Mar 3, 2016
Executives
Kevin Mitchell - Vice President of Investor Relations Paresh Patel - Chairman and Chief Executive Officer Richard Allen - Chief Financial Officer
Analysts
Casey Alexander - Ladenburg Thalmann & Co. Inc.
Dan Farrell - Piper Jaffray Matt Carletti - JMP Securities Arash Soleimani - Keefe, Bruyette & Woods, Inc.
Operator
Good afternoon. Welcome to HCI Group’s Fourth Quarter and Full-Year 2015 Earnings Call.
My name is Tim and I will be your conference operator this afternoon. At this time, all participants will be in a listen-only mode.
Before we begin today’s call, I would like to remind everyone that this conference is being recorded and will be available for replay through April 3 starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until April 3 on the Investor Information section of the HCI Group website at www.hcigroup.com.
I would now like to turn the conference over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.
Kevin Mitchell
Thank you, and good afternoon. Welcome to HCI Group’s fourth quarter and full-year 2015 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 fourth quarter and full-year 2015, and then turn the call back to Paresh for an operational update and business outlook.
Finally, we will answer questions. To access today’s webcast, please visit the Investor Relations section of our corporate website at 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 conditions, and results of operations. HCI Group, Inc.
disclaims all the obligations to update any forward-looking statements. With that said, I would like to turn the call over to Paresh Patel, our Chairman and CEO.
Paresh?
Paresh Patel
Thank you, Kevin, and welcome, everyone. As most of you know, HCI Group is a holding company with subsidiaries engaged in diverse yet complementary business activities.
Our principal operating subsidiary is Homeowners Choice Property & Casualty Insurance Company, which provides homeowners and flood insurance in Florida. In addition, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our Homeowners Choice reinsurance program.
We also have an information technology operation called Exzeo. We’ve developed innovative products and services for Homeowners Choice, as well as the insurance industry, at large.
Finally, we have Greenleaf Capital, which owns and manages a diverse and growing portfolio of real estate investments. As you’ve gone throughout the company’s history, we continue to invest in strategic opportunities to add to and further diversify our operations.
As Richard will expand on shortly, 2015 was a solid year for HCI with record earnings per share and our 8th consecutive year of profitability. Here are few important highlights from the quarter.
First, the fourth quarter generated $11.1 million in net income, or $1.5 per share diluted earnings per common share. This despite a small increase in claims-related expenses and investment losses in our equity portfolio.
Secondly, we also paid $0.30 per share in dividends, marking our 21st consecutive quarter of paying a dividend. Our cumulative dividends paid cents per share are now at $4.95.
In addition to the dividend, our Board of Directors authorized a plan to repurchase up to $20 million of the company’s common shares. As a side note unrelated to the company’s buyback claim – plans, I firstly initiated a rule 10b51 plan to purchase up to 30,000 shares and that plan has completed purchases by mid-February and terminated.
In short, I purchased 30,000 shares on the open market under SEC rules. The 2015 hurricane season ended quietly on November 30.
As a result, a number of things happened Claddaugh our Casualty Reinsurance division earned net premiums of $17.6 million that otherwise might have been ceded to outside reinsures. Two, the profit commission benefit on our multi-reinsurance contract that we entered into years ago has now finally approved and it’s beyond the loss experience period, so therefore it is now lost in.
We look forward to updating our financials in the coming months. Now, before I go further, I would like to invite our CFO Richard Allen, who will take us through our financial performance for the fourth quarter and full-year.
Richard?
Richard Allen
Thank you, Paresh, and good afternoon, everyone. For the quarter ended December 31, 2015, income available to common shareholders totaled $11.1 million and diluted earnings per share of $1.5, compared to the same quarter of 2014 of $14.6 million, or $1.30 per common share.
Gross premiums earned for the quarter over $101.9 million, compared to $91.4 million for the prior period, reflecting an increase of 11.5% increase as result of renewal of policies from the December 2014 and February 2015 assumptions. Net premiums earned in the fourth quarter of $61.6 million is stable with the $61.8 million over the same period in 2014.
Investment income in the fourth quarter of 2015 was $1.2 million compared with $1.4 million in the same period in 2014. Additionally, the company recognized net non-cash charges of $0.8 million in the fourth quarter of 2015 and $0.1 million in the fourth quarter of 2014, due to declines in the fair value of securities determined to be other than temporary.
