Business Context and Reporting Period
HCI Group, Inc. is a Florida-based InsurTech company operating through property and casualty insurance subsidiaries, TypTap Group, information technology services, reinsurance, and real estate operations. Its primary insurance markets are Florida and other catastrophe-exposed states. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $129.0 million | $127.0 million | Up $2.0 million |
| Net premiums earned | $109.6 million | $125.8 million | Down $16.2 million |
| Net investment income | $17.7 million | $2.9 million | Up $14.8 million |
| Income before taxes | $23.1 million | $4.0 million | Up $19.1 million |
| Net income | $17.8 million | $2.8 million | Up $15.0 million |
| Net income after noncontrolling interests | $15.3 million | $0.9 million | Up $14.4 million |
| Diluted EPS | $1.54 | $0.09 | Up $1.45 |
| Operating cash flow | $99.1 million | $57.3 million | Up $41.8 million |
| Combined ratio on net premiums earned | 96.65% | 97.83% | Improved 1.18 points |
| Combined ratio on gross premiums earned | 58.80% | 68.77% | Improved 9.97 points |
Net income after noncontrolling interests represented an approximate 11.9% net margin on total revenue, compared with approximately 0.7% in the prior-year quarter. The improvement primarily reflected higher investment income, lower losses and loss adjustment expenses, and lower policy acquisition and underwriting expenses.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $302.0 million at March 31, 2023, up from $234.9 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $305.0 million.
- Total investments were $630.3 million, including $524.8 million of available-for-sale fixed-maturity securities and $37.4 million of equity securities. Approximately 95% of fixed-maturity securities were rated A or higher based on estimated fair value.
- Total assets were $1.77 billion and total equity was $179.9 million. Stockholders’ equity was $180.3 million.
- Long-term debt was $196.2 million, down from $211.7 million at year-end 2022. The decrease resulted primarily from the buyer’s assumption of a $9.0 million promissory note and repayment of a $6.8 million callable promissory note.
- The revolving credit facility had no borrowings outstanding, $50.0 million of available capacity, and all covenants were satisfied.
- Cash used in investing activities was $17.8 million, while cash used in financing activities was $14.1 million. Financing uses included $3.4 million of common dividends, $3.0 million of dividends to redeemable noncontrolling interests, and $6.9 million of debt redemption.
- The Board declared a quarterly common dividend of $0.40 per share payable June 16, 2023. Insurance subsidiary dividends to HCI remain subject to Florida regulatory restrictions.
Material Changes Versus the Prior Comparable Period
- Gross premiums earned increased modestly to $180.1 million, but net premiums earned declined 12.9% because premiums ceded increased to $70.5 million from $53.2 million. Ceded premiums represented 39.2% of gross premiums earned, compared with 29.7% in Q1 2022.
- TypTap gross premiums earned increased to $87.6 million from $60.6 million, while HCPCI gross premiums earned declined to $92.5 million from $118.3 million. Policies in force declined to approximately 216,300 from approximately 283,900.
- Losses and loss adjustment expenses declined to $60.6 million from $72.7 million. Management attributed the decrease to fewer claims and less Florida litigation, partially offset by higher TypTap losses from growth in non-Florida policies.
- Policy acquisition and other underwriting expenses declined to $22.7 million from $29.4 million, primarily because of fewer HCPCI policies.
- Net investment income increased to $17.7 million, including $9.3 million from real estate investments and $3.7 million from cash and cash equivalents. Real estate income included $8.9 million of gains from sales of two Florida retail properties.
- The company recognized $529,000 of net unrealized investment gains, compared with $3.6 million of net unrealized losses in Q1 2022.
- Interest expense increased to $2.8 million from $0.6 million, primarily due to the 4.75% convertible senior notes issued in May 2022.
- The effective tax rate declined to 23.1% from 30.2%, partly because management released approximately $890,000 of deferred-tax-asset valuation allowance.
Outlook, Commentary, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects liquidity needs to be met primarily through operating cash flows, premium collections, and investment income, but may consider additional debt or equity financing.
- Insurance results are seasonal, with hurricanes and tropical storms generally concentrated from June through November. Reinsurance treaty costs and coverage typically reset on June 1.
- Management estimated total losses and loss adjustment expense reserves of $806.3 million at March 31, 2023, including $728.1 million of incurred-but-not-reported reserves. Prior-period loss development was unfavorable by $3.9 million, primarily due to litigation and claim severity.
- Reinsurance recoverables totaled approximately $596.7 million, with 60.6% due from six reinsurers. The company remains exposed if reinsurers cannot meet their obligations.
- United Property & Casualty Insurance Company was placed into receivership in February 2023. HCI reported a net amount due from or payable to United of $10.3 million and $45.3 million of funds withheld for assumed business. Actions by the receiver could materially affect HCI’s financial position and results.
- HCI discontinued or is phasing out flood insurance because of increased reinsurance costs and reduced availability. Management stated that the impact is not expected to be material.
- A retrospective reinsurance arrangement produced a $7.0 million reduction in ceded premiums during the quarter. HCI had $23.3 million of accrued benefits that could be charged to earnings if a qualifying catastrophic loss occurs.
- The company had $182.7 million of minimum aggregate premiums payable under a multi-year reinsurance contract and $5.5 million of unfunded limited-partnership commitments.
- Two Florida retail properties were sold for aggregate stated prices of $31.9 million, generating $8.9 million of net realized gains. The related debt transactions included assumption of one promissory note and repayment of another, with a $177,000 debt-extinguishment loss.
- Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Whether elevated reinsurance costs and the June 1 renewal cycle reduce future net premiums earned or underwriting profitability.
- The adequacy and subsequent development of the $806.3 million loss and LAE reserve, particularly the $728.1 million IBNR component and prior-period litigation reserves.
- The recoverability of the $596.7 million of reinsurance recoverables and the $45.3 million of funds withheld associated with United following its receivership.
- The sustainability of Q1 investment income and the $8.9 million real estate gain, which included unusual property-sale activity.
- The effect of hurricane and other catastrophe activity during the June-November season on reserves, reinsurance recoveries, and the retrospective reinsurance asset.
- Future debt maturities and potential repurchase obligations related to the convertible senior notes, including the earliest noteholder put dates in 2027.
- Regulatory limits on dividends from Florida insurance subsidiaries and their effect on HCI’s future capital distributions.