Good afternoon, and welcome to HCI Group's Third Quarter 2022 Earnings Call. My name is Paul, and I will be your conference operator. [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 and will be available for replay through December 8, 2022 starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 8, 2023 on the Investor Information section of HCI Group's website at www.hcigroup com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Thank you, Paul, and good afternoon. Welcome to HCI Group's Third Quarter 2022 Earnings Call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the third quarter of 2022, and then Paresh will provide a strategic update. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Before we begin, I would like to take this 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 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 disclaims all the obligations to update any forward-looking statements. Now with that, I would like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?

Thank you, Matt, and welcome, everyone. Before we discuss the quarter, I would like to express our sincere sympathy for all who have been impacted by Hurricane Ian, the Category 4 hurricane that hit Florida just 6 weeks ago. Every day, as we work with our customers, we're reminded of the thousands who have been affected and the time it will take to fully recover. Serving our policyholders remains our top priority. It is why we're here. Having navigated 15 storm seasons and several major hurricanes, HCI was prepared when Ian made landfall on September 28. Our dedicated customer service teams answered calls, providing a human voice to our policyholders while keeping wait times to a minimum. After just 14 days, we had received over 10,000 claims across Homeowners Choice and TypTap. We thank all of our associates for their hard work and dedication to our policyholders. Immediately after Ian made landfall, our proprietary technology showcased its ability within the claims handling process. Our systems are specifically designed to drive efficiency in claims processes through resource allocation, management oversight and report automation. We have real-time information at our fingertips. This unique transparency is invaluable and is a proven differentiator in claims handling. On October 10, we shared our preliminary reviews of Hurricane Ian in a presentation posted to our web page. To date, we received just over 12,000 claims in line with our initial estimates and consistent with the loss that is comfortably within our reinsurance towers. Now moving on to our third quarter financial results. The pretax impact of Hurricane Ian was $78 million for the quarter, resulting in a loss of $51 million for the company. If not for Ian, we would have reported a profit for the quarter. Gross premiums earned grew more than 20% over last…

Thanks, Karin. Hurricane Ian was obviously an event that had a significant impact on our results for the quarter. I'll discuss that impact as well as some positive trends in the business that are a little harder to see because of Ian. Last month on our website, we presented the net impact of Ian and those numbers have not changed. The total expense related to Ian this quarter, $77.6 million, $65 million of higher loss expense and $12 million of higher reinsurance expense as we reversed some accrued benefits under our multiyear reinsurance agreement. I also wanted to explain the gross loss estimates. As you know, we have a few different reinsurance towers, and I'll explain the impact by reinsurance tower. For Homeowners Choice, the growth loss estimate is $550 million, and the reinsurance tower limit is $936 million. For TypTap, the gross loss estimate for Florida wind is $370 million, and the reinsurance tower limit is $610 million. For TypTap flood, the gross loss estimate is $40 million, and the reinsurance tower limit is $61 million. And lastly, for the non-Florida tower, the expected gross loss is $10 million against the reinsurance limit of $525 million. There are -- these are, of course, estimates. And while things are progressing as expected, it's still early and these numbers could change. However, we have significant additional capacity in our reinsurance towers should claims start to develop outside of these expectations. So let's turn to the rest of the quarter. On a pretax basis, we lost $63.6 million in the third quarter. The loss from Ian was $77.6 million. And so before Ian, we made just over $14 million pretax, which is obviously a strong quarter. There are two positive trends that I wanted to point out. Loss ratios are coming down…

Thanks Mark. Let me start by offering my deepest sympathies to those who have been impacted by hurricane Ian. We are here to help our policyholders move forward and rebuild their lives. And while on a daily basis, the entire company is currently working to take care of our policyholders, this is an earnings call, and everyone is expecting a business outlook which is why the following commentary is focused on the business aspects of the company and the future outcome. So let us begin. Clearly, Ian has been a devastating event that has caused a massive disruption to the Florida market. However, history suggests that with great disruption comes great opportunity as well, and Ian has firmly established the value of our main business, which is insurance, not only to our policyholders, but to others as well, including the Florida legislature. As Ian approached, no one thought they had too much insurance. Everyone appreciate the coverage they had and some wish they had even bought more. Going forward, the demand for insurance will only increase. No one is considering going without insurance in the next hurricane season. The Florida legislature must solve for the availability of homeowners' insurance next year, and they will have a special session next month to do just that. And under any range of outcomes from that session, we are poised to benefit. Why is that? Because we know what it takes to succeed in Florida. There are four imperatives: capital, technology and reinsurance, and then in addition, you need a seasoned management team that can deliver the results. In the past, people have underappreciated everything with the need for capital. We have always talked about need to be good at all four, and HCI Group is uniquely positioned in all four areas. But let's…