Losses and loss adjustment expenses incurred increased $891,000 over the prior period. This increase is primarily the result of claim development in the fourth quarter of 2015.
Policy acquisition and other underwriting expenses were $11.1 million in the fourth quarter of 2015, as compared to $9.3 million in the same period of 2014. This increase as a result of premiums and commissions, premium taxes and commissions on the policies assumed in December and February, as was mentioned earlier.
Salaries and wages were $5 million in the fourth quarter of 2015 compared to $3.9 million in the fourth quarter of 2014. This increase is attributable to increase staffing requirements and merit increases granted throughout the year.
Other operating expenses, which include a variety of general and administrative expenses in the fourth quarter of 2015 were $5.6 million, reflecting an increase of $680,000. The increase is primarily attributable to increase consulting and professional fees in the quarter.
For the year ending December 31, income available to common shareholders was $65.9 million, or $5.90 diluted earnings per common share, as compared to $62.7 million and $5.36 earnings per common share for the year ended December 31, 2014. Gross premiums earned increased 15.8%, or $57.6 million to $423.1 million, as compared to the prior 12 months period.
For the same period, net premiums earned increased 12.1% to $282.5 million, an increase of $30.4 million. Investment income during 2015 totaled $3.4 million compared with $9.6 million in 2014, which included $4.7 million of net realized gain from investment sales.
The decline in 2015 was primarily due to net losses related to the company’s limited partnership investments. Additionally, the company recognized net non-cash charges of $4.7 million in 2015, due to declines in the fair value of securities determined to be other than temporary.
Loss and loss adjustment expenses incurred increased to $87.2 million from $79.5 million. The increase of $7.8 million is primarily the result of an increase in the number of claims reported through the year and subsequent development of prior reported claims.
Policy acquisition cost increased to $42 million, reflecting the renewal and commissions and premium taxes as mentioned earlier. The salaries and wages in 2015 were $20.1 million compared to $16.4 million in 2014.
This is primarily attributable to a 10% increase in staff count and the impact of merit increases. Our combined ratio for the fourth quarter of 2015 was 74.3% compared to the prior period of 66.8%.
For the year ended December 31, our combined ratio was 63.6% compared to 65.5% for the prior year. On the balance sheet, invested assets have increased to $232.9 million from $168.8 million at December 31, 2014.
Cash and short-term investments decreased to $267.7 million from $314.4 million a year ago. Total stockholders’ equity increased 32.8% over the year to $237.7 million.
Included in the balance sheet and an income statement as discussed in prior calls is the benefit of our multi-year reinsurance treaties. Recorded benefits for the year and as of December 31, 2015 were $21.7 million and $35.7 million, respectively.
Book value per share was $23.10 at December 31, 2015 compared with $17.92 at December 31, 2014. In closing must to remember 2015 was a strong year following the exceptionally good years of 2014 and 2013.
Our loss ratios continue to set the market in the Florida market. Thank you.
Paresh.
Paresh Patel
Thank you, Richard. We’re pleased with our results for 2015.
Looking at 2016, the first quarter has always been interesting. No one expected in an El Nina year, Florida has been impacted by several tornadoes since the beginning of this year.
The expected losses from these tornadoes for HCI are around $5 million. We are well prepared to build this weather related losses, this is the business we are in.
And also this is not the first time we had weather related losses. For those who have been long-term shareholders, you recall back in 2012.
We had tropical storm Debbie and hurricane Isaac, which also resulted about $5 million of weather related losses. So this is normal business and actually we’re somewhat below the expected numbers, because the last time there was El Nina year, there were about 12 tornadoes so far I think were right about six to eight and the season seems to be ending.
Okay, having said all of those things, let’s go to the future. Looking at 2016 and beyond, we are really excited to announce our newly formed insurance company, TypTap Insurance Company, a much shorter name than Homeowners Choice, Property & Casualty Insurance Company, Inc.
By the way that’s called TypTap. TypTap is the first insurance company licensed in Florida to specialize solely in flood insurance.
A plan to establish itself as an alternatively National Flood Insurance Program or NFIT, the NFIT has enforced to increase its phase dramatically based on the events of Katrina and Sandy. These are one with the Florida event by the way.
With approximate two million residential Florida policies generated approximately $1 billion in annual premium, we think there is an opportunity to compete in Florida. We stated that in the past, what makes TypTap different is the technology.
