypTap premium and risk covered by the current reinsurance contract or does it grow to a certain critical mass at which point in time it maybe separately reinsured or collectively, even if that’s possible, I mean exactly how is that likely to work?

Paresh Patel

Okay. So, I will answer part of the question, other of the part of question I will invoke trade secret kind of stuff, okay.

Casey Alexander

Okay.

Paresh Patel

Okay. So TypTap currently is or TypTap is already reinsured currently by a third party. And so we went to great lengths to get a reinsurance contract in place, not the numbers that we’ve talked about for homeowner’s choice in those towers, because when you get into a flood tower, it’s a very different beast. So, we’ve already established an put into place and its there. Two items about it though is, one, at this point in size it is not a material contract, it is the concept and the items that are in place, that are important.

Casey Alexander

Right.

Paresh Patel

And secondly, the nature on how it’s done, and all of the minutiae of why it works. Is actually the subject of a lot of speculation, both in the insurance and the reinsurance industry as to how to do it. We are involved in trade secret, because we don’t want to give a everybody else a blueprint as to how to do this, yes.

Casey Alexander

Okay. Fair enough.

Paresh Patel

Yes.

Casey Alexander

All right. Thank you for taking my questions. I appreciate it.

Paresh Patel

Thank you.

Operator

[Operator Instructions] Next question comes from Arash Soleimani of KBW. Please go ahead.

Arash Soleimani

Thanks, and good afternoon. Could you just a couple numbers questions, first. What were gross written premiums in the quarter?

Paresh Patel

Let me just look it up in the – I think it is in the press release.

Richard Allen

We had in the script. The gross written premiums for the quarter were $139.481 million.

Arash Soleimani

$139.481 million, okay. And, there was no assumed written, it was just all direct?

Richard Allen

There was a very minimal negative written premium.

Paresh Patel

Minimum, we had a small take-up back in December. November 2015, yes?

Richard Allen

$280,000 written premium.

Arash Soleimani

$280,000, okay and just to hop back quickly onto math question on weather. I know that you have said weather is obviously a normal part of operations for a Florida carrier. I completely agree, but just are you able to quantify it, because in the press release, it does call it out and it seems to have I guess like a $5.7 million uptick from last year’s quarter. And if $3 million came from the strengthening that you mentioned, I mean does that imply that $2.5 million comes from weather? I’m just trying to kind of accepting that it’s a normal occurrence for Florida, just still to try to get some kind of quantification?

Paresh Patel

Hey Arash, I think what we’re trying to say and I’m presuming the $5 million you’re talking about is quarter-over-quarter 2015 versus 2016, is that correct?

Arash Soleimani

Correct, yes.

Paresh Patel

Okay. So I think in terms of trying to rationalize that, you have three things that could explain this. One is strengthening, two is the actual issues that you have with AOB occurring, so there is loss ratio point increase because of AOB and lawsuits and everything else, yes.

Arash Soleimani

Right.

Paresh Patel

And the third item is weather. As in weather as in any unusual events, kitty cats that might have occurred during the quarter, yes.

Arash Soleimani

Sure.

Paresh Patel

The one kitty-cat that occurred during the quarter was Tropical Storm Colin, which was like in early June. Okay, and what we were saying to Matt and so let me say it even more clearly, hopefully, is if you just look at those three items, some of the increase, the $3 million or so was reserve strengthening. The bulk of the rest of the money would probably have more to do with just losses increasing because of the activity that’s going on in development and everything else. And then there is a small component that will have come in from Tropical Storm Colin because as I said it was about 120 claims.

Arash Soleimani

Right.

Paresh Patel

But when you look at it across $26 million, we didn’t want to mis-characterize it that, Oh my God, because of Colin we’re here, right? There would be a – that’s how we were trying to minimize the weather effects. Yes.

