Kevin Mitchell - VP, IR Paresh Patel - Chairman, CEO Rich Allen - CFO

Casey Alexander - Gilford Securities Matt Carletti - JMP Securities Dan Farrell - Sterne, Agee Arash Soleimani - KBW

Thank you, and good afternoon. Welcome to HCI Group third quarter 2014 earnings call.

With me today are Paresh Patel, our Chairman and Chief Executive Officer; Richard Allen, our Chief Financial Officer; and Scott Wallace, President of the Property and Casualty Insurance Division. 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 open up the call to your questions. To access today's webcast, please visit the Investor Relations section of our corporate Web site hcigroup.com.

Before we begin, I would like to take the opportunity to remind all 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 condition and results of operations. HCI Group, Inc.

disclaims all the obligations to update any forward-looking statements. Now, I would like to turn the call over to Paresh Patel, our Chairman and CEO, Paresh?

Thank you, Kevin, and good afternoon everyone. As Richard will expand on it shortly, we reported solid quarter for our third quarter ended September 30, 2014.

This marks our 28th consecutive quarter of profitability. In September, we paid $0.275 per common share dividend which will present our 16th consecutive quarter of paying common dividend.

Our core insurance business continues to deliver excellent results. Policyholder surplus is approximately $150 million.

Put this into perspective, it was $50 million at the end of 2011 and since then it is growing, it has almost tripled without the holding company making any significant contribution to capital and none at all since December of 2012. Moving on during the quarter, we repurchased and retired 246,578 shares of HCI common stock at a total cost of $10 million or an average price of approximately $4.58 per share.

This brings the total number of shares we purchased and retired in 2014 to almost 735,000 shares at a total of $27.8 million an average purchase price of $37.85. And as of September 30, 2014, we have approximately 12.2 million remaining under our Board approved plan that was implemented in March of 2014.

On a different note, our real estate division Greenleaf Capital has finalized two retail shopping center transactions. The first is a loan arrangement and the second is a joint venture both projects include a purchase option and we expect more from Greenleaf in the coming months.

We also learned during the third quarter that HCI Group ranked number two on Fortune's List of 100 fastest growing public companies in the U.S. The raking is based on average revenue growth, profit growth and stock performance over the past three years.

It's a wonderful achievement and we are glad to have been recognized, I just want to make everybody is aware that we are not looking – we have high likelihood to repeat that because of the metrics are so high too keeping doing this year-after-year, but nevertheless it was a good recognition. Before I go on, I would like to invite our CFO, Rich Allen to take us through our financial performance for the third quarter.

Richard?

Thank you, Paresh, and good afternoon everyone. Year-over-year, our third quarter income available to common stockholders grew 5.2%.

And diluted earnings per common share increased 8.8%. There are a few items I would like to highlight that have driven results in 2014.

Gross premiums earned are up year-over-year for both the three and nine months ended September 30th to 9.5% increase during the quarter and 11.5% increase year-to-date is primarily due to premium revenue from policies assumed from Citizens in November of 2013. The third quarter is an important quarter as we recognize the full impact of the current year reinsurance cost.

Our ceded premiums were $626,000 lower in the quarter ended September 30, 2014 compared with the same period in 2013 reflecting a slightly lower run rate for 2014, 2015 hurricane season as compared with the prior three years. As has been discussed in prior earnings calls, we have recorded certain benefits related to the retrospective provisions of the multi-year reinsurance treaties which amounted to 6.4 million in the third quarter of 2014 compared to 3.9 million in the third quarter of 2013.

Our net investment income in the third quarter was significantly higher than in the third quarter of 2013 reflecting a year-over-year increase in the size of our investment portfolio. We also realized a $3.3 million increase in realized investment gains year-over-year for the third quarter as we took advantage of market conditions.

Losses and loss adjustment expenses during the third quarter of 2014 were up $7.5 million compared with the third quarter of 2013. Due to this increase, our loss ratio to net premiums earned for the third quarter of 2014 was 35.9% compared with 27.4% in the third quarter of 2013.

The increase in claims in 2014 is a result of an increase in severity primarily from fire related claims as well as an increase in frequency over exceedingly good levels last year. Policy acquisition and other underwriting expenses in the third quarter of 2014 were $1.1 million higher than in the prior year quarter.

This year-over-year increase is primarily attributable to the renewal of policies assumed from Citizens in 2012 and 2013 which are now subject to commissions and premium taxes on renewal. Other operating expenses increased by $752,000 year-over-year for the third quarter and $6.2 million for the nine months.

These increases are primarily due to increased compensation and related expenses. Interest expense from our senior notes increased $1.8 million for the third quarter of 2014 compared with the third quarter of 2013.