TypTap is a technology developed by Exzeo, making coding and binding of policy, simple, convenient and fast. I encourage you to Google flood insurance Florida and find the flood that you can do online from any other sources, it’s not easy, but please try.
Only asking price then visit www.typtap.com, that’s typtap.com and follow the instructions, your customer experience will be vastly different. All TypTap will do, will ask for an address and if you’re not lucky enough to have a Florida address, 51808 West Coast.
It’s a Tampa Florida address and I believe the zip code is 33607, sorry 33606. And to frequent questions and you’ll get a quote.
Slide your finger onto slide bar to select your level of coverage, it only takes seconds. Give it a try and tell us what you’ll think.
We welcome your feedback. The early result from this and not only this is easy for consumers that insurance agents like this, because any fewer personnel to buying policies, gone other day of complex elevation certificate understanding how to read them, I need a Ph.D in base core elevations.
Real estate agents like it, because they can get a quote from their iPhone or Android device or any other device that they want to use. Day or night weekend too and incidentally TypTap has 24/7 customer service as well.
Over time our technology conservative platform to offer additional product and services most within Florida and allow us to expand from state to state to state. Typtap.com went live on March 1st, 2016.
Obviously, we have heard about the possibilities. There will be challenges ahead, but this is only the first step, we see a clear path and a bright future ahead of us.
With that we’re ready to open the call for questions. Operator, please provide the operator instructions.
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Casey Alexander from Ladenburg & Thalmann.
Please proceed with your question.
Casey Alexander
Yes, hi, good morning afternoon. First of all, in relation to the weather events in the first quarter, do you have sort of the guideline for a range of where you expect the loss ratio in the first quarter to fall in given the extra losses from the storms that landed in Florida?
Paresh Patel
Yes, Casey look, I can tell you a very simple way of doing this right, and just to go – so I think it’s hard to the model etc. The way I would do it is if you just look at the fourth quarter losses in absolute dollars add about $5 million to it, you have to do that because $5 million pretax will be a lower number after tax towards upon 40% taxes, yes.
That would great if we take you through into go in your model, yes.
Casey Alexander
Okay, okay great. Secondly, assignment of benefits has become a real hot, but in Florida, can you give us first of view from to say 50,000 fee of the assignment of benefits, what the issue is and how it affecting your company’s loss and loss ratios?
And how the company is strategically dealing with the assignment of benefits issue?
Paresh Patel
Okay. Casey, I’ll take that as a three questions.
So let me start with…
Casey Alexander
Yes, that’s fine.
Paresh Patel
Okay. For those of who, they’re not assignment of benefits, it’s actually a casual phrasewhich results from increased litigation, primarily in Southeast Florida, which is single Palm Beach down to Miami area.
And really it was one assignment of the benefits is viewed, it’s how that driven by a timing benefits to third parties or it’s driven by the – by the policyholder themselves getting involved in a lawsuit with the company. And what’s driving it is refer to insurance code, required the insurance companies to pay plaintiffs attorneys’ fees, if in litigation, if the plaintiffs is awarded even one penny more than was originally offered by the insurance company, right.
The intent is noble, but the reality is a plaintiffs lawyers use this as a weapon, it exhort higher settlement in small cases. In some litigated cases, the fees gained by the attorneys, the work, the actual money collected by the plaintiffs by tens and thousands of dollars compared to the actual amount of the disputed amount.
And the reality of this is – this result in higher rate paid by all, especially in South Florida because those cost then get transferred into our rate making formulas and will result in increased rates in the areas where these litigation cases occur. There is some conversation that legislation needs to be done to pass and fix it, I don’t know if it’s going to pass this year, but it may be required to eliminate this problem.
Again as a benchmark thing, I think Claddaugh is talking about doubling or tripling the rates in Southeast Florida over this matter, because how bad the crisis has gone for them. While it’s become a big item now, I think it’s been in the works probably percolating up with several years and it just reached – trying to reach a crisis mode here in the Southeast area.
So that’s what – what the stuff is. In terms of the things that we are doing to combat that, well, first of all, we like the fact that – we know our policyholders well, and kept a very consistent book that is in – refresh very often.
So we know who our policyholders are and the policyholders know us. That helps a tremendous level because, what’s going to happen is already happened, is equal loss ratios are up 50% from where they used to be, to say two years ago.
