Good afternoon and welcome to HCI Group’s Fourth Quarter 2016 Earnings Call. My name is Tim and I will be your conference operator this afternoon. [Operator Instructions] Before we begin today’s call, I would like to remind everyone that this conference call is being recorded and will be available for replay through March 21, 2017 starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until March 21, 2017 on the Investor Information section of the HCI Group website at www.hcigroup.com. I would now like to turn the call over to Mr. Kevin Mitchell, the Vice President of Investor Relations for the HCI Group. Sir, please proceed.

Thank you and good afternoon. Welcome to HCI Group’s fourth quarter and full year 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 Information section of our corporate website at hcigroup.com. Before we begin, I would like to take an 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, I would now 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 insurance in the state of Florida. The newest addition to our company, which we introduced last year, is TypTap Insurance Company, which provides flood insurance to Florida homeowners. TypTap features typtap.com, our internally developed online platform for coding and binding flood insurance policies. Accessible from any internet capable device, including your mobile phone, typtap.com provides a coding second and a policy in minutes. Thirdly, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our reinsurance company. We also have a information technology operation called Exzeo, which develops innovative products and services by insurance subsidiaries, including the technology that powers typtap.com. We expect to find other means to leverage Exzeo technologies in the future. And finally, we have Greenleaf Capital, which owns and manages our diverse and growing portfolio of Florida real estate, which currently includes 2 office buildings, 2 parts of Gulf Coast waterfront property and 2 grocery anchored shopping centers. I will have more to say about Greenleaf Capital in a moment. The fourth quarter was an eventful cap off to an eventful year. I am pleased to tell you that it was HCI’s 37th consecutive quarter of profitability. The most significant event during the fourth quarter was, of course, Hurricane Matthew. A category 4 storm, Matthew had significant impact on the Eastern Seaboard of the United States, including Florida. For us, Hurricane Matthew ultimately represents approximately 2,500 claims and $21 million of losses. The losses fall toward the low end of our $20 million to $25 million range, which we had discussed…

Thank you, Paresh and good afternoon everyone. For the quarter ended December 31, 2016, net income totaled $4.6 million or $0.47 diluted earnings per share compared with the same quarter in 2015 of $11.1 million or $1.05 diluted earnings per share. Gross premiums earned for the quarter were $92.4 million compared with $101.9 million for the fourth quarter of 2015, reflecting a decrease of 9.3%. This decrease is a result of policy attrition and previously discussed rate decrease that was effective for policy renewals beginning in January of 2016. Net premiums earned in the fourth quarter were $63.4 million compared with $61.6 million in the same period of 2015. This increase is a result of reduced reinsurance costs for the current 3-year and a slight impact from the November Citizens assumption offset in part by the decrease in gross premiums earned. Investment related income in the fourth quarter of 2016 was $4.8 million compared with $1.3 million in the same period in 2015. This increase was primarily due to $1.2 million of income from limited partnership investments in the current period compared to losses of $0.4 million in the same quarter of 2015. Included in the current quarter, our net realized gains from investment sales of $1.7 million compared with $45,000 of net realized losses in the same period of 2015. Company recognized the re-measurement gain of approximately $4 million in the current quarter on the acquisition of full ownership of a shopping center in which it had held in 90% non-controlling interest during the development cycle. This gain was partially offset by an impairment charge of approximately $400,000 due to the unexpected closure of one tenant’s business. Losses and loss adjustment expenses incurred for the current quarter were $45.4 million reflecting the impact of Hurricane Matthew, which accounted for…

Thank you, Richard. The fourth quarter was significant for HCI Group as illustrated the value of our long-term strategic plans to do, a) manage our risks; b) manage our cost and expenses; c) diversify our business operations; d) develop and deploy new technologies; e) maintain a strong balance sheet; and f), pursue accretive growth opportunities as they arise. And when we say diversify that could be by geography meaning the regions in which we operate both inside and outside of Florida or it could be by product mix, such as flood or it could be by industry, such as software. Our diverse operations contributed to our success in the fourth quarter, which by the way was up 37th quarter of profitability. Looking at the individual subsidiaries, our insurance subsidiary Homeowners Choice Property & Casualty Insurance Company continues to be our largest and most meaningful operation. Since inception of this business, we have focused on strict underwriting. We continue to assess the quality and diversification of the book. We look for diversification both geographically and across product types. Outside of the recent major weather events, our gross loss ratio is relatively stable on a year-over-year basis near the 25% mark, which we believe reflects our commitment to underwriting and distribution of risk. Our efforts to manage our risks are in part the reason gross premiums have declined in recent periods. Traditionally, insurance companies have grown when times were good and re-change when times were bad. We have followed this approach slavlishly. I have often said that we are more interested in the bottom line than the top line. And when opportunities for appropriate policy growth arise, we will pursue them aggressively and that we have the financial strength to do so. Our efforts on managing risks have enabled us to reduce…

[Operator Instructions] Our first question comes from the line of Matt Carletti of JMP Securities. Please proceed with your question.