The year-over-year increase for the nine month period was $5.4 million. The increase is attributable to the company's 3.875% convertible notes issued in December of 2013.

Our total combined operating ratio to gross premiums earned including investment income and reinsurance cost for the three months ended September 30, 2014 was 74.4% compared to 73.2% for the same period a year ago. Total stockholders equity at the quarter end was $179.6 million up 11.9% from $160.5 million at December 31.

Book value per common share has increased 17.1% to $17.19 at September 30th from $14.68 per share at December 31st. As always, we constantly review claims experience for the development and identification of trends and frequency, severity and the cost of last claim reported.

We are encouraged by our results for the third quarter and remain committed to increasing shareholder value in future periods and years ahead. With that, I would like to turn the call back over to Paresh.

Paresh?

Thank you, Richard. Once again for this quarter, we achieved four things simultaneously.

We paid a healthy dividend, we reduced share count meaningfully, we increased book value and we increased shareholder equity all at the same time. And while we were doing this we were obviously still pursuing growth opportunities at they arose.

Our core business delivered profitable results and we continue to apply stiff underwriting standard while providing our policyholders with the highest level of service. Subsequent to the quarters end, we will approve to assume policies from Citizens for December.

We expect the policies we assume will have an annual return premium in the range of $80 million to $100 million. We will not know the final number of policies assumed until December 16th of this year.

The majority of the assumed policies are placed to be wind-only. We will only be responsible for the parallel wind and not for such exposures as theft, fire or water leaks.

And until hurricane season starts on June 1, 2015, we believe that our exposure will be minimal relative to these policies. HCI Group has a history of growing a strategic moment throughout the years and this December Citizens assumption is just one recent example of how we wait for the right moment and then pounce.

Looking forward, our consistently profitable core business coupled with our strong cash position of over $300 million allows us to patiently seek accretive growth opportunities while we remain relentlessly focused on the bottom line. With that, we are ready to open the call for your questions.

Operator, please provide the appropriate instructions?

Good afternoon. First of all, I heard – I missed a little something on the $10 million worth of shares that were repurchased during the quarter, what was the number of shares and the share price?

Hi, Casey, hang on just a second – meeting back to that – with that part of the question. Yes, we repurchased 246,578 shares total cost of $10 million average purchase price of $40.58.

$40.58 okay, great. Thank you.

I just heard that the loss in the LAE came up to a more normal level from level that had been almost exaggeratedly low but was there any – was there an event or a geography or a type of claim that cropped up or an increased IBNR, is there any type of color that you have on the sort of change in percentage of the loss in LAE as compared to as a percentage of gross premiums?

Yes. Casey look I think you hit of the points already in the question.

Year-over-year comparisons are particularly stark because last Q3 was such a good quarter. So you have a little bit of that fragmented.

But beyond that what we did have in the quarter, one, it was a very wet summer, so we ended up with a lot more claims, we just had to get a more claims in the summer, I think as to do with the rain. So we got a little bit more of that this year.

And secondly, we had some significant fires and a few fires tend to move the number around dramatically. It's part of the risk nature of the business here.

Right, okay. On a quarter-to-quarter basis, the gross premiums earned declined by about 2.5% but just about a 10% annualized attrition per rate.

Is that a fair rate to use in modeling going forward?

Casey normally people ask this stuff in terms of discounts and those kinds of things. And we typically have been talking about keeping your retention rates there in the high 80s, 85, 88 that kind of range maybe 90, yes.

So I think, yes, you are in line with that. Some of this quarter-over-quarter variants occurs also because we don't renew our polices evenly throughout the year.

You have some quarters with a lot of renewals and policy drop-off tends to occur around renewals, yes.

But was the policy count at the end of the quarter?

Don't have it exactly in front of me but I think it would be somewhere around 150,000 give or take one or two.

What was that 150 or 158?

No, 150 plus or minus one or two thousand, right?

150 plus or minus a couple of grand?

Yes.

Okay. All right, great.

I will jump back in the queue and if I have something else I will come back.

Okay.

Thanks. Good afternoon.

Good afternoon, Matt.

Good afternoon, Matt.

I have few questions, first one, so you guys have a history of being called pioneers in the kind of areas that maybe others don't want to go and have a pretty good track record at it. I'm curious, wind-only is an area that people have really stayed away from – there has been a few that haven't done so well there.

Can you walk us through what you see in the wind-only policies and what you see the opportunity for HCI, and why you are attracted to them?

Yes, Matt. It's a intricate path we have to walk because we have to make sure that we takeout these policies, you can reinsure them because you think about it, reinsurance will come in most parallel of these policies, because it is wind-only, you have to make to sure that you can pay for your corporate expenses and buy a reinsurance at a sufficient value – sufficient price to be able to cover these policies.