So two years ago, your loss ratio was in the case of citizens around 40%, 45%. It is now sitting at 70%.
Luckily for HCI, we spend our time underwriting and taking the right policy that citizens and taking to underwriting discipline. Our loss ratios in South Florida were much lower.
So while there are 50% that actually still lower than citizens who were loss ratios from two years ago. So we’re feeling the pain that it is not fatal at any graceful amount.
Other things that we’ve done that I can talked about, something is I can’t talked about, but other things we have done talked about is the nature of these claims is obviously to do with lawyers and litigation fees and obviously not only the litigation fees paid to the plaintiff, they drive litigation expenses on the defense side as well. Well, we did – what would be a normal reaction to this.
Almost two years ago, we started hiring attorneys on to staff in South Florida. And at this point, we actually employed five attorneys full time in South Florida that are HCI employees.
This ensures that we keep our litigation expenses down. In fact, that is more important than, because most of the claims when they come in have already got adjusted and lawyer is attached to them in this kind of category.
So the fact that if you had costs driving around South Florida won’t help much, having lawyers down they does and we have them. So that’s what we’ve done.
The second thing we’ve done, because we’ve seen this thing coming for years. And Casey, this goes to conversations that have gone on for years about discount and premium and premium growth and discount growth and all of those things.
What is now coming into clear focus across the industry is, while growth is good, along with growth comes risk. Nobody haven’t talked about exposure of growth, midst exposure of growth.
Every time you write a new policy, you get more risks that comes on board. I think a number of people who have grown rapidly in South Florida in the last couple of years, especially in the – each of the section of the business finding this out.
Conversely, if you look at our phase-out reports for HLP policies, the numbers we had in High County in – at the end of 2012 was 46,500 policies. As of the end of last year, we’re down to 36 – just over 36,000 policies.
Important thing about this is by reducing discount, you reduce the exposure to litigation, and until we find legislative relief and when we do we will also expand again. Until that point, we are in a defensive mode, as we have been for a couple of years and it is keeping this pinpoint manageable for us.
Did I miss any part of your question?
Casey Alexander
No, that’s a very good summation of it. In relation to the 30,000 shares, was that a 10b5 for you personally?
Paresh Patel
Yes, it was. There were two buyback that they’re going to initiate in the fourth quarter.
The company started its own and that’s been virtually successful. But I just wanted to make sure, because people have asked question about it that everybody be aware that our initiative personally a 10b5-1 program.
And once you do that, you sort of handover a pile of money to somebody and they execute in a blind cost sort of mechanism buying these shares. And so over the course of something like 70 days ending in mid-February, I bought 30,000 shares at a cost – I think approximately $1 million or so.
Casey Alexander
Okay. And how many shares do the company buyback in the fourth quarter?
Paresh Patel
I don’t think the company bought any back, because I don’t think its buyback activated in sufficient time pricing to be done before the end of the quarter.
Casey Alexander
Okay, yes. As it relates [Multiple Speakers] yes.
Paresh Patel
It’s hard to take, but I do want to make sure that I’m clear on this. The company’s buy back did activate as for the start of the year and there are – there has been a buy back in process from the company.
We usually give out the numbers for the quarter, when we report the quarterly numbers in the next earnings call.
Casey Alexander
Right.
Paresh Patel
…we will tell you where the first quarter numbers were, yes.
Casey Alexander
Right, that’s fine. Now, as it relates to TypTap, you mentioned that this is open to agents as well.
So agents were beginning a commission on policies that they refer to the company through TypTap?
Paresh Patel
Actually I think they will sell and buy just like they do by other insurance career.
Casey Alexander
Okay. And how do you see TypTap sort of on-boarding and affecting the company’s gross written premiums over the course of 2016?
Do you have any feel for that?
Paresh Patel
We have some feel for the item that’s really here is that, seem like it’s all a three days old, it’s a little bit early.
Casey Alexander
And, yes.
Paresh Patel
Right. The other part of it is, given that you’re comparing this against a $400 million premium in course book
Casey Alexander
All right.
Paresh Patel
It’s not the significant of what’s written in TypTap, but it’s the nature and how it’s done and how the system works, okay? I know by the way in every policy, there’s always an agent involved, because when you are buying the policy, you do have to pick an agent that you want to be agent directly.
