Good morning, ladies and gentlemen, and welcome to the PCTEL Second Quarter 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After our prepared remarks, we will have a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Kevin McGowan, the company's CFO. Kevin, the floor is yours.

Thank you, Jenny. This is Matt Glover from Gateway Investor Relations. Thank you, and good morning. Welcome to HCI Group's second quarter 2022 earnings call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's opening remarks, Mark will review our financial performance for the second quarter of 2022 and then Paresh will provide an operational outlook. To access today's webcast, please visit the Investor Information section of our corporate website at hcigroup.com. Before we begin, I'd like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan, and project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the Company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments should have material adverse effects on the Company's business, financial conditions, and results of operations. HCI Group disclaims all the obligations to update any forward-looking statements. Now with that, I'd like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?

Thank you, and good morning, everyone. The second quarter of 2022 marked another quarter of growth. Our insurance division's gross premiums earned were up 30%, and our national expansion continues with premiums outside of Florida approaching a quarter of our business. There were two main items that impacted our financial results. First, investment income with unrealized losses was impacted by market declines, and second, we strengthened reserves in response to inflation and litigation. These two items resulted in an $8.5 million loss for the quarter. Strengthening reserves resulted in a 7% increase in our loss ratio. To offset this, we filed meaningful rate increases, 10% at Homeowners Choice, and 12% at TypTap. We also executed on a number of key items this quarter. First, we raised more than $170 million through the issuance of convertible notes, increasing our flexibility at a time when capital is scarce across our industry. Paresh will speak more to this in his remarks. Second, we finalized our reinsurance with pricing and terms comparable to last year while maintaining a conservative program with modest retentions and substantial limits. With reinsurance in place, Demotech reaffirmed our exceptional ratings at both Homeowners Choice and TypTap. Finally, we remain committed to returning capital to shareholders through dividends and share repurchases and continue to view our stock as an attractive investment. During the quarter, we repurchased shares representing approximately 10% of the company, and we paid a dividend of $0.40 per share, our 47th consecutive quarterly dividend. In summary, we continue to position HCI to take advantage of the opportunities in front of us while managing the business to maximize shareholder returns. Now I'll turn it over to Mark, who will provide more detail on our financial results. Mark?

Thanks, Karin. In the second quarter last year, net income was $3.8 million. In the second quarter of this year, we had a net loss of $8.5 million. Half of that change came from realized and unrealized changes in the value of equities in our investment portfolio as the overall market declined more than 16% in the quarter. The balance of the difference came from a higher loss ratio, which increased from 40.1% to 47.9%. There were three reasons for the increase. First, business mix simply relates to premium growth coming from lines with a higher loss ratio. The second reason with inflation, which resulted in this making higher current period loss selection. The third factor was adjustments we made to some prior period loss selections for inflation and some adverse litigation development. We continue to build reserves by expensing more than we are paying out in claims. In the first six months of this year, non-cat claims paid were $30 million less than what we expensed. There were also a number of positive trends this quarter. First, the company continues to grow. Gross premiums earned were up 30% over the same quarter last year. Second, as Karin mentioned, we completed our reinsurance program for the new treaty year. Our net premiums ceded, assuming no storms are expected, will be $245 million for the treaty year that started June 1, and we expect reinsurance as a percentage of premiums to continue to be lower this year than last. Third, policy acquisition expenses as a percentage of gross premiums earned were coming down because TypTap is paying lower commissions. Fourth, investment income is going up. We kept cash on hand, waiting for the interest rate environment to improve, and it has. So far this year, we have bought over $350 million of short-duration, fixed-term securities. As a result, investment income is increasing. Lastly, we are continuing to adjust rates to compensate for inflation. As Karin mentioned, in August, we implemented rate increases for Florida homeowners in both TypTap and Homeowners Choice, and as these higher rates are earned, we expect the loss ratio to start to improve. There have been a number of favorable developments on the balance sheet as well. In May, we closed on a new convertible debt issue. We set out to raise $150 million, and we were significantly oversubscribed. We raised gross proceeds of $172.5 million at a rate of 4.75% maturing in June of 2042. We started this year in a solid liquidity position, and that position is even stronger now. Both of our insurance companies are in strong surplus positions, and we have significant liquidity at the holding company level. We have over $170 million of cash and investments at the holding company level and full access to our credit line with Fifth Third Bank. This is almost twice as much liquidity as we started the year with. Just a couple of other quick points, our share count for purposes of calculating book value per share and paying dividends is now 9,048,000. We used $67 million of the convertible proceeds to buy back almost 10% of the company on a fully diluted basis. As of June 30, our fully diluted share count was 11,300,000. In conclusion, this quarter we addressed our rate needs to combat inflationary pressures, we continue to build reserves, we secured our reinsurance program, and we bought back almost 10% of the company. We also significantly improved our liquidity position. We ended the quarter with close to $0.25 billion of liquidity at the holding company level. The actions taken this quarter put us in a strong financial position to execute on our strategy in the future. And with that, I'll turn it over to Paresh.