Hey, thanks. Good afternoon, guys. Few questions. Paresh, maybe we could start with just kind of an AOB update from what you guys are seeing, particularly as we think about some of the most impacted Tri-County area. From a claims perspective, what are you guys seeing in terms of trends? And then secondly, what are the trends been in terms of your pits count there?

Thanks, Matt. So as we have been operating in Tri-County for most of our existence, so we know the area very well. The AOB issue is generally confined to-date and Broward Counties. And it seems we are predominantly centered around the HO3 book, the homeowners policies. So knowing those things, we monitor those things very carefully. And what we have noticed in the course of 2016 is that policies generate claims and claims generate losses. And all of those things lead to expenses. So by tracking policies, we can track claims. And by tracking claims, we can track losses. The losses take up to 18 months to 2 years to appear after the date of the loss. So, this is a very long-tailed event that is now occurring. Having said all of that, what we seemed to see is a stabilization in terms of the amount of AOB that’s going on. It is at extremely elevated levels, but it is stable. What we are saying is for every 100 claims we are getting in HO3 in Dade and Broward, we are seeing ultimately about 35 lawsuits. And these are all measurable trends and we can see that they have steadied out. I think there are other people in the industry, who have just expanded to Dade and Broward and they are seeing the uptick. But eventually, what we are seeing is it’s stabilizing out into those kinds of numbers. In terms of how we look at it on an overall basis, I will tell you two things. One is AOB is a problem in 2 counties out of 67 counties that we operate in and it’s in one product line out of 5 product lines we operate in. So, we have taken active steps to corral that problem area and we manage it. That’s our business. That’s what we are supposed to do, risk management. And to that effect, what we have done is reduced our HO3 exposure in Dade and Broward County and we did this quickly early on in 2016. And what we are now seeing is a decline in the claims rate and the absolute number of claims we are getting on a weekly basis from Dade and Broward for HO3 policies. This means we will eventually see a decrease in losses and everything else. It’s too early to tell yet, but the action, we have taken make us very optimistic that at a minimum, the AOB problem for us has stabilized and at a maximum, it may actually go into decline because of some of the underwriting actions that we have taken. Longwinded answer, but hopefully, that gives you some clarity.

No, very helpful, very helpful to kind of hear the progression of events. Kind of separate topic but be curious your thoughts on Demotech, which rates yourselves than a lot of your peers in Florida, recently announced some news about potential ratings changes on some companies. It was clearly focused more on, I’d say, some smaller balance sheet competitors of yours and others that might have been a little more impacted by Matthew. So along those lines, could you tell us what thoughts you think that might have on the market and if there might be any opportunities for HCI that come out of that?

Absolutely. And I think there will be opportunities that come out for HCI for that. Let me start by saying reassuring one more time that both of our insurance subsidiaries, TypTap, as well as Homeowners Choice, neither one of them needed any capital infusions in 2016 nor are they subject to any requirements currently on needing additional capital. Demotech has other things that we should discuss, which I am gladly we will in due course. What the Demotech actions have illustrated and really, I think they are getting – they are merely the final straw in what’s been going on for the last year. You have a number of weaker players and smaller players, our newer entrants in the market who have neither the capital base nor the large and distributed book to enable them to sustain their losses that they are currently taking. I think what this is ultimately going to lead to is a number of players will exit the market. And I think by exiting the market, they will probably sell either the company or the book of business. We are very well positioned to buy those books of business, because we know how to operate and manage these books. So, we think 2017 could be a very good year for us to grow by acquisition. I think the number of participants in the Florida market is going to shrink meaningfully over the course of the year.

Great, thanks. Very helpful. And then just a couple of numbers, apologies if I missed them in the comments, but just gross written and net written premiums for the quarter?