Casey Alexander
Is it – are you hopeful that TypTap in writing flood insurance exposes you to do customers, which you can then potentially convert the Homeowners polices?
Paresh Patel
Yes, some of that in due course will occur. TypTap isn’t licensed for Homeowners at the moment.
But the key item in this is, here is the initial feedback we’re getting and this why we’re encouraging people to actually to try it, go try buying flood insurance with something else and then try it with this. Most people after they do this sort of go, hey can you take my Homeowners policy as well because it’s so much more convenient easy to do than how it’s been done in the past.
Casey Alexander
Yes.
Paresh Patel
So please go ahead and try, if you get a chance tonight do try it out.
Casey Alexander
Okay. I’ve asked a lot of questions.
So I’ll let somebody else jump in here. Thank you.
Paresh Patel
Thank you.
Operator
Our next question comes from the line Dan Farrell of Piper Jaffray. Mr.
Farrell please proceed with your question.
Dan Farrell
Thank you and good evening. Yes, I apologize if I missed this in the prepared remarks.
Do you happen to have the gross written premium and net written premium, I think, you’ve provided, but if you have the written that would be helpful?
Paresh Patel
I think Rich is looking at our press release.
Dan Farrell
Okay.
Richard Allen
One item I didn’t…
Dan Farrell
I can – let me ask another question and you can help me when you have.
Paresh Patel
Yes.
Dan Farrell
Just as TypTap premium brands and I guess, I’m thinking more intermediate to longer-term. How does that change the sort of the profitability component of the company and the margins that you’re generating and I realize reinsurance is a factor in the past, but is there anything that you can sort of give us to think about that?
Paresh Patel
Yes, given TypTap work and also the product mix, because the product mix will be a big issue in this scenario. The expectation is that the margin would actually improve.
Dan Farrell
Okay. So…
Paresh Patel
We’re doing things that actually increase margins further from what you are.
Dan Farrell
Okay. And then can you give us a sense of how you see your reinsurance buying evolving, as you go forward.
And I realize we’re heading sort of having early discussions now, we’ll move through the year. But how do you see you’re buying sort of taking shape this year and maybe the long-term, how you think about it strategically?
Paresh Patel
Well, let me answer the second part first just how we think about it strategically. The idea of reinsurance, right, and I’m going to make it a slight comment here and it’s a joke, so that then people take this as context, please appreciate that.
We have bought reinsurance now for nine win seasons. And we’ve never yet called the claims.
We never had one degree of reinsurance rebate coming back the other way from the loss. That is in a bad thing.
It actually is good, because in order to get losses back, you’ve got to have bad events happen and it’s bad for us is that for policyholders, it’s bad for everybody concerned. So we look at reinsurance as something you buy to adequate levels.
So that you can rest at night and should anything happen, any kind of bad event happens. One, our policyholders are protected and that they can sleep at night.
And secondly, our shareholders are protected, and they can sleep at night. So we buy reinsurance to levels that there are sufficient to insure the company would spend the next bad event whatever it maybe.
Once you get past that then you sort of sit there and say what is the most cost efficient way of doing it? What is the best use of capital, et cetera, and that’s what we do.
And obviously, we do try to negotiate favorable rate as we can with our reinsurance partners. So I think having said that going forward generally the viewpoint that’s coming out right now is that insurance, reinsurance cost – for the reinsurance cost reductions are probably closer to the finished in the start, because rates have come down tremendously over the last few years.
You just can’t imagine them continually going down at those rates. So that’s a general consensus.
Obviously, once we get our reinsurance finalized, we will update all of our shareholders at that point, yes, but we’re in the middle of those negotiations right now.
Dan Farrell
Okay, great. That’s all I have unless you have the – those preview numbers.
That’s it. Thank you.
Paresh Patel
Yes, yes.
Richard Allen
This is Richard. Gross written for the year is $396 million, $338 million.
Net written for the year is $255 million, $724 million.
Dan Farrell
Great. And that does for the year.
Okay, great. Thank you very much.
Paresh Patel
Thank you.
Operator
Our next question comes from the line of Matt Carletti from JMP Securities. Please proceed with your question.
Matt Carletti
Hi, thanks. Good afternoon.
Paresh Patel
Good afternoon, Matt.
Matt Carletti
Casey and Dan covered a lot of the questions I had. I just had a – I guess, a couple others going down the list.
