Good afternoon, and welcome to HCI Group's Second Quarter 2017 Earnings Call. My name is David, 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 September 2, 2017, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until September 2, 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 Kevin Mitchell, Vice President of Investor Relations for HCI Group. Sir, please proceed.

Thank you, and good afternoon. Welcome to the HCI Group's Second Quarter 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 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 would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan and project, and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the company's business, financial conditions and results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements. With that said, I would now like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

Thank you, Kevin, and welcome, everyone. Similar to prior calls, I'd like to start by providing a brief overview of our company for those new to the HCI story. 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 Florida. We also have TypTap Insurance Company, which currently focuses on providing flood insurance to Florida homeowners. TypTap features TypTap.com, our internally developed online platform for quoting and binding flood insurance policies. Accessible from any internet-capable device, including your mobile phone, TypTap.com provides a quote in seconds and a policy in minutes. In addition to Homeowners Choice and TypTap, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company that participates in our reinsurance programs. To support all of our insurance operations, we also have an information technology subsidiary called Exzeo that develops insurance-related products and services, several of which are used in our day-to-day operations. In fact as I've mentioned before, Exzeo developed the technology that powers TypTap.com. It also developed Atlas Viewer, our map-based technology that enables us in real time to identify, track and manage daily claims, as well as claims associated with catastrophic events. Looking ahead, we expect to find additional means to lever the new technologies developed by Exzeo, including the development of new products and services for third parties. Finally, we have Greenleaf Capital, which owns and manages our growing portfolio of Florida real estate, which currently includes two office buildings, two parcels of waterfront property and two grocery-anchored shopping centers. Now turning to second quarter results, the highlights include that Q2 was our 39th consecutive quarter of profitability. Secondly, we paid a $0.35 per share dividend, which is our 27th consecutive…

Thanks, Paresh. So I'm going to go over some of the financial highlights from the quarter, try to add a bit of color and discuss some of the trends that we are seeing. Fully diluted earnings per share were $0.93 in the second quarter, up from $0.71 from the second quarter of last year. The increase was driven by higher net premiums earned, higher investment income and a lower effective income tax rate, offset partially by an increase in loss reserves, interest expense and a one-time expense related to the redemption of our 8% senior notes. The net result of all that was an increase in after-tax net income from $7 million in the second quarter of last year to $9.5 million in the second quarter of this year. Similar to the past four quarters, net premiums earned were up despite gross premiums earned being down, because of the lower rates on our 2016-2017 reinsurance program. Ceded premiums were 31% of gross premiums earned this quarter, compared to 38% in the second quarter of last year. Investment-related income of $4.6 million was more than double that of the same quarter last year. A number of things are happening here. First, we are cautiously putting more money to work in our investment portfolio. Second, we are earnings higher rates of return on cash and cash equivalents. Third, our income from limited partnerships is up. And lastly, we realized a $1.8 million gain on sale of some securities in the quarter. I wanted to point out a few things related to our expenses. First, you will notice that interest expense was about $4.4 million compared to $2.7 million in the second quarter of last year. We issued our new senior convertible notes in March, and redeemed our 8% senior notes in April,…

Thank you, Mark. Let me begin with a quick note about Tropical Storm Emily, which crossed Florida on Monday. The state experienced some heavy rain and gusty winds. We have received less than 50 claims thus far, and we don't expect Emily to be a material event. Onto the regular business, one of our growth areas is flood insurance. Since its inception, TypTap, our flood insurance subsidiary, has sold more than 5,500 policies, with gross written premiums of over $7 million. We believe there is significant room for growth in this line of business. I mentioned in my opening remarks that we plan to expand our flood insurance operations to other states. We have applied to enter into nine additional states. They are Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. We have already received regulatory approval in Arkansas and Pennsylvania, and expect more approvals soon. This expansion is consistent with our philosophy to invest prudently and patiently. While our enhanced balance sheet and liquidity, we continue to look for strategic opportunities to put our cash to work. We believe this conservative and proactive approach has enabled us to generate solid returns on investment over the past 10 years, and will continue to do so in the future as well. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question is from Matt Carletti with JMP Securities.

So a few questions, I thought maybe I'd start with kind of where you ended a little bit, kind of on TypTap and the flood. Can you just update us on kind of the reception by the market of TypTap, kind of how that progress has gone? What would have been any of the surprises, good, bad or otherwise?