Gross written for the quarter was $58.886 million, gross written for the year is $367.191 million, net written for the quarter, $29.832 million, for the year, $232.140 million.

Great, thank you for the answers and best of luck in ‘17.

Thank you.

Thank you.

Our next question comes from the line of Brian Hollenden of Sidoti & Company. Please proceed with your question.

Hi, guys. Thanks for taking my call.

Thank you.

Can you give us an update on – and sorry if I missed this, but can you give us an update on flood insurance? What does the opportunity look like for 2017 in terms of gross premiums?

Brian, I know it looks bright. I just can’t tell you how bright it may get. And the reason for that is depending on what Congress does when – again if I speak from the authorization, it could really open the opportunity for TypTap, but it requires on Congress to do what they want to do and then it becomes speculation. Now assuming 2017 continues just like 2016, so there is big thing that is out there that has to be handled over the year, assuming it’s a non-event, which is a big assumption. I think TypTap will continue to grow because we are seeing gaining traction in the Florida marketplace and it’s a system that even agents love. We are getting 80% of our business from independent agents. So with every passing month, we see more and more production coming in. And of course, once it comes in, it sticks with us. So because of the big Homeowners Choice sitting next to it, it looks small. But over the course of the next few months, we expect by the end of the year, this thing will be close to about $10 million premium in force if nothing happens. If things go slightly haywire in Washington, it could be a much larger number.

Okay, thank you. And are you seeing broad signs of premium rate increases in the market since Hurricane Matthew and you mentioned earlier what increases are you asking for?

Okay. As far as broad rate increases in the market, I think we were seeing that even before Matthew. I think 2016 was a particularly tough year for the industry. So, there were already lots of rate increases being filed for and some have already been approved. So, it’s not a Matthew event, a related item, but I think it was there, more AOB and other causes. As for ourselves, we have done our annual rate filing. We expect to probably get a rate increase somewhere in the low single-digits is what we think we would get. It may be greater than that, but all we are banking on at this moment is something in the low single-digits.

Okay. And then one last question for me is there a price to book level that you guys will hold off on share buybacks, how should we broadly think about that?

There is a price at which you would holdback on buybacks, absolutely. Given all of our diverse operations – and that’s why I went to some length today to go through all the different things that we own. I think price book may not be the only measure that we should be valued at. For example, if I was to look at some – you have got two insurance subsidiaries, which you might apply price-to-book, but you have Greenleaf, which has lots of real estate, which is on the books at purchase prices and has a lot of unrealized appreciation that is not in the books that should be factored into the price. And then you have both Claddaugh, which you couldn’t assign a value to and then Exzeo, which is turning out to be a quite a nice insure tech startup and insure tech startups of evaluation that is nothing to do with price-to-book, is to do with the potential of business. So when you look at some of the parts, you have to come to a conclusion as to what do you think is a bargain for this company. The other way just as an aside that we look at valuation and we do a buyback or not is return on earnings. We have a very high ROE and most people go off and look for businesses with these kinds of ROEs to buy. We look at ourselves as an investment just like we look at other things. And sometimes the best investment is in HCI. We know the management, we know the business, and we like the returns.

Alright, thank you for the color.

[Operator Instructions] Our next question comes from the line of Mark Hughes of SunTrust. Please proceed with your question.

Yes, thank you. Good afternoon. Do you have an updated estimate on the real estate value? As you point out that the current valuation is not really reflected on the balance sheet. But when you have published the K, will you give an update? And if so, can you give us a sense of what that is?

Mark, before I answer that question, I just want to – I am just being told something I have to correct. When Brian asked the things that we look at, I mean to a buyback, I meant return on equity, not return on earnings were truly different things. I am sorry I misspoke. As far as your question about what we estimate the unrealized gains are on the properties, our current estimates are somewhere in the neighborhood of $35 million to $40 million.

Thank you. And then how about the pipeline at Greenleaf, what do you think of the real estate valuation that you see out there? I think you talked about a growing capability to do development, what do you see coming in the next 12 months?

I think there is a couple of projects that are under development within Greenleaf. They have to mature out. Given the high valuation that people now put on real estate, I don’t necessarily know there is much in the pipeline for us to just go acquire straight off the bat kind of thing, because the cap rates are so low that it doesn’t make sense for us to acquire those. The method we have been doing with developing and then acquiring obviously has proven well given the bargain one-time gains we have had to book when we bought these things. So, we will continue to look for more of those opportunities, but they are more of a longer nature of opportunity, which is fine by us, because we are doing this for the long haul.

