HCI Group, Inc. 2019 Q1 Form 10-Q Summary
Business Context and Reporting Period
HCI Group is a Florida-based property and casualty insurance, reinsurance, real estate, and information technology company. Florida remains its primary insurance market. The filing covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. Financial statements are unaudited and presented in accordance with U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $60.6 million | $57.7 million | Up $2.9 million |
| Net premiums earned | $51.2 million | $53.5 million | Down $2.3 million |
| Net investment income | $3.3 million | $3.2 million | Up $0.1 million |
| Net income | $6.7 million | $10.8 million | Down $4.1 million |
| Diluted EPS | $0.82 | $1.11 | Down $0.29 |
| Operating cash flow | $10.6 million | $(14.6) million | Improved $25.2 million |
| Combined ratio on net premiums earned | 100.3% | 80.2% | Up 20.1 percentage points |
| Cash and cash equivalents | $178.0 million | $239.5 million at Dec. 31, 2018 | Down $61.5 million |
| Total debt, including revolving facility | $169.6 million | $250.2 million long-term debt at Dec. 31, 2018 | Debt structure changed |
| Stockholders’ equity | $187.0 million | $181.4 million at Dec. 31, 2018 | Up $5.6 million |
Losses and loss adjustment expenses were $27.0 million, or 52.7% of net premiums earned, compared with $19.7 million and 36.7% in the prior-year quarter. The expense ratio increased to 47.6% from 43.5%. The effective tax rate was 27.4%, compared with 27.1%.
Gross premiums earned were $82.6 million and net premiums written were $36.2 million. Policies in force declined to approximately 125,000 from approximately 136,000 at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Net income declined 37.5%, primarily because losses and loss adjustment expenses increased $7.3 million and net premiums earned decreased $2.3 million.
- Investment results were favorable overall versus Q1 2018: unrealized investment gains were $5.3 million versus a $2.6 million loss, partially offset by a $0.4 million realized loss versus a $2.2 million realized gain.
- Current-period loss experience included approximately $5.0 million related to a severe March storm. Prior-period losses included approximately $1.7 million from litigation and $0.8 million of adverse development related to Hurricane Matthew.
- The company repaid the remaining $90.0 million principal balance of its 3.875% convertible senior notes on March 15, 2019.
- HCI borrowed $8.0 million under its revolving credit facility to fund the acquisition of approximately nine acres of undeveloped Tampa land for $8.5 million. The facility provides total capacity of $65.0 million, leaving $57.0 million unused at quarter-end.
- Cash used in financing activities was $87.4 million, mainly reflecting debt repayment of $90.3 million, dividends of $3.3 million, and share repurchases of $1.4 million, partially offset by the $8.0 million revolving-facility borrowing.
- The company repurchased 31,789 shares under its repurchase plan for approximately $1.3 million and had approximately $18.7 million remaining under the authorization.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $0.8 million of operating lease liabilities and $0.8 million of right-of-use assets.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative full-year earnings or premium guidance. Management expects future liquidity needs to be funded primarily through insurance premiums, investment income, and operating cash flow, with potential debt or equity offerings available to support growth and investment opportunities.
- Insurance results are seasonal because Florida hurricane and tropical storm activity generally occurs from June 1 through November 30. Reinsurance treaty costs also generally reset on June 1.
- Management considers reserves adequate, but reserves are highly judgmental and may change materially as claims develop. At March 31, 2019, gross loss reserves were $184.7 million, including $140.5 million of estimated incurred-but-not-reported losses.
- Reinsurance recoverables were $86.2 million, and approximately 33.8% of the reinsurance recoverable balance was concentrated with three reinsurers. HCI remains liable if reinsurers fail to perform.
- The company had $15.5 million of unfunded limited-partnership commitments and $4.6 million of minimum premiums under a multi-year reinsurance contract.
- The revolving credit agreement contains covenants restricting additional debt, restricted payments, liens, asset dispositions, mergers, and certain affiliate transactions. Variable-rate borrowings expose the company to rising interest rates.
- Investment portfolios are exposed to interest-rate, credit, and equity-price risk. A hypothetical 100-basis-point increase in rates would reduce the estimated fair value of fixed-maturity securities by approximately $4.4 million, or 2.1%.
- Legal proceedings arise in the ordinary course of business; management did not believe currently pending matters would materially affect consolidated results.
- Insurance-subsidiary dividends are subject to Florida regulatory restrictions. The insurance subsidiaries paid $20.0 million of dividends to HCI during the quarter.
Investor Verification Items
- Verify whether the elevated 100.3% net combined ratio was temporary or reflects sustained deterioration in claims frequency, severity, litigation, or policy mix.
- Review subsequent loss development, particularly the 2018 litigation-related reserves, Hurricane Matthew development, and the March 2019 storm losses.
- Assess the adequacy and collectability of the $86.2 million reinsurance recoverable balance and the concentration among three reinsurers.
- Confirm the refinancing, repayment, or potential call treatment of remaining debt, including the $143.8 million principal amount of 4.25% convertible senior notes.
- Monitor liquidity after the $61.5 million quarterly cash decline, the $15.5 million unfunded investment commitments, dividends, and potential catastrophe claims.
- Evaluate the effect of the June 1 reinsurance renewal on ceded premiums, coverage, retentions, and future underwriting margins.
- Verify the sustainability of investment gains, which materially supported Q1 2019 revenue despite weaker underwriting results.