Thank you sir.[Operator Instructions] And the first question is coming from Matt Carletti from JMP. Matt, your line is live, please proceed.

Thanks, good afternoon. Paresh, I was hoping I could actually just kind of follow on from those last points you made. And last quarter, provide us with an update in terms of plans to establish a new subsidiary company with a pretty sizable opportunity in terms of potentially a few hundred million dollars’ worth of business you put on the books fairly quickly. Kind of fast forwarding a few months now post Ian, can you update us on kind of your thought process there in terms of if you still see the same opportunity, a better opportunity, a worse opportunity? And if your time line you're thinking about that has changed at all?

Sure, Matt. So in terms of the time line, we are -- through all of this, we have been making progress towards setting up those subsidiaries. So that continues as previously stated, and we expect them to be hopefully up and operating sometime next year. As far as the opportunity goes in Florida, I think, as I said in my prepared remarks, Ian has really crystallized the value of the product that we sell insurance. It's -- the demand for it is going to be greater than ever, and it's just a question of making sure you have a mechanism whereby you can provide insurance to people who'll be our customers in a healthy, profitable manner, which is what we're working at every day.

Okay. Great. And then you made some comments there about your reinsurance and having Homeowners Choice secured about three quarters of its needs already and TypTap not far behind. Is there any other color you can provide even high level, and I'm thinking along the lines of kind of magnitude of change in pricing or if it requires significant changes to retentions or if you just haven't crossed the bridge on those items yet in terms of having to make a decision?

Yes. Matt, a simple answer to that is, I don't know the extent of the repricing or any of those aspects or how much the supply will shrink. But what I do know is it isn't going to 0. And there will be a flight to quality, and we are the folks that people think of first when they think about who do they want to place reinsurance with. So those are the nature of the comments. I was just providing perspective that all the debate that's going on an industry about reinsurance is about a reduction in supply, not a elimination of reinsurance, so yes.

Okay. Great. And then, Mark, if I could just a follow up from some of your comments. You talked about kind of the underlying attritional loss ratio. Obviously, we've seen kind of the improvement come faster than planned. Can you talk a little bit about expectations moving forward? Are you seeing kind of continued improvements in some of the items that you talked about that we should expect continued improvement? Or have we just kind of gotten to the finish line quicker and kind of we should expect more stabilization maybe?

Yes. Good question. Obviously, anything that I'd say is -- about trends is going to be weather dependent. But we do expect continued improvement. As I mentioned in my prepared remarks that the trends are moving in the right direction. Frequency is coming down. Arguably more important, average premium per policy is going up faster than the severities going up. So the example, in Q3, the average premium per policy was about 17% higher than the third quarter last year, and average severity was up about 8%. So there's a good gap there. And I think that gap may well widen because some of the seasonal increases are just starting to kick in. So if you look, for example, this is just Homeowners Choice in Florida, but in the third quarter, we wrote 9% or 10% more in gross written premium with 13% fewer policies. And obviously, claims don't come from premium, they come from policies, right? So I think that gap may likely widen. So to come back to where I started, I think it's going to continue to improve. We -- I think on the last call, I said it would -- we expect it to come down a couple of points per quarter because of the impact of those things. Obviously, it came down faster in Q3 than we had expected, but I think we'll still see that drop a couple of points in the third quarter to fourth quarter, weather dependent, of course. But that's the general expectation is that the trends are moving in the right direction, and we expect it to increase to keep doing that.

Very helpful. Thank you both for the color.

Thank you. [Operator Instructions] The next question is coming from Mark Hughes from Truist. Mark, your line is live, you may proceed.