And getting the formulas and the algorithms right to be able to pick the right book of business, took quite a while. And the stuff that I'm telling you about is exactly the same concerns the department would have over the matter and we had to show them – why we are doing, what?

All of those things led us to – into this camp. What also got us here where we were in a different position to most of our other brethren is couple of things.

One is that the wind-only policy tends obviously be on the coast right on the beach kind of thing. And those also the places where you might want to write them a flood policy.

So we already – and fund it up -- this conversation had gone with the department well over a year ago in the sense of flood policies and wind-only policies tend to do the same policy of the same thing. So we have been working in all of those things but it takes a while to get that formula right and have the right structure with which to do this.

Obviously, time will tell us to how well we did this, yes.

Yes. Do you think that I know this might be tough to answer because you never know when the storm is going to hit.

But, I guess assuming that you are paying for the reinsurance and the fund for reinsurance to cover the storm, so and here doesn't really matter one way or another at least until the renewal whether storm hits or not. Do you think the wind-only policies are accretive, dilutive of the same in terms of ROE to your business as the other policies in the book – the aggregate – the policies?

It depends on which measures you do. When you talk about ROE, right, clearly it's going to be accretive because you just added a big piece of revenue for the top line, and you haven't had to increase it by any.

And profits are going to go up, so ROE is going to go up.

And I guess I think about it from the standpoint from a – it got to be some amount of incremental required capital because it increases P&Ls and what not, so on that after adding in the incremental capital that it requires and I realize you have that capital, we kind of thinking in terms of like excluding those capital, think about it in terms of required capital?

Yes. I guess, you are asking is it a better – is it a more profitable line of business there, existing line of business would that be…

Essentially, essentially, yes.

I think it maybe slightly less profitable than our existing book on a wind-only basis but clearly because of the fact that we have flood opportunities et cetera that may change over time, yes, in fact, you know.

Okay. Next question I have is, does during the takeout change or share repurchase have to hide at all, does we expect to continue to see you repurchase shares or just put that on hold and there is a new (indiscernible)?

Simple answer is nothing. I think we have made that commitment about $40 million.

I think that's been earmarked as such. What may make a difference your existing terms of full disclosure is where the shares trade at?

Yes. Of course, of course.

Yes. So…

That makes sense. All right and not last one just kind of cleaning up numbers questions, do you have growth in net premium and weighted average and quarter-end share count?

Gross premiums for the quarter?

Yes.

Gross return premium was 86,085,000.

Great.

Net premium return was 58,000,401.

All right.

At quarter end fully diluted shares was 11,518,000; year-to-date for the nine months it's 11,787,000.

All right. Thank you very much and congrats on the quarter.

Thank you.

Thanks and good afternoon. Just a question on progression of the other expense ratio, we saw a trend up through the year last year and part of that I think was poor timing of accruals for compensation, incentive comp expense.

I think you have been doing that at a more even pace through the year, but were still seeing a gradual decline, however, and I'm wondering if that pattern would continue in the fourth quarter if that's an expectation we should be thinking about?

There should be a slight decrease in that.

Okay. Okay.

So it is more even. Okay.

Yes.

That's helpful. And then just I guess the longer term question on – I'm thinking about reinsurance as we look ahead to reinsurance purchase, you guys obviously have a multi-year agreement that served you well.

I'm wondering if you think you will see opportunities to do additional multi-year as you go forward, how confident that you think would be attractive to do versus kind of one-year type coverages.

Dan, its Paresh. A simple answer about some of this stuff is, it's a long time between now and next June and the perception is the marketplaces are shifting, right, and that's why I'm going to give you a slightly funny answer.

Last year when we were doing multi-year deals a lot of our reinsurance partners were reluctant or hesitant in doing so in the business model. I think what people are now thinking about is that if you did a multi-year deal last year you lock in better rates than you will in the open market this year.

So you now have people – the reinsurers who might be more not only willing, but looking forward to doing multi-year deals, I'm not saying they are going to be but there are some people that are changing their thoughts on this. Equally well on this side of the table people are going – do I want to lock-in a multi-year deal?

They are going to be lower next year. So there is a shift in thinking going on both side of the table.

So where all this plays out who knows, but we remain comfortable with the multi-year deals that we do have and then the amount of single-year coverage that we would have to buy – additional coverage you will have to buy on June 1 of next year. I think we are well-positioned for both sets of outcomes putting just only the well-hedged, yes.

That's helpful. And then just one last question with regard to the wind policies that were taken out of the Citizens, as we think about modeling that what kind of differences in loss ratio would there be on that?

And then also, we have seen some of the experience what the retention is on pack takeout, is there any reason to think one of the retention of this takeout will be – it's really different or can we use – what you have seen in the past as a proxy for that? Thank you.

Yes. All right, let's start with the retention levels, right?

