HCI Group, Inc. 2021 Form 10-K Summary
Business context and reporting period
HCI Group, Inc. is a Florida-based holding company primarily engaged in property and casualty insurance through HCPCI and TypTap, with additional reinsurance, real estate and information technology operations. The filing covers the fiscal year ended December 31, 2021; the company reorganized its reporting structure in the first quarter of 2021 to establish TypTap Group as a separate segment.
Insurance operations remain concentrated in Florida, although the company is expanding geographically through TypTap growth and policy assumptions from United Property & Casualty Insurance Company. HCI had approximately 180,700 policies in force at year-end 2021, compared with approximately 154,000 at year-end 2020.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Gross premiums earned | $577.0 million | $415.9 million | +38.7% |
| Net premiums earned | $377.3 million | $262.5 million | +43.8% |
| Total revenue | $407.9 million | $310.4 million | +31.4% |
| Income before income taxes | $11.2 million | $36.9 million | -69.6% |
| Net income | $7.2 million | $27.6 million | -73.7% |
| Net income after noncontrolling interests | $1.9 million | $27.6 million | -93.3% |
| Diluted EPS | $0.21 | $3.49 | -94.0% |
| Net cash from operating activities | $96.5 million | $77.3 million | +24.9% |
Net margin was approximately 1.8% of revenue and pretax margin was approximately 2.8%. The loss ratio on net premiums earned was 60.3%, versus 61.0% in 2020. The expense ratio increased to 44.8% from 43.2%, producing a 105.1% combined ratio on net premiums earned, compared with 104.2% in 2020. The combined ratio on gross premiums earned increased to 68.7% from 65.8%.
- Gross written premiums were $674.4 million, including $426.9 million from HCPCI and $247.5 million from TypTap. Net written premiums were $474.6 million.
- Losses and loss adjustment expenses increased to $227.5 million from $160.0 million. The company recorded $27.6 million of unfavorable prior-year development, primarily related to increased litigation involving Hurricane Sally and Tropical Storm Eta.
- Net investment income increased to $12.3 million from $4.6 million, including a $2.8 million gain from a Kroger legal settlement. Net realized and unrealized investment gains were $6.5 million and $1.4 million, respectively.
- Cash and cash equivalents were $628.9 million, or $631.3 million including restricted cash, compared with $431.3 million and $433.7 million, respectively, at year-end 2020.
- Total assets increased to $1.177 billion from $941.3 million; total equity increased to $324.5 million from $201.1 million. Redeemable noncontrolling interest was $90.0 million at year-end 2021.
- Total investments declined to $196.7 million from $225.7 million, primarily reflecting a lower fixed-maturity securities balance.
- Outstanding borrowings consisted of a $15.0 million revolving credit facility and $45.5 million of long-term debt. The credit facility had $65.0 million of total capacity, matures in December 2023 and was covenant-compliant at year-end.
- Common dividends remained $1.60 per share for the year, or $0.40 per quarter.
Material changes versus the prior comparable period
- TypTap Group became a separate reporting segment following a corporate reorganization. TypTap gross premiums earned increased to $175.9 million from $78.8 million, while its segment reported a $30.2 million pretax loss compared with a $16.5 million loss in 2020.
- HCI assumed substantial United business. United-related gross premiums earned were $98.5 million in 2021, and the company began renewing or replacing policies in parts of the Northeast Region in December 2021.
- HCI received a $100.0 million investment in TTIG from a Centerbridge-affiliated fund. TTIG issued preferred stock, and HCI issued warrants for 750,000 HCI shares at an exercise price of $54.40 per share. The preferred investment generated $7.4 million of income attributable to redeemable noncontrolling interest in 2021.
- Holders converted approximately $115.3 million of principal amount of the 4.25% convertible senior notes into HCI common stock during 2021. Long-term debt declined from $156.5 million to $45.5 million, while shares outstanding increased to approximately 10.1 million from 7.8 million.
- 2021 results did not include the $37.0 million one-time gain from the 2020 eminent-domain sale of the former headquarters property, which was a major reason for the year-over-year decline in earnings.
- Policy acquisition and underwriting expenses increased to $93.7 million from $53.9 million, and general and administrative personnel expenses increased to $45.4 million from $33.8 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management emphasizes continued organic TypTap growth, geographic expansion, selective policy assumptions, disciplined underwriting, technology investment and maintaining sufficient capital and liquidity.
- In February 2022, HCPCI entered a further United quota-share arrangement covering personal lines business in Georgia, North Carolina and South Carolina. Annual premiums from this assumed business were estimated at approximately $87.0 million, subject to regulatory approvals for policy replacement.
- HCI postponed the planned TypTap initial public offering in January 2022 because market conditions were not favorable. The transaction may not be completed and its intended funding benefits may not be realized.
- None of the convertible noteholders exercised their March 1, 2022 put right. In March 2022, the share repurchase forward contract was physically settled through delivery of 191,100 HCI shares.
- Key underwriting risks include hurricanes, tropical storms, floods, winter storms, climate-related loss severity, Florida concentration, litigation, unfavorable reserve development, reinsurance cost and availability, reinsurer collectability and regulatory restrictions on rates, underwriting and dividends.
- Loss reserves totaled $237.2 million at year-end 2021. The filing states that a 20% increase in claim severity would reduce equity, net of tax, by approximately 10.91%; a 20% decrease would increase equity by approximately 10.91%.
- The company had $11.1 million of unfunded limited-partnership commitments and $20.9 million of estimated minimum premiums payable under multi-year reinsurance contracts.
- HCPCI and TypTap exceeded required statutory capital and surplus and risk-based capital requirements. However, TypTap was not permitted to pay dividends without prior regulatory approval, limiting upstream cash availability.
- COVID-19 effects remained uncertain and unquantifiable, with potential impacts on policy retention, reinsurance costs, investment values, real estate income and cybersecurity.
Most important facts for investors to verify
- Whether TypTap can convert significant premium growth into underwriting profitability, given its $30.2 million 2021 segment pretax loss.
- The adequacy of the $237.2 million loss and LAE reserve, particularly after $27.6 million of unfavorable prior-year development.
- The terms, economics and regulatory treatment of the United assumed-business transactions and the associated renewal rights.
- The sustainability of the $0.40 quarterly dividend in light of low common-stock earnings, subsidiary dividend restrictions and catastrophe exposure.
- The potential dilution and financial obligations associated with TTIG preferred stock, its increasing dividend rates, HCI’s guarantee and the 750,000 HCI warrants.
- Reinsurance attachment points, limits, retrospective provisions and counterparty concentrations, including the fact that approximately 70.5% of reinsurance recoverables were due from three reinsurers.
- The company’s exposure to Florida catastrophe events, regulatory rate limitations, litigation trends and changes in reinsurance pricing.