Arash Soleimani

Okay, okay. Okay, that’s fair. Then in terms of the prior period developments, I know you said that you’re trying to be cautious there, but I guess going back to your leveling off comments, can you just give a little bit more, I guess, clarity just maybe more detail around what you are seeing, that gives you maybe confidence that it’s leveling off – what’s your thinking that way?

Richard Allen

Two things, is because we manage well, not even manage, we have to acknowledge every lawsuit that comes our way. So we count how many law suits we got year-over-year in Tri-County, et cetera. And I think as Casey rightfully pointed out, our lawsuit account year-over-year is down. So that’s an interesting development in a world where everybody is talking about increasing AOB and increasing losses. So that’s – as I also stated it in response to that whether that’s a temporary respite or whether it’s a trend that will continue on, it’s just too early to tell, but that deviation is there and it’s almost a public record.

So we have that going on the other kind of things and we also see leveling off is in terms of claims coming in and how many AOB, lawsuits, et cetera, that are coming in and AOB non-lawsuit claims that are coming in. It is sort of – is looking like it’s leveling off now. I’m not saying you it’s going away, I’m not saying its problem solved or anything else. I’m just telling you that whatever the higher elevated level is, it seems to be leveling off, because we measure this week after week, month after month, yes.

Arash Soleimani

Okay. And is this leveling off, is it just you think an industry dynamic, so to speak, or are there specific actions that you’re taking at HCI that you think are helping with that?

Paresh Patel

Well. That’s a nebulous question, I don’t know what everybody else is or isn’t doing, what I can tell you is because we monitor a number of lawsuits filed across a large cross section of the other Florida insurance market. What we’re seeing is this trend seems to be leveling off across the industry if you look at on a cumulative basis. Now, there are a few outliers there is a handful of carriers, the only one I am going to name is Citizens who may still be seeing an increased claim and lawsuit activity. It seems to me there’s a few places – few carries that seem to be still seeing increases month over month, but as an industry, at least for whatever reason the last couple of months, the lawsuit activity seems have leveled off, it’s still way too high, but it’s leveled off, yes.

Arash Soleimani

Right, right. Okay. I know there has been lot of talk by Citizens about this, the new policy language that they had put in place to help with AOB. I think they did that in July and I think some other carriers aside from citizens have started to meet to that language, is that something you guys are doing or have you done it already are you planning on doing it?

Paresh Patel

A very simple answer, Citizens new policy language when into effect July 1. Obviously it’s too early to see what effect it would have on it. Homeowners Choice policy language went into effect on August 1, one month later and again it’s too early to tell, but policy language is there and done.

Arash Soleimani

And is that August 1 date, for both new and renewal business?

Paresh Patel

Yes.

Arash Soleimani

Okay. And I mean are your expectations that it would be helpful based on the languages does that strike you or something that will make a difference, or do you think that it’s nice to have it written down, but maybe not practically speaking beneficial?

Paresh Patel

Arash, I am an optimistic person. I hope it will have the desired effect and lead to the improvements that we are seeking. We really want that to happen because we are trying desperately to not increase rates or charge any more premiums to people who have done nothing wrong in this situation. Having said that it’s just too early to tell whether my optimistic viewpoint will actually be met or whether somebody will discover new loophole or something or the other around, it’s just too early to tell, yes.

Arash Soleimani

Sure, sure. And I guess you kind of touched on my next question, in terms of rates obviously it seems across the industry like we’ve almost turned from a soft market to hard market. Do you see the need for HCI to sort of follow on that bandwagon or are you happy with the rate decreases you have in place. And you think that that is adequate for the time being?

Kevin Mitchell

So I guess my answer is going to be slightly different than what most people would like to hear on this call. But we’ve tried to be straightforward and explain this. We are trying very, very hard not to raise rates at all on anybody, from what we see, we see that a handful of people are gaming the system and passing the cost onto everybody else and we are trying to see what steps we can do and to see if we can do the best that we can do for the vast majority of our customers who have basically are just trying to pay their bills, raise their kids, go through life. And we are trying to do what we can to avoid have a rate increase, either file for rate increase or have one approved. And to put this into perspective, it’s been the last time we actually applied for a rate increase, it was 2012.