Sure. For most of the second quarter, every week was a record week in terms of business production. So every passing week, we are seeing more and more people, more business being generated and the policy counts increasing. And to put this into perspective, 14 short months ago, we started out with a new brand name, TypTap. And the TypTap Insurance Company also had no agents. There was no takeout or assumption business to be had. Everything had to be done from scratch, building a new company. And also along the way, as you know, our commission structure for TypTap is materially different to that of the NFIP. So against all of that backdrop of difficulty to start a company, TypTap has come through in splendid fashion and now has started to be deployed as a known brand. And agents are now calling us to be appointed. Whereas a year ago, we were trying to recruit agents. So all of these things all lead to a much more positive future. And that's just within our own control. On a different note, of course, the NFIP reauthorization is going to be due by the end of September, and we look to see what Congress will do about that matter in the next couple of months.

And just another high-level question before a few numbers, you just came off your reinsurance renewal really one following what really was the largest kind of major cat event the state's had in a while, even though it ended up just to be a glancing blow that being Matthew. What are your takeaways from the renewal? And I'm not so much thinking about kind of - I think you've laid it out pretty well in terms of price and how much risk retained and so on. But I mean more so the intangibles and your discussions with the reinsurers, did anything stand out in terms of - it was really a lot of their first chance to get real evidence of differentiation amongst books, as opposed to maybe just model differentiations. Did anything stick out there, or was it just business as usual?

No. Matt, I can tell you that - and we never, as you know, we never root for storms of any kind. Because it's bad for us, bad for our policyholders, bad for our reinsurers, et cetera. But one of the things that came from Matthew was when we went to all the reinsurers, they suddenly could see the difference in how different companies handled which was a first major storm in a decade. One of the big differentiators that everybody appreciated was the Atlas Viewer program that I talk about frequently. What we did was before the storm came, we sent a link to all of our reinsurers so they could track our handling of the claims that were associated with Matthew in real time. We sent that link to all of our reinsurers, as well as all the regulators of Florida, OIR, et cetera. The results of that were that when we went to see them well after the event, what they all said was, wow. That was great. Because for the first week after Matthew came by, we were trying to get a handle as to what the numbers looked like, what the damage was, et cetera. And with a lot of companies, we were asking, and they were still trying to grasp as to what was going on in their world. Meanwhile, we could log into Atlas Viewer and see what Homeowners Choice was doing hour by hour. And it was very transparent and very much on the mark. That turned out to be a big differentiator. And one of the byproducts of that was we had a lot of reinsurers who were not on our panel last year, who all wanted to join the panel this year, just because word of how the company handled…

Lastly just a few numbers, questions maybe for Mark, net written premiums and weighted average shares outstanding?

So net written is $106.2 million. And weighted average fully diluted, Matt?

Yes, fully diluted.

Yes. 12.33 million.

And then the last one numbers-wise is you mentioned in both I think the opening commentary and definitely in the release that there was some prior-period adverse in the loss number. Can you quantify how much that is?

Yes. So in the second quarter, we've put about $5.5 million in for reserve strengthening as part of the 27.7.

Okay, mostly AOB related?

Yes.

Our next question is from Arash Soleimani with KBW.

Just two questions - thanks for providing net premiums written. Can you also just provide gross premiums written?

Yes, $134.4 million.

And you mentioned in the prepared remarks that you - in terms of the some of the technology products that Exzeo is working on that that you might have the opportunity to, I guess, monetize that with third parties. Could you just expand on that comment a little?

Yes. I'll go back to discussing Atlas Viewer. It was a tool that we developed a couple years ago. We actually had showed it to a lot of people in the marketplace as to how great it was and how it helps you handle the logistics of a large number of claims and also keep all the different parties that need to be kept appraised of what's going on in a large event, and keep them all on the same page. When we were showing that a couple years ago, people sort of looked at that and said, well, this is nice, but why would we need this? During Matthew, suddenly everybody saw the value of having a system like this already up and running. So we are getting some inquiries as to can other parties get it, et cetera. And we are obviously in the business of technology. So we would obviously look at that. But stay tuned as to when that actually occurs.

I apologize if you said this already. Were there any repurchases, share repurchases in the quarter?

Yes. That was in my remarks. It was - there were 900 shares for $40,000 in total.

900 shares for $40,000. And in terms of the - I know you mentioned just now the $5.5 million of reserve strengthening. Can you just provide, I guess, a general update on AOB and what changes you're seeing and how it's kind of changed quarter-over-quarter since last time we spoke on the call?