Couple of numbers question just how is the policy retention running? And what are you seeing in terms of pricing?
Paresh Patel
Policy retention, I think the discount at the end of the year would be around 152,000 policies. So I think it’s a much better than people have been speculating about.
Retention, if you look for the year for 2015 is actually slightly better than 2014 was. Having said that, our retention rates are so high at this point, they have really got only got one way to go, which is down.
That doesn’t mean the world is ending is just that we’ve had an extraordinary run of our customers who don’t want to leave the company. So it’s actually a good thing.
As far as rates and everything else, as you know, our rate reduction of 5% give or take went into effect on January 1, 2016. But I think is the assignment of benefits issued and those kinds of things do not get handled very quickly and it doesn’t look like they will.
I think the days of reduce – rates being reduced in Florida are at least over in the short-term. And I think people maybe looking at increased rate, especially in Southeast Florida.
Matt Carletti
Okay. And then my other question is going back to TypTap in terms of flood and this again is a kind of medium to longer-term view, I realize it’s only three days old at this point.
Would you look to potentially expand that into other states. I would imagine there’s some work technologically to kind of get all the data ahead of time that goes into that.
But it seems that once you have the portal, are those risks that you booked to add another costal areas, or is there something about Florida that were watching to keep the book there?
Paresh Patel
No, I think, when you look at this thing you would say, we’re so much inevitable that you would probably expand into other states. And probably would expand into other states with both the flood product and a Homeowners product as well right, because.
Matt Carletti
Right.
Paresh Patel
If somebody uses this and it’s so and no matter how you buy flood insurance, why wouldn’t you sell them Homeowners product as well. And this finally gets to this point that we’ve been talking about for several quarters, where we’ve been talking about went to expand into all these other states, and we said we’ll wait for the right moment and we want the right vehicle on which to do this.
Matt Carletti
Right.
Paresh Patel
Buy our TypTap. And I think it’s almost like wherever you live, if you worked in Florida, you can’t wait for it to get to your space, it’s almost that kind of product.
And so we think on the back of that, we should be able to expand into other states and have a different selling proposition to everybody else.
Matt Carletti
Right, makes sense. Great, well, thanks for the answers and congrats on launching TypTap and best of luck.
Paresh Patel
Thank you.
Operator
Our next question comes from the line of Arash Soleimani from KBW. Please proceed with your question.
Arash Soleimani
Hi, good afternoon. So I just wanted to touch based on the comment you made.
So you said that you would be willing to go into Homeowners in other states also would have otherwise been since you’re offering bundle products or with the TypTap product to some extent subsidize the homeowners product some more color around that?
Paresh Patel
Hey Arash, It’s a great question. But I think that what TypTap does is open things to a different dimension.
TypTap is also people buy because of convenience, not because it’s slightly more expensive or slightly cheaper, right.
Arash Soleimani
Correct.
Paresh Patel
I think I encourage you to go and buy it out, because what we are seeing in just a few days of this – the launch of this, is that people are walking around with this thing, a few insurance agents, a couple of realtors and anytime question comes about how much for the flood insurance be on this house? They have a number, right.
Arash Soleimani
Right.
Paresh Patel
And the convenience makes people – as long as the prices is reasonable which it is makes people want to do it that way, because who wants to go through the hassle of evaluation certificates and 25 other questions? And I really encourage you will try and buy flood insurance on the address I gave you 1818 West Coast Avenue and that advice, any otherwise and then try to do it on TypTap.
And then imagine that was your house, what would you rather do.
Arash Soleimani
Right. And I guess my other question is with TypTap.
And you may have mentioned this, I apologize if I missed it, why put it into a new company rather than the way you were doing it before? Why not offer the – kind of technology for flood through HCI kind of the way you have been in the past?
Paresh Patel
Good question, well, a couple of things. We wanted to make sure and by the way, why do we call it TypTap.
One, it is much easier to type in typtap.com that it is to type in Homeowners Choice Property & Casualty Insurance Company, alright. Also TypTap is typical insurance company.
We wanted to make sure people understood this is different. This is the future, not an online version of the past.
And if a lot of those kinds of reasons and especially also because we are talking about doing the flood only products, to start with, it made sense to put it in a separate company. And we had long talks with the department, they are doing with us because you have – they seem to like that as well.
So that’s why we did it this way.
