Good afternoon. Welcome to HCI Group's second quarter 2016 earnings call. My name is Ben, and I'll be your conference operator this afternoon. At this time, all participants are in listen-only mode. Before we begin today's call, I'd like to remind everyone that this conference call is being recorded and will be available for replay through September 2nd, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until September 2nd on the investor information section of the HCI Group website at www.hcigroup.com. I would now like to turn the conference call over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.
Thank you. 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. 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.
Thank you, Kevin. 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 and Casualty Insurance Company, which provides homeowners and flood insurance in Florida. The newest addition to our company is TypTap Insurance Company, featuring typtap.com, an online platform for quoting and binding policies. TypTap currently offers flood insurance for 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 quote in seconds and a policy in minutes. It's 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. As we have done throughout the company's history, we continue to investigate 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. 1, we paid a $0.30 per share dividend, marking our 23rd consecutive quarterly dividend. Our cumulative dividends paid since inception now total $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 demonstrate the board's 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 a catastrophic loss in a single event, which is sufficient to cover a one in 165-year storm based on the approved 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 our online insurance company, TypTap. We are very pleased with the results to date and will 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. 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.
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 the impact of the 5% rate decrease that was effective January 1st, 2016, for our new and renewal business. Direct and gross premiums written for the quarter were $139.8 million and $139.5 million respectively. For the six-month period, corresponding amounts were $215.4 million and $215 million. For the second quarter of 2016, reinsurance costs 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 of $76.8 million, are 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 full quarter remaining in the 2016 and 2017 treaty year.
During the three and six months ended June 30th, 2016, as a result of our multi-year reinsurance treaties, 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 July 1 of 2013 and terminated on May 31st of 2016. As of June 30, 2016, we had a total of $830,000 of accrued benefits and $277,000 of ceded premiums deferred related to the new multi-year agreements that began June 1st. 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 30th, 2016, our loss ratio was 45.6%, compared with 25% for the six months ended June 30th, 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 30th, 2016 was 41%, compared with 28.5% for the six months ended June 30th, 2015. These year-over-year increases are 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 and 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 30th, 2016, the combined loss and 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 ratios 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 for $1.2 million in the six months ended June 30th, 2016, compared with $2 million in the same period of 2015. Investments in fixed maturity and equity securities totaled $185.4 million at June 30th, compared with $173.2 million at December 31st, 2015. Book value per share has increased to $24.37 at June 30th, 2016, from $23.10 at December 31st. Our June 30th book value is based on approximately 9,838,000 shares outstanding at June 30th. I'd like to turn the call back over to Paresh.
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 costs of $113 million for the 2016-17 reinsurance year, or approximately 32% of the coming estimated gross premium for the coming year. This compares with about $161 million or 40% of gross premium earned in the 2015-16 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 compared to the prior contract year. Turning to claims, the growth of so-called AOB lawsuits appears to be leveling off. It is a little bit early to be sure, but we continue to address the AOB issue through policy language changes, book optimization, and reserve strengthening. Additionally, we are very encouraged by the March 1 launch of our newest division, TypTap. The product and service have been well received by our agents and policyholders. During the second quarter, we wrote over almost 400 new policies and the growth has continued into the current quarter. We are confident that our superior technology will provide us a continuing strategic advantage over any competitors. In summary, we keep adding book value quarter after quarter, even as we pay dividends and buy back stock.
I have 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 the application of our technology that allows us to connect easily with our customer. 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.
Thank you, sir. We will now be conducting a question and answer session. If you'd like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star then two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. The first question comes from Matthew Carletti of JMP Securities. Please go ahead, Matt.
Hey, thanks. Good afternoon. Just had a few questions. I guess the first question is just kind of some of the numbers. The 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 a kind of underlying level to work off of?
Matt, it's Paresh. I don't think we said there was any cat, there was Tropical Storm Colin, which is what you may be referring to.
Yeah, the press release referenced weather related events.
Yeah. If you remember in the first quarter, there were several severe weather related events.
Right.
Tropical Storm Colin was basically insignificant in our impact.
Okay. Q2 really didn't have weather, it was more the AOB development that pushed it up. Is that right?
