HCI Group, Inc. Form 10-Q Summary
Business context and reporting period
HCI Group is a Florida-based InsurTech company operating through property and casualty insurance, reinsurance, real estate and information technology businesses. Its insurance operations include HCPCI and TypTap, with Florida as the primary market. The unaudited filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2020.
During the quarter, HCI reorganized its operations into four reportable segments: HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. TypTap became a separately structured segment following a $100.0 million minority investment from an affiliate of Centerbridge Partners.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Gross premiums earned | $130.9 million | $92.4 million |
| Net premiums earned | $87.8 million | $61.6 million |
| Total revenue | $94.9 million | $55.4 million |
| Income before income taxes | $10.1 million | $0.7 million |
| Net income | $6.8 million | $0.5 million |
| Net income attributable to HCI | $6.1 million | $0.5 million |
| Diluted earnings per share | $0.75 | $0.07 |
| Net cash provided by operating activities | $36.1 million | $55.4 million |
| Net cash provided by investing activities | $19.1 million | $23.9 million |
| Net cash provided by financing activities | $66.8 million | $8.6 million |
At March 31, 2021, total assets were $1.017 billion, compared with $941.3 million at year-end 2020. Cash and cash equivalents were $553.4 million, and cash, cash equivalents and restricted cash totaled $555.8 million. Total investments were $211.4 million.
Long-term debt was $160.5 million, compared with $156.5 million at December 31, 2020. HCI repaid the $23.8 million revolving credit facility in March, leaving no borrowings outstanding and $65.0 million of borrowing capacity. Total liabilities were $713.1 million. Redeemable noncontrolling interest was $85.9 million at quarter-end.
Net premiums written increased to $82.7 million from $45.8 million. Policies in force increased to approximately 154,000 from approximately 133,000 a year earlier. TypTap policies in force reached 42,489 at March 31, 2021.
The loss ratio on net premiums earned was 52.1%, compared with 45.6%; the expense ratio was 44.9%, compared with 43.2%; and the combined ratio was 97.0%, compared with 88.8%. On gross premiums earned, the combined ratio was 65.1%, compared with 59.3%.
Material changes versus the prior comparable period
- Total revenue increased $39.5 million, driven principally by a $26.2 million increase in net premiums earned and improved investment results.
- Gross premiums earned increased 41.8%. HCPCI contributed $102.1 million and TypTap contributed $28.8 million.
- HCPCI began assuming 69.5% quota-share reinsurance on United policies in Connecticut, New Jersey, Massachusetts and Rhode Island. Assumed premiums earned from this business were $20.7 million, and related losses were approximately $10.9 million.
- TypTap gross premiums earned increased to $28.8 million from $16.6 million, reflecting policy growth. TypTap generated a segment loss before taxes of $3.8 million, compared with a $1.9 million loss in Q1 2020.
- Losses and loss adjustment expenses increased to $45.8 million from $28.1 million. Policy acquisition and other underwriting expenses increased to $23.1 million from $11.8 million.
- Investment results improved materially: net investment income was $4.6 million versus a $0.2 million loss; realized investment gains were $1.1 million versus a $2.2 million loss; and unrealized investment losses declined to $0.3 million from $4.8 million.
- Net cash from operations declined $19.3 million. The prior-year period benefited from approximately $30.0 million of advance premiums from Anchor, which did not recur.
- Interest expense declined to $2.1 million from $3.0 million, partly due to early adoption of ASU 2020-06, which eliminated amortization of the conversion-feature debt discount.
- The effective tax rate increased to 32.2% from 16.7%, primarily because deferred tax assets associated with canceled restricted stock were derecognized.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects future growth from TypTap’s expansion into additional states and from renewal or replacement rights acquired for United policyholders. As of April 15, 2021, TypTap had approval to offer homeowners coverage in 12 states outside Florida.
HCI expects liquidity needs to be funded primarily through operating cash flow, including insurance premiums and investment income. Future uses include claims, reinsurance premiums, interest, dividends, operating expenses and potential real estate acquisitions. Management stated that it believes liquidity is sufficient for claims, expenses and unforeseen events, but insurance-subsidiary dividends to HCI are subject to Florida regulatory restrictions.
- Catastrophe exposure is significant because Florida is the primary market. Hurricane and tropical-storm season generally runs from June through November, and major events could materially affect quarterly results and operations.
- Loss reserves are judgmental and volatile. Gross losses and loss adjustment expense reserves were $205.8 million at March 31, 2021, including $160.1 million of estimated incurred-but-not-reported losses. Management considered reserves adequate, but actual claims may differ substantially from estimates.
- Reinsurance does not eliminate risk. HCI remains liable if reinsurers cannot perform, and approximately 61.3% of reinsurance recoverables were concentrated with two reinsurers.
- A retrospective reinsurance contract generated $4.7 million of accrued benefits during the quarter. The $15.6 million accrued balance could be charged to earnings if a qualifying catastrophic loss occurs.
- HCI guaranteed payment obligations on TypTap’s Series A Preferred Stock. The preferred stock carries cumulative dividends, conversion rights, redemption rights beginning after the fourth anniversary, liquidation preference and anti-dilution protection.
- The Centerbridge transaction included warrants for 750,000 HCI shares exercisable at $54.40 per share and expiring four years after issuance, creating potential dilution.
- HCI acquired United renewal rights and a non-compete agreement for $5.4 million of common stock and estimated contingent consideration of $2.4 million. Amortization was expected to begin June 1, 2021.
- The company had $9.9 million of unfunded limited-partnership commitments at quarter-end and faces interest-rate, credit, equity-market, regulatory, COVID-19 and reinsurance-pricing risks.
Unusual items included a $2.8 million net gain from a legal settlement with The Kroger Co., the $100.0 million TypTap capital investment, the United renewal-rights transaction, and the early adoption of ASU 2020-06. The board declared a quarterly dividend of $0.40 per common share payable June 18, 2021.
Most important facts for investors to verify
- Whether TypTap can achieve profitable growth as it expands geographically and absorbs the cost of its separate workforce, technology platform and equity compensation.
- The adequacy of loss reserves, particularly the $160.1 million incurred-but-not-reported component and reserves associated with the United book and catastrophe exposures.
- The terms, capacity and renewal pricing of catastrophe reinsurance beginning June 1, 2021, including reinsurer concentration and collateralization.
- The financial impact and potential dilution from TypTap’s preferred stock, HCI’s guaranty and the 750,000 outstanding warrants.
- Whether the $15.6 million retrospective reinsurance benefit remains collectible without a significant future earnings reversal.
- Regulatory capital and dividend restrictions applicable to HCI’s Florida-domiciled insurance subsidiaries.
- The assumptions supporting fair values of investments, private-equity commitments and the United renewal-rights intangible assets.