So, we’d like to keep that record going. And especially as we just reduced rates last year, we are always in this for a long-term. So, we don’t look at this that you [indiscernible] increase rates at the drop of off high, just because you can.

Arash Soleimani

Right, right.

Kevin Mitchell

And I think our policy holders, appreciate that. Yes.

Arash Soleimani

Sure. Has retention changed at all, just given that lot of peers are raising rates and you guys have took them down last year, has that benefited retention?

Kevin Mitchell

Yes, absolutely. I think because of the sentiment that I just expressed in the last answer to the last question, what’s happening out there is our high retention rates actually seem to be getting even higher. So, we are looking at projections – compared to the projections we are seeing the retention be even higher than we had been anticipated. The part above that is I think partly because if this is going on, agents, people out there talking to policyholders and saying, do you want to be with a company that looks for any reason to raise rates or be with Citizens who has raised rates every year for the last umpteen years or do you want to be with a company whose trying very hard not to raise rates.

I’d note that about 15 companies or 16 companies may have filed for rate increases under this whole AOB thing, we are not one of them.

Arash Soleimani

Are you able to quantify the retention that I think last call you said was around 88% or 90%, if I remember correctly?

Paresh Patel

Okay. So I will tell you one other item. Yes, retention has probably gone up by a couple of points, because it – from 88%, 90%, it can’t go up much, because then it will be over 100%.

Arash Soleimani

Right.

Paresh Patel

So it can’t go up by much, it’s only a couple of points. But what we are also doing and to my earlier conversations about trying to manage the business in challenging times is that we are non-renewing and we are shedding business in – on a very targeted basis of policies that we think are likely to develop over the next few years and past rate increases on all the other policyholders. So we are using the elevated retention rate to actually shrink the business a little bit, if you like.

Arash Soleimani

And that shrinkage is mostly Tri-County, I assume?

Paresh Patel

Tri-County and the Orlando area.

Arash Soleimani

And why Orlando?

Paresh Patel

Again, it just worked out that way. We’re looking through the numbers and where we see these things, we’re trying to hold down rates for the vast majority of customers requires us to take the actions that we have to take. And there are some AOB trends in the Orlando area, yes?

Arash Soleimani

Okay. That makes sense. My next question is, I know this isn’t your favorite question, but can you provide a policy count at quarter end?

Paresh Patel

Yes, funny enough, we’ve been so busy doing other things [indiscernible] I figured maybe around the 155,000 mark, give or take a couple of thousand.

Arash Soleimani

Is it 355,000?

Paresh Patel

155,000.

Arash Soleimani

155,000, okay. And I guess the last question, in terms of flood, so TypTap, just to be clear, is TypTap the main vehicle for flood going forward rather than I guess the legacy flood business?

Paresh Patel

Yes, I think if you were to consider flood policies, TypTap already has more flood policies than Homeowners’ Choice does, yes?

Arash Soleimani

So TypTap – can you quantify at all what the difference would be, kind of at a very high level, just the difference in rate, so to speak between what someone could get going through the NFIP versus going through HCI? I think how much more competitive do you view TypTap’s flood rates relative to the NFIP?

Paresh Patel

It depends, right? And what it depends on is how great a deal or lack of a deal people are getting from the NFIP. And what we are doing is, we are taking advantage of dislocations in risk and what happens with it also is that we are doing, in terms of flood policy, the same thing that we did with wind policies in Citizens all those years ago, yes? So we are basically trying to take good risk and underwrite the matters out of NFIP. Some of the risks we take, you’d be amazed as to how much money they saves up, it can be as easy as 15%, sometimes it’s high as 50%, right, so basically…

Arash Soleimani

50% savings relative to NFIP?

Paresh Patel

Yes, some of those places, it gets as high as that, right? I don’t want to put out a slogan, 13 seconds could save you 50% or something, but they’ll have seen those kinds of savings, yes?