Yes. Richard did mention Tropical Storm Colin, which I think other people are talking about as well. To us it was business as usual. We did have about 120 claims from Tropical Storm Colin, but we're a Florida insurance company, an occasional tropical storm going through during hurricane season should not be an unexpected event, yeah?
Right. Exactly. How much was the PPD in the quarter related to AOB?
I think we strengthened reserves by about $3 million.
Right. Okay.
Now, I think we should stress as was said during the initial commentary, that we see this thing leveling off at this point, but out of an abundance of caution, we are strengthening reserves.
Got you. That was my next question was, I caught your comment and should we expect, absent some new development, things to trend in a better direction on the loss ratio, and it sounds like that wouldn't be a bad assumption.
Matt, we are seeing a lull in the increase of AOB, maybe even a slight decrease. It's too early to tell whether it's a permanent trend or whether it's a temporary respite, yeah?
That makes sense. Okay. My other question just related to, you mentioned a little bit about TypTap, but I was hoping you could, and how you wrote, I think you mentioned 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 and into broader homeowners? Have you looked anymore at using it as a vehicle to potentially enter neighboring states?
Yes to all of the above.
Good.
It's work in progress. We are moving down that path. Clearly, doing this as an admitted company with filed rates, et cetera, takes a little bit of time. Plus, not to mention, we are doing two things at the same time. We're developing for that expansion. At the same time, we are actually marketing and getting the world more familiar with TypTap. We are stretching in both directions as we speak, yeah?
Great. I'll leave it there and let somebody else jump in. Thank you.
Thank you.
Our next question comes from Casey Alexander of Compass Point Research & Trading. Please go ahead.
Hi, good afternoon.
Good afternoon, Casey.
How are you doing, Casey?
I actually have gone through the Florida Financial Services, going back over the last couple of years. As from what I can see, the lawsuits filed in the Tri-County area for HCI have declined the last two quarters by 16% and 23%. I don't see one peer competitor that saw declines anywhere near that magnitude. Some have continued to see increases. First, what is the lag between the filing of a suit and when you actually either settle it or bump reserves? It appears to me as though HCI has had some success turning the corner on AOB that the competitors haven't. How do you explain that? 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.
Okay. I think there was like four questions in this.
Yeah, I know
complicated answers, yeah. First of all, in terms of how long it takes to figure out what the lawsuit's going to cost, et cetera. Well, the trouble with these things, they have a fairly long tail, it could take quite a while. The other trouble with the lawsuits also is that it might pertain to a claim that was settled and closed several years ago. You end up with prior year reserve development, all kinds of other things. That stuff goes a little bit all over the map. I think in terms of what you're seeing in the number of lawsuits, as you rightly pointed out, that we are seeing versus say, some of our other publicly traded brethren are seeing, yes, we are aware of the same numbers.
I think all of this goes back to some of the 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, there's about an 18-month lag to fill the full brunt of nearly five lawsuits and everything else for it to get to that point. At least that's our experience. If you look back over the last two years, we've been taking our foot off 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. I think at this point, at this juncture, what you're 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're seeing in the numbers. Time will tell, but that's as close to an explanation as we've managed to rationalize this thing at this point, yeah?
Okay. I mean, HCI has been a company that for years was characterized as having lower loss ratios than the peer group. Since 2015, it's 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? How do you expect the TypTap to factor into your loss ratios as it grows?
Okay. The last part of the question, TypTap's loss ratio factoring into this. TypTap at this point is on a weighted basis, such a small part of the business that TypTap's loss ratio doesn't really move the needle one way or the other at all. Down the road it might, but we are 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. Some of that, I think, I would characterize that we play to our own, to what we actually see on the ground, as opposed to what the fashionable thing to do is. I'm very sane in the situation, as Richard said earlier.
Despite the fact that we're seeing leveling off and/or even slight decrease in losses and AOB claims, et cetera, we chose to take the conservative path of strengthening reserves that we've put aside for those things. 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 getting the reserves adequate. I think you will see that as we go forward as to whether that statement is correct or not. I think we will continue over time to have loss ratios that are better than the bulk of the industry on a measure on a long-term basis. Yeah?