Yes. What we are seeing is a couple of things. In some ways we are seeing lawsuit numbers tick up in the second quarter. But part of that is what's happening is that now that Matthew has aged by about nine months, we are starting to see the Matthew lawsuits starts to come in. It was expected and it's occurring. So I don't want to imagine that it was a surprise. It was baked into our numbers. But those things are occurring. So you are seeing some lawsuit increase. The other side of that is the lawsuit numbers this year are higher than last year. But they're along the lines of what we expected. So all of those aspects are playing out. For this year and this accident year, claim counts are down. The lawsuits obviously for this year will not have come in yet. They won't even start coming in till late this year or early next year. So you've got all those various items that play out. But we are out of an abundance of caution and obviously AOB keeps going on and on, we keep every quarter adding more and more to reserves and strengthening them until the issue is behind us. So as I think Mark said in his numbers, we've got fewer policies this than last year. We've got fewer claims this year than last year. We've got fewer- the business is smaller, et cetera. But we are putting away the same amount of money for losses just so that we have plenty of reserves for any outcomes in the future.

And in terms of the - I know the second quarter was a heavy rain quarter. Are you able to quantify the amount of, I guess, weather-related losses you had?

Actually we debated about that. And can we quantify it? Yes, we could. The only item about it, and yes, the stuff you're referring to is the heavy rains that were there in the last three weeks of June. But the only trouble with quantifying that is we also had a first quarter where there was very little weather events. And some of these weather events, while they were there, should not be- they're just normal course of business. It occurs, right? So that's why we didn't break it out separately. It's just baked into the numbers.

How would you look at, I guess, the weather year-over-year? Was 1Q- I know there were tornadoes last year, or tornadoes were 1Q. 2Q '16 I think was a pretty quiet weather quarter. So with that rain - I guess what I'm trying to back into is how much of the loss ratio uptick was from just heavier rain in 2Q '17 versus 2Q '16?

Yes. So look, I can actually quantify that and help you with that in some way. And this is the reason why we don't break these things out. Because it suddenly gets - it can be very distorting unless you're paying close attention. Second quarter last year wasn't quiet. We had, I think, Tropical Storm Colin, which would have been a similar kind of rain event to what the rains in June were. So you did have something in both quarters.

That's actually very helpful. And with the rain we saw this quarter, did TypTap have any, I guess, material claim activity?

No. Yes, rain has been - it's been very wet, but I don't know [ph] that we've had extensive flooding.

And when do you plan to start writing - I know you mentioned those nine states. When do you plan to start or when do you expect to start writing in any of those nine?

I'm optimistic that sometime in the fourth quarter the - it is obviously subject to getting through all the regulatory approval process that you have to in each of these states. Because we are doing it as an admitted carrier. So there is some time that's needed in these states to get licensed, approved and then rates and forms approved, recruit agents; all those kinds of things before you write your first policy. But I'm hopeful that we're doing it in some of these states before the end of the year.

And how are you targeting the agents that you're appointing or that you plan to appoint in the other states?

It's been interesting, just because of the fact that we announced that we were going into these places, and this goes back to how the TypTap brand seems to be getting more and more known out there. We've been receiving phone calls from agents, asking us that as soon as we get approved in their states, can we appoint them. So we are almost keeping a tally of people who are interested in writing flood with us when we get to their state. So - and this is without actually actively going and trying to recruit agents. So I think it will work itself out in due course of time.

I think you mentioned this in your prepared remarks. Can you remind us, what's the in-force policy count and in-force premiums within TypTap currently?

I think I said about 5,500 policies have been written, and the in-force client count will be something lower than that. And the gross written premiums was north of $7 million.

Was that a 2Q number or was that in-force premium number?

Sorry, say that again.

Was the $7 million- is $7 million in-force premiums within TypTap?

The $7 million worth of policies sold. Some of this stuff is going to be slightly different timing-wise, because when we sell policies, we're selling them two or three months in advance of their effective date. So we've sold about $7 million of policies. The in-force premium would probably be something less than that. Because not all policies would be effective at this moment in time.

Because I think I was just going back last quarter. I think you had mentioned, I think as of 1Q you mentioned it had $4 million of in-force premium. So is it fair to assume it's somewhere above that but below $7 million?

Yes. I think it's- yes.

And this might be a question for Mark. I think other operating expenses that had ticked up as a percentage of gross earned premium. I was just wondering, can you remind us what runs through that line and if there was anything notable there?