Yes, thank you good afternoon. Mark, on formulation, you just gave us severity up 8%. What did you say for pricing?

So that number was on a consolidated basis, and it was a floor number. So average premium per policy as of the end of the third quarter is up about 17% from Q3 last year to Q3 this year.

And then severity up 8%?

Yes, 8%, 8.5%, something like that.

Okay. Paresh, you mentioned that three quarters of the tower is already in place. Does that represent the premium? Or is that just dollars of coverage?

Mark, it's mostly the limit, if you just measure it in terms of how much limit you're buying. In terms of dollars, I think for -- I'll go through Homeowners Choice because that's the one I mentioned. We have a multilayer -- multiyear cover down low, then we have the cat fund, which will be available to us next year and we defer the wrap layer for those -- the reinsurance versus policyholders that was passed in the special session on May 24. So all of those pieces will be there for us in the upcoming year. So it really fills out most of the needs for Homeowners Choice very quickly between just those three pieces. So again, the general tenor of my commentary and also actually some of the numbers Mark was talking about is, we are not disputing that Ian was a watershed event and Florida has -- and reinsurance, there will be challenges for the industry as a whole. We were just trying to distinguish that for us in the specific, the future is much greater than the general commentary that's going on in the industry. We wanted to make sure we said this thing in this call because apart from earnings calls, we don't really get many opportunities to make public statements. I thought this was a moment to let you know that things that are set in the generalities do not necessarily apply to us on a specific, yes.

Understood. How much capital do you think will be downstreaming? And could you kind of give us an update on any appropriate capital ratios at the subs once you do that leverage, kind of leverage limits?

Yes. Let me answer that and to say no comment. And the reason for that is, I think, with the special session upcoming and whatever legislative items that they pass, it will definitely color what we do thereafter for year-end. I think as Mark alluded to, we already have the money. But how we allocate and what we do with it is going to be very dependent on what is done in a special session.

When you mentioned the $150 million of the holdco and then $100 million of unlevered real estate, that's separate from the $150 million, correct?

Yes, yes, yes. And yes, so that $150 million is -- most of that is cash or near cash, that's at the holding company level. The real estate stuff is outside of the insurance company, but that's in addition to it. And also, I'm not counting the credit facility in that either.

What about the development? You had a little, I think, adverse last quarter. How are you seeing that lately?

Yes. It's -- I mean there's some in Q3 as well. I would say the same thing that I said in the last -- for Q2, there's a couple of specific things. Ed is one of them, a couple of accident quarters for TypTap back in 2020 that we're just working through. So it's there, similar numbers to Q2. So yes, there's still some of that that's there. But that's included in that loss ratio, right? And the other thing too, I've said this before, but -- and it's still true, we're expensing more than we're paying out, right? If you take cats out because it'll kind of -- with the timing of reinsurance payments and that kind of thing, it can distort things a bit. But if you just look at sort of regular non-cat reserves were I think, about $29 million higher in reserves at the end of September than we were at the end of December. So those loss rations that you see while they're improving, we're still dealing with some adverse and we're still in a situation where we're expensing more than we're paying. So we're still building reserve.

Yes. Yes. What's your -- how are you looking at growth here kind of in the fourth quarter as we speak? Are you kind of biding your time until the legislature act? Do you think this is a good time to be growing?

Mark, let me take that one. I think given Ian, we sort of paused writing the business. And given the -- what's laid out for the balance of this year, it makes sense to pause until you know what the legislature does, yes?

Okay, I think that was it from me. Thank you very much.

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

Thank you. On behalf of the entire management team, I would like to thank our shareholders, employees, agents and most importantly, our policyholders, for their continued support. As we end this call, I want to summarize my earlier comments. There is an increasing demand for our product and a realization for the importance -- of the importance of a healthy insurance market. We have all the pieces in place to benefit from a tremendous opportunity in front of us, and we have the right management team to execute on this opportunity. We look forward to providing an update on our progress in our next earnings call. Thank you. Have a great evening.

Thank you ladies and gentlemen, this does conclude today's conference. You may disconnect at this time. Thank you for your participation.