HCI Group, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
HCI Group 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, 2018; fourth-quarter 2018 results are included but the filing is an annual report, not a standalone quarterly filing. Florida remains the principal insurance market, and insurance operations generated approximately 95% of total segment revenue.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Gross premiums earned | $343.1 million | $358.3 million | Down 4.2% |
| Net premiums earned | $213.4 million | $224.6 million | Down 5.0% |
| Total revenue | $231.3 million | $244.4 million | Down 5.4% |
| Losses and LAE | $109.3 million | $165.6 million | Down 34.0% |
| Income before taxes | $26.9 million | $(15.6) million | Improved |
| Net income | $17.7 million | $(6.9) million | Improved |
| Diluted EPS | $2.34 | $(0.75) | Improved |
| Net cash from operating activities | $28.6 million | $16.6 million | Up 71.8% |
| Cash and cash equivalents | $239.5 million | $255.9 million | Down 6.4% |
| Total investments | $387.8 million | $380.3 million | Up 2.0% |
| Total assets | $832.9 million | $842.3 million | Down 1.1% |
| Long-term debt | $250.2 million | $237.8 million | Up 5.2% |
| Stockholders’ equity | $181.4 million | $194.0 million | Down 6.5% |
Insurance profitability improved materially. The loss ratio declined to 51.2% from 73.8%, while the expense ratio increased to 44.6% from 42.0%. The combined ratio improved to 95.8% from 115.8%, indicating underwriting profitability before other income. Measured against gross premiums earned, the combined ratio was 59.6%, compared with 72.6% in 2017. Net income margin was approximately 7.7% of total revenue, versus a negative margin in 2017.
Investment income increased to $16.6 million from $11.4 million, but net unrealized investment losses were $10.2 million compared with a $0.1 million gain in 2017, principally reflecting equity-market declines and the adoption of new equity-security accounting guidance. Interest expense increased to $18.1 million from $16.8 million.
Material changes versus the prior comparable period
- Results benefited from significantly lower catastrophe losses: approximately $16.5 million of net Hurricane Michael losses in 2018 versus approximately $54.0 million of net Hurricane Irma losses in 2017.
- Prior-year adverse development remained material at $12.5 million, driven primarily by assignment-of-benefits litigation and a $2.1 million increase in Hurricane Matthew reserves.
- Policies in force declined to approximately 127,000 from 139,000, contributing to lower premiums. Net premiums written decreased to $206.8 million from $213.7 million.
- Reinsurance recoverables increased to $123.9 million from $103.1 million, including $112.8 million related to unpaid losses. Approximately 29.1% of the reinsurance recoverable balance was concentrated with two reinsurers.
- Common share repurchases totaled approximately $21.2 million, and the company approved a new plan to repurchase up to $20 million of shares during 2019.
- Total equity declined despite the return to profitability, reflecting share repurchases, dividends and investment-related losses. Dividends per share increased to $1.475 from $1.40.
- The company adopted accounting changes affecting equity-security gains and losses, restricted cash presentation and tax-related accumulated other comprehensive income.
Liquidity, debt and capital resources
Operating cash flow was positive at $28.6 million. Investing activities used $17.7 million, while financing activities used $27.3 million, primarily for share repurchases, dividends and debt repayment. The company held $240.2 million of cash, cash equivalents and restricted cash at year-end.
Long-term debt had a principal amount of approximately $265.0 million, including $90.0 million of 3.875% convertible senior notes due March 15, 2019 and $143.8 million of 4.25% convertible senior notes due March 2037. The company disclosed that it would need to repay the $90.0 million 2019 maturity if the notes were not converted. A new $65 million secured revolving credit facility was entered into in December 2018; no borrowings were outstanding at year-end and all covenants were satisfied.
Material commitments included $16.3 million of unfunded limited-partnership commitments, $5.4 million of minimum reinsurance premiums, and $318.9 million of total contractual obligations, including principal and interest on long-term debt. Management stated that current capital and anticipated retained income were expected to support operations, but insurance subsidiary distributions are subject to regulatory restrictions.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management’s strategy is to optimize the existing insurance book, expand TypTap’s homeowners and flood products, diversify geographically, develop technology and pursue selective real estate opportunities. Policy-assumption opportunities from Citizens have diminished, making future growth more dependent on retention, voluntary business, new products and geographic expansion.
- The business is highly concentrated in Florida and exposed to hurricanes, tropical storms, climate-related changes, litigation trends and assignment-of-benefits claims.
- Loss reserves are inherently uncertain. A 5% increase in net loss reserves would reduce equity by approximately 3.73%, according to the filing’s sensitivity analysis; the base net loss reserve was approximately $207.6 million gross, including $94.8 million net of reinsurance.
- Reinsurance mitigates catastrophe exposure but creates premium expense, counterparty-credit risk and potential non-collectability. Coverage may become more expensive or unavailable.
- Insurance regulators control rates, forms, capital, dividends, reinsurance and market entry. HCPCI and TypTap were in compliance with applicable statutory capital and surplus requirements at year-end.
- Real estate operations face tenant concentration, impairment, environmental, restaurant and redevelopment risks. The Treasure Island waterfront property was classified as held for sale in November 2018.
- Cybersecurity, technology disruption, key-person dependence, investment-market volatility and limited liquidity of private partnership investments are additional disclosed risks.
- Subsequent events included a $0.40 quarterly dividend declared in January 2019, new equity awards to the CEO, and an $8.5 million acquisition of undeveloped Tampa land in February 2019, primarily financed with the revolving credit facility.
Important facts for investors to verify
- How the March 2019 $90.0 million convertible-note maturity was repaid, refinanced or converted.
- Current policy counts, premium retention, rate adequacy and the profitability of TypTap’s homeowners and flood expansion.
- Development of Hurricane Michael, Hurricane Irma, Hurricane Matthew and assignment-of-benefits reserves, including the collectability and timing of reinsurance recoveries.
- Current catastrophe reinsurance limits, retentions, pricing and counterparty concentrations for the applicable treaty year.
- Whether the $20 million 2019 share-repurchase authorization and dividend policy remain appropriate given debt maturities, regulatory capital and insurance liquidity needs.
- Occupancy, anchor-tenant exposure, redevelopment costs and valuation assumptions for the real estate portfolio.