Arash Soleimani
Okay, that makes sense. And going on in the past when you bought reinsurance, you had a separate I guess how that protected against flood.
Does that program – is that program likely to change with the new I guess the company with the TypTap?
Paresh Patel
I think it’s inevitable that over time, there will be some changes and by the way just so that we could make a convenient for Homeowners Choice customers, I wouldn’t forget them either, right. They can buy flood insurance from Homeowners Choice at the same prices as they get them from TypTap, right.
And they might want to do with Homeowners Choice because everything is with one company. So we make sure that alternative was available to Homeowners Choice customers, because we like them a lot as well.
So that was going on in terms of the flood tower, which is the reinsurance program that protects policies that have flood coverage. It will obviously change and expand and grow along with the growth of the flood business.
Arash Soleimani
Okay so just to be clear and then the legacy flood premium is that you have, those are going into this new entity, I think it just going to be kind of separate?
Paresh Patel
Well, we are leaving it to the customer, a policyholder to choose what they would prefer, right. And what we are finding is that we have lots of customers in Homeowners Choice, who realize the Homeowners Choice brand and if they’re going to buy flood insurance, they rather buy from Homeowners Choice versus TypTap, right.
And that is a – TypTap it’s just that they love Homeowners Choice so much. So we may – we clear and that we are able to do that.
Homeowners Choice does not sell flood insurance to people who are not Homeowners Choice customers whereas TypTap does to the distinction.
Arash Soleimani
Right. No, I do and you had mentioned that in – if you go into other states of TypTap and you would share it with Homeowners product.
So will that Homeowners product also be through TypTap or would that be through HCI?
Paresh Patel
It will be through TypTap.
Arash Soleimani
Okay.
Paresh Patel
Because again I think the item is how easy this is to do. So I think TypTap is that whole – if you want to think of the difference between TypTap and Homeowners Choice.
Before an iPhone came along nobody wanted to – nobody said, I miss cell phone technology and I wish somebody invent an iPhone. But once an iPhone came along, everybody wants to switch over to that.
They don’t want to use the old flip phones, right. That’s the distinction between how Homeowners Choice of things and how TypTap does things.
Arash Soleimani
Okay. So could TypTap offer Homeowners and in Florida in the future or will it be flood only in Florida?
Paresh Patel
Well, in the future it could do a lot of things and that’s what we’re saying, we had about what all of possibilities that it could do both in Florida and elsewhere. Obviously, even its standing into other states, we have to make sure we get this is regulated business.
So we have to get regulatory approvals and sign offs and all those kinds of thing before we can do it. The capability is there, but there are other people who also have to sign up on this, yes, it’s not going to happen overnight.
Arash Soleimani
Sure. So and timeline wise and the other states piece of TypTap is that something again Paresh, you mentioned this already that would be kind of down the line, we’re talking of three, four years or is it something that’s near-term in that just kind of get a sense of how you’re thinking about it?
Paresh Patel
Yeah, I think the way if you think about it is that it’s above the technology. Think about the technology.
Technology is going to make people if it works want us to enter into other states, it opens market. We’re not going to market and battling for one policy with a 100 other carriers.
We’ll be into places where hopefully people want to do business with us, because it’s – because we think different, right. Again I’ll use the iPhone example, before iPhones came along, you use to walk into a phone store and if I would tell you a phone whether it was a Nokia or Motorola or whatever.
Once Apple came onto the scene and they change the way the game is done, people now walked into an AT&T store or Verizon store and say I want an iPhone. They’re not sold a phone.
They’re walking there and they say, “I want this product.”
Arash Soleimani
Correct.
Paresh Patel
TypTap does that for the insurance business, try it out.
Arash Soleimani
I definitely will. And on the underwriting side, I know obviously there is lot of talk about privatization of flood insurance, but a lot of the concerns is around the ability to understand the risk and price it appropriately.
So I just want to get sense how do you think about that and what makes you I guess a little bit more comfortable than others in that regards?
Paresh Patel
Well. The thing that let’s us do this is one of our other wonderful divisions ATM and the levels to which we have data and research on almost 0.5 million – almost 5 million homes in Florida.
We’ve taken several years to put all this stuff together. So why this is easy for the consumer, it doesn’t mean that we will take anybody and everybody who wants to buy flood insurance.
The TypTap technology automatically figures out where the risk is our underwriting appetite or not and take appropriate actions all automatically. So yes, this is not by any means a mechanism that we will reinsure everybody across the fees, yes.