Arash Soleimani

Yes.

Paresh Patel

Because as we have done – in our entire history and we continue to do so, we charge a fair price for a great product and people look at the stuff and it comes out the – and they make their choices as to whether they want come with us or they want to stay with the NFIP.

Arash Soleimani

Sure.

Paresh Patel

All we’re doing is we’re depopulating in a profitable good spread of risk. Again, these are all things that we’ve done on the wind side for years and continue to do so. So we’re applying the same basic business principles to the flood side.

Arash Soleimani

And what’s the average premium on your flood policies?

Paresh Patel

Really it consists of two books, the books those a set of policyholders who have to buy flood insurance and these are the ones that are in the A and the V zones and then there’s a whole different set of people who don’t have to buy – the guys have to buy it because of mortgage issues, et cetera and as all the folks in the X zones who buy because they choose to buy.

Arash Soleimani

Right.

Paresh Patel

And basically, how this is working out, it’s on average working out, it’s on average working out to be about $375 per policy in the X zones, about $1,400 to $1,500 in the A zones and about $33,000 or so in V zones.

Arash Soleimani

How much was it in the A zone?

Paresh Patel

It’s averaging at about $1,400 or so.

Arash Soleimani

Okay. And are you targeting like a particular segment between the A, V and X or is it kind of just like an even spread, would you say what you’re looking for to build?

Paresh Patel

I think we are doing what we do and trying pick what we can out of all three zones. What you have to keep in mind is that it’s not like the three zones have equal numbers of the policyholders in them.

Arash Soleimani

Right.

Paresh Patel

Right. So we are trying to make sure we build the balance book.

Arash Soleimani

Sure, sure.

Paresh Patel

And there was people out there, yes.

Arash Soleimani

That makes sense. Is the X zone the batch of people that don’t have to buy it, is that what that means?

Paresh Patel

What the X zone stuff is our people who are not required by their mortgage to buy flood insurance.

Arash Soleimani

Okay.

Paresh Patel

That does not mean that he isn’t imprudent buy flood insurance and that people shouldn’t buy flood insurance or anything else of that nature, it just says, if you’re in X zone, it is not a condition of your mortgage that you’re required to buy a flood insurance, usually, yes.

Arash Soleimani

Okay. And I know you said there’s obviously different numbers of policyholders in each of these buckets, where – I guess how would you rank them, like where are the most, second most and third most?

Paresh Patel

That we’re seeing or that – the NFIP?

Arash Soleimani

I guess like when you look at TypTap’s opportunity over the next, let’s call it two years, three years, which of those three buckets between A, X and V do you think offers the largest opportunity, I guess is how would you rank those three opportunities?

Paresh Patel

Okay. So look, this is where – you’re going to love my answer, because if you think about Florida and the NFIP, Florida has about 2 million policies in NFIP, about 1.3 million of them are X zone policies, about 700,000 are A zone policies probably about 30,000, 40,000 are V zone policies, something in that – those kinds of numbers. So if you get an enamored with PIF counts, obviously the X zone is the biggest opportunity, right?

Arash Soleimani

Right.

Paresh Patel

As you know, we’ve never been always about PIF count, we look at where the opportunities lie and where there’s good risk and where there isn’t. What balance we’re going to do, we are not exactly disclosing at this point because again I suspect lots of competitors are going to be listening to this call. We have gone to great lengths to figure out what would be a balanced book and how to get it and time will tell.

Arash Soleimani

And what are you doing in terms of I guess advertising, obviously average person in Florida won’t know about TypTap, so what I guess marketing, if you will, effort to get the word out there?

Paresh Patel

It’s a mix of agents and policyholders and neighbors telling each other. We are seeing quotes and people jumping on to TypTap all over the place and it’s spreading virally.

Arash Soleimani

Okay. That’s fair. Thank you very much for the through answers.

Paresh Patel

You’re welcome.

Operator

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

Kevin Mitchell

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 progress in the near future.

Operator

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

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