The other operating expenses line?

Yes.

Yes. I mean there's a number, there's a long list of things that are in there. But there isn't really anything significant there that's jumping up. From Q2 to Q2, professional fees were up a bit, system expenses up a bit. But I mean it's 1% or 2%.

And last question, do you have the Florida Homeowners policy count?

Yes. It's around 138 or so-

139,000 at the end of June. 139,000.

[Operator Instructions] Our next question is from Mark Hughes with SunTrust.

The competitive environment in Florida, could you talk about that in terms of your sense on new production and maybe organic production on homeowners, and maybe tie that to gross written premiums. You were down a few points this quarter, pretty good performance. How should we see that playing out over the balance of the year in light of kind of what you're seeing on competition new business trends?

Yes. So Mark, the key thing about that is, yes, our gross premiums are down. But we've sort of positioned ourselves and stated that was our objective for several quarters now, given the evolving AOB crisis. Where we are now, I think, is that we've reached the point whereby we think we have got a handle on this stuff. And we may actually look to see where we can grow and expand, and whether it's within this state or outside the state. So for us, the number is maybe starting to move in a different direction. In terms of competitive environment, my sense from what we get from agents and everybody else is more and more companies seem to be rethinking their tri-county strategy, especially the ones who were looking at growing last year in tri-county. They seem to have had a change of heart as I think the losses there continue to mount. As you know, we've been shrinking down in tri-county for several years. So we are quite happy with where we are.

Is that making it tougher in the markets you want to be in?

Actually, no. I think my overall sense of the Florida homeowners market is that the days of people churning between different insurance companies every year or twice a year or whatever seem to be somewhat behind us, and the market tends to be stable in most places. I say that because there isn't any news of any carriers shedding lots and lots of policies, and/or somebody growing with lots and lots of policies. So I think generally the marketplace seems to stable with low churn.

The renewal of the flood insurance, anything in that that has the potential to help out? Or do you think that will be business as usual?

I wish I knew what Congress was going to do. Obviously the NFIP reauthorization is due by the end of September. And at different moments over the last three months there have been people saying that reauthorization and reform will all be done before the end of September. Other times there have been conversations that nothing will get done. Other times there's conversation that they will just do a temporary reauthorization so that they can spend more time on it. I'm really not qualified to make a judgment call as to which of those three will occur. But we are watching closely, as you can imagine.

Any comment on M&A opportunities or deal flow that might be of interest? Is there a little more or little less of that as you stand here today?

Yes. I think things have stabilized out in the second quarter compared to the first quarter. Because the people who needed to infuse capital into their companies because of [indiscernible] because of year-end results in 2016, et cetera; all of that has been done. So the industry seems to be stable. Nobody is imminently planning on selling. But beyond that, I'm sure there will be consolidation that will occur over the course of the next few years. The other item that I would note is I would think it would be very difficult for anybody to start a new carrier at this point. So consequently if you're not adding new carriers that gives you the same pool to choose from. And eventually with consolidation, there will be fewer carriers.

Is there anything in the takeout market that interests you?

There might be. And just so that people aren't shocked when they hear it is that we probably will apply for a fourth quarter takeout. But applying for a fourth quarter takeout, actually executing a takeout and what you ultimately get as customers are three totally different things. So the first item shouldn't be read into meaning the third item will occur. And finally, what I'll note is I think Citizens hasn't yet started to grow to the level that everybody expected it to. They're still below 500,000 policies last time I looked.

Our next question is from Brian Hollenden with Sidoti.

That 8% rate increase that was put in place, did that take effect yet, and how has that affected policy retention so far?

Okay, simple answer to that, that rate increase goes into effect as of September 1. So it would not be in the numbers that you have in front of you. And obviously its effects will be felt really starting in Q4 onwards. In terms of how it's gone over, et cetera, obviously those renewals are out there with the policyholders. But the first true read of that is going to happen at the end of September when you've got a month's worth of renewals and you see what retentions, et cetera are like. So it's in process. But it's a little bit early to get an accurate read on what's going to happen.

And then just one point of clarification, when you talked earlier in your prepared remarks about ceded premiums, did you say $113 million or $118 million.

For the new program going forward, $113 million.

1-1-3.

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

On behalf of the entire management team, I would like to express our appreciation for the continued support we receive from our shareholders, employees, agents and most importantly our policyholders. We look forward to 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.