Thanks, Mark. As discussed by Karin and Mark, the main items affecting HCI Group in Q2 were inflation and volatility in equity markets. We have taken corrective measures and continue to execute our business strategy with the company growing 30% year-over-year. Our national expansion beyond Florida, including the UPC transaction, continues as planned, and the results are within expectations. However, we are aware of the turmoil in the Florida homeowners market. These pressures brought about by a combination of increased weather events, inflation, and litigation have and will continue to disrupt existing markets. This has resulted in a liquidation of some carriers this year and leaves many others facing rating downgrades. We have a hard market and diminished competition. But our technology and our management team have shielded us from this turmoil. In fact, as a company that has successfully navigated the Florida market for 15 years, this turmoil provides a substantial opportunity. To take advantage of this opportunity, the first step was to ensure that we had ample capital, and we completed that in Q2. In the coming weeks, we intend to apply to set up additional insurance carriers in the state of Florida. We expect these new carriers to begin writing business early next year. Why are we doing this? Basically, homeowners insurance is a product that is in high demand, and it will still be in high demand a decade from now. There is an opportunity here to pick up market share. Now, some are fearful due to present market conditions, but we have a track record that lets us navigate through these market conditions. And secondly, we are focused on the long-term opportunity and intend to capitalize on that opportunity. With that, we will open for questions.

Thank you, sir. Your first question is coming from Matt Carletti of JMP. Matt, please ask your question.

Yes, thanks. Good morning.

Good morning.

Paresh, I just wanted to follow up on actually that last point you brought up about planning to set up some new companies and be ready to write business next year. How should we think about that opportunity? And I guess, when we think about HCI as it stands today, you've got TypTap, which is kind of organic growth through independent agents, and Homeowners Choice, which has a history of being more of a specialist doing book rolls and citizens takeouts and things like that. How do you see that opportunity unfolding? Will these new companies look more like one versus the other, or is it too early to tell?

Matt, it's a combination. They will look very similar or a hybrid of HCI - Homeowners Choice and TypTap, yet they will be different. That is why we're setting up separately. It will evolve over the coming months, and we will provide more detail as events progress.

Okay. Probably a question for Mark. You mentioned the upward movement in the loss ratio, the seven or eight points or so; it was a few different things, kind of business mix, the impacts of inflation, and prior-period development. I was hoping you might be able to break those pieces out, kind of how much of the movement relates to each one.

Sure. Hey, Matt. Yes, so in terms of those percentages, the loss ratio is up about 7.8% from the second quarter of last year to the second quarter of this year. So about 1.8% of that is the mix that I mentioned. About 3.3% of that is inflation, and 2.7% is prior-year development.

Okay, very helpful. And then one last one if I could sneak it in, Mark, also a numbers question. Just what is - at June 30, what is the TypTap surplus?

TypTap surplus at the end of June is, just give me one second here, $90.2 million.

Wonderful. All right. Thank you very much.

Yes, thanks, Matt.

Your next question is from Mark Hughes from Truist. Mark, please go ahead with your question.

Yes. Thank you. Good morning. The prior-year development, was there any particular trigger for that? Was there some legislative action in Florida? Was there less than a flurry of claims, or was this something that's been building for some time?