Mm-hmm. Okay.
Any given quarter, it can move up or down because everybody can move things around shortly. That's what we're going to see over the long term. Yeah?
Right. Okay. That last quarter, there was some discussion that perhaps by the end of the year, TypTap might be absorbing the premium attrition from the homeowners book. When I reverse engineer the numbers from the reinsurance contract, I come up with $350 million-plus gross premiums expected for the coming reinsurance contract year versus about $400 million in the most recent one. 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?
Yeah. Casey, two items. I think when I talked about this in the last call, I was hoping to do it more in terms of PIF count as opposed to premium count. Yeah?
Okay.
I think if you read back to that transcript, that was what the question was about, is that given the X number of policies, will you replace them kind of thing? Yeah?
That's partly a different thing. The second part of this is that as you're aware that as we add these policies on, it takes a while for it to become earned premium and offset the attrition that we're seeing currently. Yeah?
Right.
Even though you succeed at that replacement thing, it's going to take a while, and in the next fiscal year, we're conservatively projecting it to be down. 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 hopes of what we expect to grow, et cetera. Yeah?
Right.
Right. We didn't want to say when we were putting these numbers out, 32% was a number that we wanted to put out to give markets some yardstick by which to go through this. The other item of that is we could've said it was 30%, and your numbers would've worked out beautifully. Right?
Right.
Right. I'd rather that we keep the lower premium number and make 32% than have somebody back into a higher premium number that may or may not happen. Yeah?
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 may be separately reinsured or collectively, even if that's possible? I mean, exactly how is that likely to work?
Okay. I will answer parts of the question. Other parts of the question, I will invoke trade secret kind of stuff. Okay?
Okay.
Okay. TypTap is already reinsured currently by a third party. We went to great lengths to get a reinsurance contract in place, not the numbers that we've talked about for Homeowners Choice and those towers. When you get into a flood tower, it's a very different beast. We've already established that into place, and it's 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.
Right.
Secondly, the nature and 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 invoking trade secret because we don't want to give everybody else a blueprint as to how to do this. Yeah?
Okay. Fair enough.
Yeah?
All right. Thank you for taking my questions. I appreciate it.
Thank you.
As a reminder, if you do have a question, you may press star and one on your phone. The next question comes from Arash Soleimani of KBW. Please go ahead.
Thanks, and good afternoon. Could you just, a couple numbers questions first. What were gross written premiums in the quarter?
Let me just look it up. I think it's in the press release.
We had it in the script. The gross written premiums for the quarter were $139,481,000.
$139,481. Okay. There was no assumed written, it was just all direct?
There was a very minimal negative assumed premium.
Remember we had a small take up back in December?
Yeah.
November 2015, yeah?
$280,000 return premium.
$280,000. Okay. Just to hop back quickly onto Matt's question on weather. I know that you had said, weather is obviously a normal part of operations for a Florida carrier, and I completely agree, but just, are you able to quantify it? Just 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. If $3 million came from the strengthening that you mentioned, does that imply that $2 million, $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.
Hey, Arash, I think what we're trying to say, I'm presuming the $5 million you're talking about is quarter-over-quarter 2015 versus 2016. Is that correct?
Correct. Yep.
I think in terms of trying to rationalize that, you have three things that would explain this. One is strengthening. Two is the actual issues that you have with AOB occurring. There is loss ratio points increase because of AOB and lawsuits and everything else. Yeah?
Right.
The third item is weather. As in weather, as in any unusual events, cat events that might have occurred during the quarter, yeah?
Sure.
The one kitty cat that occurred during the quarter was Tropical Storm Colin, which was in early June.
Okay. What we were saying to Matt, let me say it even more clearly, hopefully, is if you 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. There is a small component that will have come in from Tropical Storm Colin, because as I said, it was about 120 claims.
Right.
When you look at it across $26 million, we didn't want to mischaracterize it that, oh my god, because of Tropical Storm Colin, we're here, right? That's why we were trying to minimize the weather effects, yeah?
