Business Context and Reporting Period
Company: HCI Group, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: June 9, 2020
Subject: Entry into a Material Definitive Agreement regarding the 2020-2021 reinsurance program for subsidiaries Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company.
Key Financial Metrics
This filing details the structure and estimated costs of the reinsurance program rather than reporting period-end financial results (revenue, profit, or cash flow). Key financial figures related to the agreement include:
- Total Coverage (Single Event): Up to $1.4 billion for catastrophic losses (excluding flood).
- Total Coverage (All Occurrences): $1.93 billion.
- Retention (First Event): Approximately $16 million (excluding flood).
- Retention (Second Event): Approximately $16 million (excluding flood).
- Estimated Private Reinsurance Premiums: $122.8 million (excluding Claddaugh and flood).
- Estimated Flood Coverage Cost: $5.9 million.
- Florida Hurricane Catastrophe Fund Cost: $56.2 million (covering 90% of $890.6 million in excess of $349.4 million).
- Claddaugh Subsidiary Premiums: Approximately $9.7 million.
- Total Estimated Net Reinsurance Premiums Ceded: Approximately $175 million for the period June 1, 2020, through May 31, 2021 (assuming no losses).
Material Changes Versus Prior Period
Management determined that a level of coverage larger than in previous years was prudent. This increase is driven by:
- Recent policy growth at Homeowners Choice, including the acquisition of policies from another Florida-based insurance company.
- Policy growth at TypTap.
- Increasing reinsurance rates in the market.
Guidance, Outlook, and Risks
Management Commentary: The program is designed to mitigate risk from hurricanes, floods, and other catastrophes. The coverage is sufficient to cover the probable maximum loss resulting from a 1 in 320-year storm based on projected exposure at September 30, 2020.
Accounting Treatment: The company will recognize an asset if losses are minimal or zero due to retrospective provisions in contracts. Conversely, this asset will be derecognized if a catastrophic loss occurs, which will negatively impact operating results.
Risks and Contingencies:
- Premiums are estimates based on exposure projections and are subject to a true-up at September 30, 2020.
- Forward-looking statements regarding exposure levels and loss potential are subject to uncertainties.
- Actual catastrophic events could materially adversely affect the company's financial condition.
Important Facts for Investor Verification
- Verify the final exposure projections at September 30, 2020, to confirm the accuracy of the $175 million premium estimate.
- Monitor the financial strength ratings of private reinsurers (currently all AM Best 'A-' or better or fully collateralized).
- Track the impact of the retrospective premium adjustment provisions on future earnings if a loss event occurs.
- Confirm the specific terms of the Florida Hurricane Catastrophe Fund agreement regarding the $349.4 million retention threshold.