Business Context and Reporting Period
HCI Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2019. The company is primarily a Florida-focused property and casualty insurer through Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company, with additional reinsurance, real estate and information-technology operations. Insurance operations represented approximately 95% of total segment revenue.
At December 31, 2019, HCI had approximately 131,000 policies in force, compared with 127,000 at December 31, 2018. TypTap gross written premiums increased to $60.2 million from $14.5 million, while HCPCI gross written premiums declined to $304.7 million from $321.9 million.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net premiums earned | $216.3 million | $213.4 million | +1.4% |
| Total revenue | $242.5 million | $231.3 million | +4.8% |
| Net income | $26.6 million | $17.7 million | +49.9% |
| Diluted EPS | $3.31 | $2.34 | +$0.97 |
| Losses and LAE | $107.5 million | $109.3 million | -1.7% |
| Income before taxes | $36.1 million | $26.9 million | +34.2% |
| Net cash from operations | $54.0 million | $28.6 million | +$25.5 million |
| Cash and cash equivalents | $229.2 million | $239.5 million | -4.3% |
| Total investments | $341.5 million | $387.8 million | -11.9% |
| Long-term debt | $163.7 million | $250.2 million | -34.6% |
| Total stockholders’ equity | $185.5 million | $181.4 million | +2.3% |
Net income margin was approximately 11.0% of total revenue, versus 7.7% in 2018. The loss ratio improved to 49.7% from 51.2%, while the expense ratio increased to 45.7% from 44.6%. The combined ratio improved modestly to 95.4% from 95.8%; measured against gross premiums earned, it increased to 60.3% from 59.6%.
Cash flow from investing activities was $50.5 million, primarily reflecting maturities and sales of investments. Financing activities used $114.7 million, including $91.3 million of debt repayments, $20.1 million of share repurchases and $12.7 million of dividends, partially offset by $9.8 million of revolving-credit borrowings.
Material Changes Versus Prior Comparable Period
- Net income increased by $8.9 million, driven primarily by higher net premiums earned, improved investment results and lower interest expense.
- Net premiums written rose to $239.2 million from $206.8 million, principally from TypTap growth and lower ceded premiums.
- Investment results improved: 2019 included a $7.95 million unrealized gain on investments, compared with a $10.2 million unrealized loss in 2018. Net realized investment results changed from a $6.2 million gain to a $0.3 million loss, while net investment income declined to $13.6 million from $16.6 million.
- Interest expense fell by $5.0 million following repayment of the 3.875% convertible senior notes in March 2019.
- Policy acquisition and underwriting expenses increased to $42.5 million from $38.9 million, and general and administrative personnel expenses increased to $31.1 million from $25.9 million, reflecting TypTap growth, higher staffing, compensation and incentive costs.
- 2019 losses included approximately $7.4 million from a severe March storm, $1.9 million of adverse Hurricane Matthew development and approximately $9.1 million of adverse non-catastrophe development, primarily related to assignment-of-benefits litigation.
- The company repurchased 454,010 shares for approximately $18.9 million, compared with 511,628 shares for $20.0 million in 2018. The quarterly dividend increased to $0.40 per share from $0.375 during 2018.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management’s stated strategy is to optimize the existing insurance portfolio, expand organically, develop technology, diversify operations and pursue selective policy assumptions or acquisitions.
- HCPCI assumed approximately 2,700 Citizens policies in October 2019, representing approximately $7.3 million of premiums in force.
- After year-end, HCPCI entered into an agreement to offer up to approximately 43,000 replacement policies from Anchor Property & Casualty Insurance Company, representing up to approximately $69 million of annualized premiums beginning April 1, 2020. Policyholders are not required to accept the replacement policies.
- On February 28, 2020, HCI borrowed $10.0 million at a fixed 3.90% rate, primarily to repay the 3.95% promissory note due in February 2020.
- Florida concentration creates significant hurricane, tropical-storm, flood, litigation, climate and regulatory exposure. Reinsurance mitigates but does not eliminate catastrophe risk, and availability and pricing may change materially.
- Gross unpaid losses and LAE were $214.7 million, including $116.5 million recoverable from reinsurers. Reserve estimates are inherently uncertain; a 20% increase in gross reserve severity would reduce equity, net of tax, by approximately 15.1% under the company’s sensitivity analysis.
- A retrospective reinsurance asset of $9.5 million was recorded at year-end, compared with $3.1 million in 2018. A sufficiently severe catastrophe could require this benefit to be derecognized.
- The company had $15.1 million of unfunded limited-partnership commitments and $223.5 million of total contractual obligations, including debt, leases, reinsurance commitments and capital commitments.
- Florida insurance subsidiaries exceeded minimum statutory capital and surplus and risk-based-capital requirements. However, regulatory restrictions may limit subsidiary dividends and cash transfers to the holding company.
- Legal proceedings arise in the ordinary course; management does not believe currently pending proceedings will have a material adverse effect, but assignment-of-benefits litigation has contributed to adverse reserve development.
Most Important Facts to Verify
- Whether TypTap growth and the Anchor replacement opportunity translate into profitable earned-premium growth after reinsurance and acquisition costs.
- The adequacy of loss reserves, especially for assignment-of-benefits litigation, Hurricane Matthew, prior hurricanes and new catastrophe exposure.
- Reinsurance terms, attachment points, coverage limits, retrospective provisions and the collectability of the $116.5 million recoverable balance.
- Liquidity at the parent company, subsidiary dividend capacity, debt maturities and the convertible notes’ March 2022 holder put option.
- The sustainability of the $0.40 quarterly dividend and ongoing share repurchases given catastrophe, reserve and regulatory-capital requirements.
- Real estate valuations, tenant concentration, the unsold Treasure Island property and the $15.1 million of unfunded private-equity commitments.
- The effect of investment-market volatility on earnings, equity and available liquidity.