There's a couple of things going on in there. There are two or three discrete items in there. So Homeowners Choice had $2 million of adverse development. It relates to the anchor assumption from back in 2020. A lot has changed since then. But if we look back at that assumption in 2020, we tweaked that loss ratio up a bit. It's largely related to increasing our litigation picks a little bit. The other thing that's going on is we've talked about a couple of times before, but tropical storm Ada from November of 2020 has shown a significant difference between the number of lawsuits that we thought we'd get off of the 1,200 or 1,300 claims that were expected. We've been increasing the ultimate selection for Ada as a result of that too. So again, that's largely litigation-driven. We do have just a few of these accident quarters from 2020 that we're going back and adjusting the initial litigation pick.

And then when we think about the inflation and mix impacts. What is that, about five points? Does that persist? I guess, then, it may diminish over time as you get these rate increases? How should we think about them?

Yes, good question. So assuming that - so we've got some rate increases that we mentioned, and inflation has obviously been higher than our rate increases. Assuming that inflation - I don't think anyone is expecting prices to go down. They've gone up, but I don't think anyone is expecting they'll go down. If they stay flat, sort of stay at these elevated levels, then as the rate increases work their way into the book, I would expect the loss ratio to drop a couple of points each quarter for the next couple of quarters.

Sequentially, some improvement, and then maybe some improvement after that?

Yes, exactly. A couple of points in Q3 and Q4.

Yes, Mark, as you know, the loss ratios are not immediately in the second quarter. The rate increases that we've put through, which are greater than the increase in the loss ratio, will take several months to earn in. Consequently, as that happens, the loss ratio will drop, but it will be a multi-month process, multi-quarter process.

Yes, understood. I think you've mentioned TypTap paying lower commissions. Could you talk a little bit more about that? Is that across all states, is that directed in Florida, and will that continue?

Yes, Mark, we should clarify on that a little bit better. TypTap's business plan has always been that we pay higher commissions on new business compared to renewals. As more of the book renews, the blended commission rate comes down. So it's not necessary that we are reducing commissions everywhere. We may be doing that in a couple of places, but not dramatically. Most of the effects you're seeing are mainly because renewal commissions are lower than new business commissions.

Understood. So you - kind of the easing off during storm season means there is more concentration in renewals in the period, and so...

I mean, look, it's simple math in a weird way. In the sense of the first year when you've got $100 million of business, it's all new business. In the second year, you add $100 million of new business, half of it is renewal and half of it is new business. In the third year, you add $100 million, it's $200 million of renewal business and only $100 million of new business. So the renewal rate tends to, over time, dominate the new business rates. It's a natural occurrence and predictable.

Let me ask a new question. You said - I think you've done very well historically, keeping losses under control and then substantially better than your peers. This kind of the appearance of inflation here, Florida has been - and your competitors have been undergoing some stress for a while. You've seen some of that. But why now? I think you've touched on this, but I just wanted to flesh it out a little more, if there is anything else to be said, why the mix, I understand, the prior-year development mix there is, then inflation having a more incremental impact. 330 points is very meaningful. I'm just sort of curious why you think right now?

I think the second quarter moved a lot from what people were believing in April versus what people believed by the end of June. One of the big things was, and I'll quote, I think the Federal Reserve Chairman, a shift in belief: lasting inflation is permanent. If you remember Mark's earlier comments, Mark Harmsworth's earlier comment that he is not expecting prices to come down anytime soon. So now you have permanently elevated expenses. You should factor that into your business, and we have, obviously, by our actions, swiftly moved in that direction. We can't always predict the future, but whenever the present becomes obvious, we take corrective action quickly and efficiently.

Fair enough. And then what's your appetite for growth in Florida once we get out of storm season? How should we think about your growth posture come Q4, for instance?

Well, therein lies the comments on the question that Mark Carletti asked earlier. Because of the turmoil in Florida, we actually see a greater opportunity at this moment in time unfolding in the fourth quarter than maybe we saw six months ago. We wanted to make sure that we communicated this clearly to everybody. So TypTap Insurance Company's plans and expansion plans in Florida are going unabated and unchanged. We see additional opportunity in Florida, and that's why we are setting up new carriers to take advantage of those opportunities.

Yes. Okay, thank you very much.

Thanks, Mark.

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

Thanks. On behalf of the entire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. While we talked about a lot of numbers, we never lose sight of the fact that our primary mission is that we are protecting our policyholders' most valuable asset, their home. With that, thank you very much, and see you next quarter.

Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.