Arash Soleimani
Sure, and did you mention earlier – I’m sorry what margins do you expected on this business?
Paresh Patel
We did, we said we’re hoping that the margins were actually better than the existing business.
Arash Soleimani
Obviously better than legacy Homeowners Choice, Homeowners premium okay?
Paresh Patel
We’re hoping to improve on that, yes.
Arash Soleimani
Okay.
Paresh Patel
Just there will be a lot of expenses initially, but over time it should be better.
Arash Soleimani
Sure. And once you have the change from – I guess maybe over a year ago at this point that you had expected lot of HCI to be sort of margin neutral and so what makes you more I guess optimistic on the margin today?
Paresh Patel
Try it out.
Arash Soleimani
Okay.
Paresh Patel
It’s a technology, I think when you say, you can see the amount of real paperwork and headaches and reviewing of documents and all those kinds of things that have been cut out. By the way this technology works.
The efficiency is stunning and…
Arash Soleimani
Yes, then did you mention how much capital you have put into TypTap well I guess that’s …
Paresh Patel
No, we’ve Kevin, mentioned it, but it is $25 million.
Arash Soleimani
Okay.
Paresh Patel
Initial, capitalization.
Arash Soleimani
And those premiums you said for flood, I mean how does that compare the Homeowners from the way you would think about it otherwise regulators would think about it?
Paresh Patel
I think most often the regulators are coming to grips with what all of these things mean et cetera. And how go about doing it.
You can go with the industry standard to four to one, but I mean obviously we are nowhere near that. And some of this is a brave new world for everybody.
Arash Soleimani
Correct. Okay and my very last question.
So in terms of again the glide path with the rates and I know this is a bit different, because you’re providing a more attractive technology platform that policyholders will like, but, how – I guess how many more iterations of the glide path rate increases do you think you need for something like TypTap to really quite gain traction?
Paresh Patel
You mean like, which glide path are you talking about NFIT glide path or?
Arash Soleimani
Yes, the NFIT, just, but I was – the NFIT glide path I guess may a private market alternative to the NFIT attractive to a policyholder. I know the technology piece of TypTap helps with that as well, but…
Paresh Patel
Yes, well. Actually Arash you’re asking me as your question that we sort of disagree with a lot of people about, right.
We think the rates as they were three digit what is, were more than adequate.
Arash Soleimani
Right.
Paresh Patel
For a select group of people. I’m sure the men you are collectively they are inadequate, but I think the people in Florida have been hard done by the rate increases that have gone and so we think the rates are more than adequate for most of Florida, and our rates are set accordingly.
Obviously with time, as lot of experiences, and the book matures rate will be adjusted in conjunction with the department and rate filings, but for now we are quite happy, we’ve built the business model assuming that the rates stay exactly as they’ve got them right now. Which is well below the NFIT for the people that we are targeting.
Arash Soleimani
Okay that makes sense. I know I’ll definitely go online and try to what’s the revenue address.
Thank you very much for the answers.
Paresh Patel
Thank you.
Operator
We have a follow-up question from the line of Casey Alexander with Ladenburg Thalmann. Please proceed with your question Mr.
Alexander.
Arash Soleimani
I’m sorry, if I missed this, I think, I heard your commentary related to we’ve probably bottomed out as far as we can in term of reinsurance rates. But it occurs to me that three years ago, and two years ago that HCI Group multiyear reinsurance contracts.
And in the time that they had those multiyear reinsurance contract rates did subsequently come down while you were locking at a level. Is there any opportunity has, I mean when did those contracts sort of run off and is there any opportunity for reinsurance savings as those contracts runoff?
Paresh Patel
Casey well remembered, well noted stay tuned. Okay, we are in the midst of our reinsurance renewal as we speak and lots of moving parts, but by the time the next earnings call or one thereafter, we will keep you updated once we have it finalized, yes.
Arash Soleimani
Okay, great. Thank you very much for taking my question.
Paresh Patel
Thank you.
Operator
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 the few closing remarks.
Kevin Mitchell
On behalf of the entire management team, I would like to express our appreciation for the continued support we received from our shareholders, employees, agents, and most importantly, our policyholders. We look forward to our continued success.
Operator
Thank you for joining us today for our presentation. This concludes today’s call.
You may now disconnect.