Our expectations it should be about the same but having said that obviously, we are dealing with a new class of – and a new group of customers if you like, so they may behave differently. As I eluded everything else we are monitoring this closely.

But, to-date we don't have any reason to believe that the retention rates won't be similar but equally well we don't have a track record of saying that it will be the same here. In terms of the losses and those kinds of things, if you look at our multi-peril business et cetera, the bulk of our losses obviously come from other perils things like fire, theft, water leaks as we talked about.

When you do a wind-only policy, the only thing that can – the losses you cover basically are hurricanes and things like tornados and hailstorms very specific event. So especially when things like tornados, hailstorms, often would never say never, but those are not common perils that occur in Florida between the month of December and June.

Yes. That's helpful.

Okay. That's all I have.

Thank you very much.

Thank you.

Thank you.

Hi. Good afternoon.

Good afternoon.

Just a couple of questions here, it sounds like obviously you are saying the main interaction of the wind-only policy seizes the opportunity within flood. Just in terms of thinking about that both in the short-term and long-term, I know you mentioned maybe a couple of calls ago that the flood uptake was a bit slower, so in terms of these takes out what's your anticipation when the flood piece of it really starts to flow through?

Good question. And we keep fine tuning this and playing away at it.

There are progress items that you should be aware off. One is, I think SEMA as laid out a new rate tables for next year.

And I think the premiums are going up – from between – I think like 15% to 30%, if I remember it correctly. So when those kind of things flow through obviously, the fact the response this year may not be that for next year people, but tuning the increases of these – effect of these rate increases that's what we have kind of communicated all along to be patient eventually things will go in a certain direction.

So those aspect of things are playing into – falling into place and obviously something like a – this wind-only take out complements that because a lot of people that are looking to convert will already be our customers. So if you imagine that somebody currently is buying a wind-only policy, a flood policy and an excellent policy to cover their property, we really don't have any of those relationships with them right now by doing the Citizens takeout, we are going to get the wind-only relationship with them.

The flood-only relationship is going to – put this is way, is going to start deteriorating over time because SEMA and then seeing connect the dots from there on, right?

Right, right. And obviously, I mean you had the flood initiative in place the idea of it for a bit of time, why was it that fire – the wind-only was in as attractive, what made it more attractive during this take out given against the flood idea was already in place.

It wasn't a question of attractive or not attractive. There is a lot of finds that goes behind this in terms of policy selection and making sure you are in a comfortable position to be able to buy reinsurance not in the next year, but subsequent years for these policies, right?

So we are doing this because and it took this thing to time to do it because we wanted to make sure we got it, right.

Okay.

And yes?

Yes. That makes sense.

And then just in terms of kind of a general rate question when you are renewing policies now and over the next few months, what are you seeing in your book in terms of the primary rate?

Very simple, it's been flat because we have in our pipeline rate increases. We don't have any rate decreases pending but I think it's safe to say the current rate trend is toward.

Okay. And do you – but with that said given the go to insurance environment you expected it to be sort of margin neutral or do you think it will be – are they ever close to underwriting margins?

Good question. Look I think next few months it's downward, it should be margin neutral.

But, this is Florida one storm and all of these projections will go in a different direction, yes.

Yes. The takeout you mentioned in December 16, you get the final numbers, when is the actual assumption itself occur?

It actually occurs on December 16.

Actually occurs, okay. And with the multi-year benefit you mentioned, are those benefits have been offset in ceded earn premium?

Ceded recommend, ceded earn.

Okay. So the 2.6 was within earn then that I think you reported two point something million number?

Yes. We reduced it to return and the earn by the same amount.

Okay, okay. And then just last two numbers questions, what were duration and prior period development in the quarter?

I don't think we have that – hand in front of us here, we will go back at the audit, it will be in our SEC filings. We will get back to you on it.

Okay. Thank you.

That's all I had. Thanks for the answers.

Thank you.

Hi. The real estate portion is up to about 5% of your investable asset, is there a limitation to how far you can go with that either as a percentage of your assets or, I mean, how do you feel about that and could you give us a little bit more delineation of the real estate strategy guess why?

Yes. Casey, I think the whole thing about the investable assets kind of thing, I think you think for the insurance sub.

The real estate that we are talking about doing is in Greenleaf and Greenleaf Capital comes from the parent, the holdco not from the insurance sub. So basically the real estate deals we are talking about is being paid out of shareholder funds not policyholder funds.

Casey, there are requirements for a segment reporting and I'm not sure the percentage of total assets and total income for that “division” but we are not near that yet.

Yes. And as far as you know, we go off and do with this we are just playing along with it.

We take opportunities as they come along.

Great. Thank you.

Thank you. 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 the continued success. Thank you and have a great evening.