Okay. Okay, that's fair. In terms of the prior period development, so I know you said that you're trying to be cautious there. But I guess going back to your leveling off comment, can you just give a little bit more, I guess, clarity, just maybe more detail around what you're seeing that gives you maybe confidence that it's leveling off? Or just what kind of puts your thinking that way?
Two things. Is because we manage, well, not even manage, we have to acknowledge every lawsuit that comes our way. We count how many lawsuits we've got year-over-year, in Tri-County, et cetera. I think as Casey rightfully pointed out, our lawsuit count year-over-year is down. That's an interesting development in a world where everybody's talking about increasing AOB and increasing lawsuits. That's now. As I also stated 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. That deviation is there, and it's almost a public record. We have that going on. The other kinds of things that we also see leveling off is in terms of claims coming in and how many AOB lawsuits, et cetera, that are coming in.
AOB non-lawsuit claims that are coming in. It sort of is looking like it's leveling off. I'm not saying it's going away. I'm not saying it's problem solved or anything else. I'm just telling you that at whatever the high elevated level is, it seems to be leveling off because we measure this week after week, month after month. Yeah?
Okay. 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?
Well, that's a nebulous question. I do not 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 Florida insurance market. What we are seeing is this trend seems to be leveling off across the industry if you look at it on a cumulative basis. There are a few outliers. There's a handful of carriers, the only one I'm willing to name is Citizens, who may still be seeing an increased claim and lawsuit activity. It seems to me there's a few carriers that seem to be still seeing increases month-over-month. As an industry, at least for whatever reason, the last couple of months, the lawsuit activity seems to have leveled off. It's still way too high, but it's leveled off, yeah?
Right. Okay. I know there's been a lot of talk by Citizens about this and 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 mimic that language. Is that something you guys are doing, or have you done it already? Are you planning on doing it?
Very simple answer. Citizens' new policy language went into effect July 1. Obviously too early to see what effect it would have on it. Homeowner's Choice policy language went into effect on August 1, one month later. Again, it's too early to tell, but policy language is there and done.
Is that August 1 date for both new and renewal business?
Yes.
Okay. Are your expectations that it would be helpful based on the language? Does that strike you as something that would make a difference, or do you think that it's nice to have it written down, but maybe not practically speaking beneficial?
Arash, I am a 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 a new loophole or something or the other around it. It's just too early to tell. Yeah?
Sure. 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 a 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's adequate for the time being?
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 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 on to everybody else. We're trying to see what steps we can do and 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 having to have a rate increase. As a file for rate increase, I have one approved.
To put this into perspective, the last time we actually applied for a rate increase, it was 2012. We'd like to keep that record going, and especially as we just reduced rates last year. We're always in this for the long term, we don't look at this that you go to increase rates at the drop of a hat just because you can.
Right.
I think our policyholders appreciate that, yeah?
Sure. Has retention changed at all, just given that a lot of peers are raising rates and you guys have took them down last year? Has that benefited retention?
Yes, absolutely. I think because of the sentiment that I just expressed in the answer to the last question, what's happening out there is our high retention rates actually seem to be getting even higher. We are looking at projections. Compared to projections we had, we are seeing the retention be even higher than we had quite anticipated. The hard part about that is I think partly because as this is going on, agents, people out there are 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 who's trying very hard not to raise rates?" I note that about 15 or 16 companies may have filed for rate increases under this whole AOB thing.
We are not one of them.
Are you able to quantify the retention at all? I think last call you said it was around 88% or 90%, if I remember correctly.
Okay. I will tell you one other item. Yes. Retention has probably gone up by a couple of points because from 88-90, it can't go up much, because then it'll be over 100, right?
Right.
It can't go up by much. It's only a couple of points. 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, or we are shedding business on a very targeted basis of policies that we think are likely to develop over the next few years and pass rate increases onto all the other policyholders. We are using the elevated retention rate to actually shrink the business a little bit, if you like.
That shrinkage is mostly Tri County, I assume?
Tri County and the Orlando area.
Tri County and Orlando. Why Orlando?
Well, 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. There are some AOB trends in the Orlando area. Yeah.
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?
