HCI Group, Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
HCI Group is a Florida-based InsurTech company operating primarily in residential property and casualty insurance, with additional reinsurance, real estate, and information technology operations. Florida remains its primary insurance market. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Insurance operations generated approximately 95% of segment revenue.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $60.0 million | $61.7 million | $179.2 million | $178.3 million |
| Net premiums earned | $54.4 million | $54.2 million | $157.6 million | $160.7 million |
| Income before tax | $7.7 million | $11.9 million | $27.3 million | $38.2 million |
| Net income | $5.9 million | $9.0 million | $20.1 million | $26.2 million |
| Diluted EPS | $0.73 | $1.00 | $2.49 | $3.03 |
| Operating cash flow | Not separately provided | Not separately provided | $38.1 million | $29.4 million |
Q3 net income declined approximately 35%, while nine-month net income declined approximately 23%. Net profit margin was approximately 9.8% in Q3 2019 versus 14.6% in Q3 2018, and approximately 11.2% for the first nine months versus 14.7% in the prior-year period.
- Q3 loss ratio increased to 50.2% from 47.6%; the nine-month loss ratio increased to 49.9% from 41.8%.
- Q3 combined ratio increased to 96.0% from 92.0%; the nine-month ratio increased to 96.4% from 87.2%.
- Net premiums written increased to $65.8 million in Q3 and $204.1 million for the nine months, up from $58.4 million and $195.7 million, respectively, driven primarily by TypTap growth.
- TypTap policies in force grew 90.5% during the first nine months to approximately 19,500. Total policies in force were approximately 125,000 at September 30, 2019, compared with approximately 128,000 a year earlier.
- Net investment income declined to $3.6 million in Q3 and $11.1 million for the nine months. Net unrealized investment gains were $0.6 million in Q3 and $7.3 million for the nine months, compared with losses in the prior-year periods.
Liquidity, capital, and debt
- Cash and cash equivalents were $214.6 million at September 30, 2019, compared with $239.5 million at December 31, 2018. Cash, cash equivalents, and restricted cash totaled $215.3 million.
- Operating cash flow was $38.1 million; investing activities provided $44.5 million, while financing activities used $107.4 million. The overall cash decrease was $24.8 million.
- Long-term debt declined to $163.0 million from $250.2 million at year-end, principally because the company repaid $90.0 million of 3.875% convertible notes in March 2019. The company also had $9.8 million outstanding under its revolving facility.
- The revolving credit facility provides borrowing capacity of up to $65.0 million, with $55.25 million unused at September 30, 2019. The company reported compliance with applicable covenants.
- Stockholders’ equity was $184.2 million, compared with $181.4 million at December 31, 2018.
- The company paid $9.8 million of dividends and repurchased $16.2 million of common stock during the first nine months. Approximately $4.8 million remained available under the repurchase authorization at September 30, 2019.
Material changes, outlook, and risks
- Losses and loss adjustment expenses increased by $1.6 million in Q3 and $11.4 million for the nine months. Management cited non-catastrophe litigation and reserve strengthening, a severe March 2019 storm costing approximately $6.5 million, and $1.1 million of Hurricane Matthew losses.
- Gross reserves for losses and loss adjustment expenses increased to $237.9 million from $207.6 million at year-end. Approximately $196.5 million represented estimated incurred-but-not-reported losses, making reserve adequacy a significant estimate.
- Gross estimated losses for Hurricane Irma increased to $514.0 million from $411.0 million, and Hurricane Michael increased to $33.0 million from $22.3 million. The filing states that the increases were entirely ceded and did not affect current-period results.
- Reinsurance recoverables and receivables totaled $163.4 million, with approximately 40.4% of the recoverable balance concentrated among four reinsurers. The company remains liable if reinsurers fail to perform.
- A retrospective reinsurance provision produced $4.3 million of premium reductions for the first nine months and an accrued benefit asset of $7.0 million. A catastrophe exceeding the contract’s coverage could require this asset to be charged to earnings.
- Management expects TypTap expansion to continue. Subsequent to quarter-end, HCPCI received approval to assume approximately 2,700 Citizens Property Insurance policies with annualized gross premiums of approximately $7.3 million.
- The company declared a $0.40 per-share quarterly dividend payable December 20, 2019.
- Key risks include Florida hurricane and catastrophe exposure, reserve estimation uncertainty, litigation, reinsurance pricing and collectability, insurance regulation and rate restrictions, market and interest-rate risk, and variable-rate debt.
Important facts for investors to verify
- Whether reserve strengthening and litigation-related adverse development continue, particularly for non-catastrophe claims and prior hurricane years.
- The adequacy, collateralization, and concentration of reinsurance recoverables, including the $7.0 million retrospective reinsurance benefit asset.
- The pace and profitability of TypTap growth, including whether policy growth converts into earned premiums without materially worsening loss or expense ratios.
- Future cash requirements from debt maturities, dividends, share repurchases, and $14.4 million of unfunded limited-partnership commitments.
- The effect of Florida insurance regulation, catastrophe activity, reinsurance renewals, and interest-rate movements on capital, liquidity, and earnings.
- The filing’s stated conclusion that disclosure controls were effective and that pending legal proceedings were not expected to have a material adverse effect.