How about a policyholder retention? Any change in those trends in the fourth quarter?

Not in the fourth quarter. We have previously said that policyholder retention has been very, very high over the last – the second half of last year and that’s been occurring because of all the turmoil in the market. We are a very steady player. We are very responsive to our policyholders, etcetera. So, we tend to get a very high retention rate around the 90% mark.

And I think you said you expect end of 2017 being bigger, then you started the year. Do you need to do a deal or two in order for that to happen?

We need a break or two, whether we do a deal or two, but given our range of opportunities, we could get bigger because TypTap does really well because of disruptions in the flood market or we could get bigger because Homeowners Choice buys a – another insurance company or we could get bigger because we buy an insurance company in some other state or we could get bigger, because Greenleaf buys some real estate. There are number of different ways we could do this, but it will be more of a step function as opposed to every day we make – we right-size more policies or something. It’s just unique on how we grow, it’s kind of lumpy.

Understood. The – I think you gave the $20.5 million the amount for the reserve strengthening for the full year, what was it for the fourth quarter?

Fourth quarter was, I think there was about $3 million in the quarter for prior periods, including approximately $21 million for Matthew.

About $3 million? Okay. And then final question on – were there any – I assume there is a reversal on comp accrual in the quarter, your salary and benefits was fairly low. Was there some amount that was reversed and if so, how much?

The incentive compensation – yes, the incentive compensation was reduced due to the reduced pre-tax income.

Right. Was there a reversal from prior quarters or just lower year-over-year?

It was lower year-over-year, but there was a – we reversed the accrual in the fourth quarter down to actual.

Okay. And the magnitude of that?

Approximately $2 million.

Okay, great. Thank you very much.

Our next question is from Arash Soleimani of KBW. Please proceed with your question.

Hi, thanks. Just wanted to ask a few. How much – in terms of the variable compensation, what are the loss ratio thresholds where the variable pay starts to decrease and what are the sensitivities after the threshold is met?

Are you talking about the incentive plans and the bonus schemes and stuff?

Yes. Since you guys have mentioned that the compensation was impacted by the higher losses from Matthew, I was just wondering what the loss ratio sensitivity is there, the thresholds that you have to hit?

I think the bonus scheme is entirely discretionary. So at the end of the year, I think the board and the compensation committee decides what they feel is appropriate given the performance for the year, etcetera. I think the finance department accrues throughout the year based on previous years, etcetera. And the outcome is what the outcome is. And then they threw it up for the end of the year, which is what I think Richard said when he said there was a $2 million reversal. Putting in English, they accrued $2 million more than was eventually paid out and they had to reverse it.

Arash, it’s based on pre-tax income.

Okay. And the other – go ahead, sorry.

Okay, go ahead.

Sorry, I thought Richard was saying something else. And then TypTap current premium in force, I think you said you have 3,000 policies right now, what are the premiums in force there?

I would say probably around $3 million to $4 million, $3 millionish.

$3 million to $4 million, okay. And then the goal by the end of the year to hit $10 million?

That’s the stretched goal, yes, assuming the Congress doesn’t help in anyway.

Okay. And if Congress helps, I guess, how much more optimistic do you get for the end of the year?

Arash, I wouldn’t like to speculate because I don’t how much help they will provide.

Okay, no, that’s fair. And then also a couple – in terms of the – what were the TypTap losses from Matthew, if any?

I think there were a 1 or 2 claims. For clarification, I think we had more Hermine claims for TypTap than we had Matthew claims, but there were a handful of claims across the two hurricanes.

Okay. And then can you provide – just a couple of numbers questions share count for the quarter and also the pits count?

The pits count at the end of the year was around 150,000. I am talking about Homeowners Choice, yes?

Okay, yes.

Diluted share count for the quarter was 9,152. For the year, it was 9.152 million. For the year, it was 10,873,000.

Thanks. Sorry, you said for the quarter, it was 9.152?

Yes.

Okay, thanks. And then the other question I had on other operating expenses, specifically, I am just looking at that as a percentage of gross premiums earned. It increased not by much by about 50 basis points. I was just wondering what’s going in there that’s pumping that up?

That’s got a little bit of everything in there. It’s no one major item counted for the increase.

Okay. Okay, that was it for me. Thank you very much for the answers.

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

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

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