Shoot. Yeah. Funny enough, we've been so busy doing other things, we haven't looked, but I think it may be around the 155,000 mark, give or take a couple of thousand.
Sorry, is it 355?
155.
Oh, 150, okay. 155, okay. I guess, last question. In terms of flood, TypTap, just to be clear, is TypTap the main vehicle for flood going forward rather than the legacy flood business?
Yes. I think if you were to consider flood policies, TypTap already has more flood policies than Homeowners Choice does, yeah.
Okay. TypTap has more. Can you quantify at all just 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? How much more competitive do you view TypTap's flood rates relative to the NFIP?
It depends, right. What it depends on is how great a deal or lack of a deal people are getting from the NFIP. What we are doing is we are taking advantage of dislocations in risk. What happens with it also is that we are doing, in terms of flood policy, the same thing that we did with wind policies and Citizens all those years ago. Yeah. We are basically trying to take good risk and underwrite them out of NFIP. Some of the risks we take, you'd be amazed as to how much money they save. It can be as easy as 15%, sometimes as high as 50%. Right.
50% savings relative to the NFIP?
Yes. Some of those places, it gets as high as that, right? I don't want to put out a slogan, 15 seconds could save you 50% or something. We have seen those kinds of savings, yeah?
Yeah.
As we have done our entire history, and we continue to do so, we charge a fair price for a great product. People look at this stuff and it comes up, and they make their choices as to whether they want to come with us or they want to stay with the NFIP.
Sure.
All we're doing is we're depopulating in a profitable manner with a good spread of risk. Again, these are all things that we've done on the wind side for years and continue to do so. We're applying the same basic business principles to the flood side.
Sure. What's the average premium on your flood policies?
Really, it consists of two books. There is a set of policyholders who have to buy flood insurance, these are the ones that are in the A and the V zones. Then there's a whole different set of people who don't have to buy. The guys who have to buy, have to buy it because of mortgage issues, et cetera. There's all the folks in the X zones who buy because they choose to buy.
Right.
Basically, how this is working out. It's on average working out to about $375 per policy in the X zones, about $1,400-$1,500 in the A zones, about $3,000 or so in the V zones.
How much was it in the A zone?
It's averaging out to about $1,400 or so.
Okay. Are you targeting a particular segment between the A, V, and X, or is it just an even spread, would you say, what you're looking to build?
I think we are doing what we do and trying to 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 policyholders in them.
Right.
Right? We are trying to make sure we build a balanced book.
Sure.
Those are the number of people out there, yeah?
No, that makes sense. Is the X zone, is that just people that don't have to buy it? Is that what that means?
What the X zone stuff is, are people who are not required by their mortgage to buy flood insurance.
Okay.
That does not mean that it isn't prudent to buy flood insurance and that people shouldn't buy flood insurance or anything else of that nature. It just says, if you're in an X zone, it is not a condition of your mortgage that you're required to buy flood insurance, usually. Yeah?
Okay. I know you said there's obviously different numbers of policyholders in each of these buckets. I guess, how would you rank them? Where are the most, second most, and third most?
Oh, that we are seeing or that are in the NFIP?
I guess when you look at TypTap's opportunity over the next, let's call it two, three years, which of those three buckets between A, X, and V do you think offers the largest opportunity? I guess, how would you rank those three opportunities?
Okay. 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, and probably about 30,000, 40,000 are V zone policies. It's something in those kinds of numbers. If you get enamored with PIF counts, obviously the X zone is the biggest opportunity. Right?
Right.
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. Time will tell.
What are you doing in terms of, I guess, advertising? Obviously, your average person in Florida won't know about TypTap. What's the, I guess, marketing, if you will, effort to get the word out there?
It's a mix of agents and policyholders and neighbors telling each other. We are seeing quotes and people jumping onto TypTap all over the place, and it's spreading virally.
Okay. That's fair. Thank you very much for the thorough answers.
You're welcome.
At this time, this concludes our question and answer session. I would now like to turn the call back over to Kevin Mitchell for 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 progress in the near future.
Thank you for joining us for our presentation. This concludes today's call. You may now disconnect.