HCI Group, Inc. annual report, FY2023

Business Context and Reporting Period

HCI Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2023. HCI is primarily a property and casualty insurer operating through HCPCI and TypTap, with additional information technology, reinsurance, insurance management, real estate and corporate operations. The company added CORE Insurance Operations during the fourth quarter of 2023 and consolidates CORE as a variable interest entity.

Operations remain concentrated in Florida, although the company is expanding across other states through organic growth and policy assumptions from Citizens Property Insurance Corporation and other insurers. HCI assumed approximately 60,100 Citizens policies in December 2023, representing approximately $226.4 million of annualized gross written premiums.

Financial Performance and Key Metrics

Metric	2023	2022	Change
Gross premiums earned	$765.5 million	$724.7 million	5.6% increase
Net premiums earned	$495.9 million	$463.6 million	7.0% increase
Total revenue	$550.7 million	$499.6 million	10.2% increase
Losses and loss adjustment expenses	$254.6 million	$371.5 million	31.5% decrease
Income before taxes	$117.7 million	$(68.4) million	Returned to profitability
Net income	$89.3 million	$(54.6) million	Returned to profitability
Net income after noncontrolling interests	$79.0 million	$(58.5) million	Returned to profitability
Diluted earnings per share	$7.62	$(6.24)	Improved materially
Net cash from operating activities	$230.7 million	$(0.0) million	Improved materially

• Net income margin was approximately 16.2% of total revenue; pretax margin was approximately 21.4%.
• The loss ratio improved to 51.3% from 80.1%, and the expense ratio improved to 36.0% from 42.4%.
• The net combined ratio improved to 87.3% from 122.5%; the combined ratio based on gross premiums earned improved to 56.6% from 78.4%.
• Net premiums written increased to $629.0 million from $464.9 million, primarily due to Citizens policy assumptions. Policies in force increased to approximately 247,000 from 210,400.
• TypTap gross premiums written increased to $363.6 million from $348.2 million, while HCPCI gross premiums written increased to $535.1 million from $377.9 million.
• Net investment income increased to $46.2 million from $32.4 million, driven primarily by higher interest income and fixed-maturity investment income.
• Interest expense increased to $11.1 million from $7.8 million. No impairment loss was recorded in 2023 versus $2.3 million in 2022.

Cash Flow, Liquidity and Capitalization

• Cash and cash equivalents were $536.5 million at December 31, 2023, compared with $234.9 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $539.8 million.
• Total investments were $520.3 million, including $383.2 million of fixed-maturity securities and $45.5 million of equity securities.
• Total assets were $1.811 billion, total liabilities were $1.388 billion and total equity was $327.2 million.
• Long-term debt was $208.5 million at year-end. The company had no borrowings under its $75.0 million revolving credit facility and was in compliance with its covenants at December 31, 2023.
• The company paid $13.7 million in common dividends, or $1.60 per share, and continued a quarterly dividend of $0.40 per share.
• Operating cash flow benefited substantially from reinsurance recoveries and working-capital movements, including a $338.4 million change in reinsurance recoverable balances.
• Insurance subsidiaries exceeded applicable minimum capital and surplus and risk-based capital requirements. Combined statutory capital and surplus for HCPCI and TypTap was approximately $209.2 million versus minimum requirements of approximately $68.9 million.

Material Changes Versus the Prior Comparable Period

• Profitability reversed sharply from a 2022 loss, primarily because losses and loss adjustment expenses declined by $116.9 million. The 2022 period included significant Hurricane Ian costs; 2023 benefited from lower catastrophe losses and lower Florida claims and litigation frequency.
• Gross premiums written increased by $172.6 million, driven largely by Citizens assumptions of approximately $143.1 million of written premiums and continued TypTap growth.
• Premiums ceded increased by $8.5 million to $269.6 million, reflecting higher reinsurance costs and increased Florida coverage, partly offset by retrospective contract provisions.
• Gross loss reserves declined to $585.1 million from $863.8 million, while net loss reserves increased modestly to $254.4 million from $246.5 million. Reinsurance recoverables on unpaid losses declined to $330.6 million from $616.8 million.
• Shareholders’ equity increased to $324.8 million from $162.6 million, aided by 2023 net income and $84.6 million of net proceeds from a December common-stock offering of 1.15 million shares.
• HCI discontinued offering flood insurance in Florida during 2023 because of reduced availability and affordability of flood reinsurance.
• United Property & Casualty Insurance Company entered receivership in February 2023. HCI ceased providing related claims-processing services and retained $30.1 million of funds withheld for assumed United business at year-end, subject to receiver actions.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal earnings or revenue guidance. Management expects future liquidity needs to be funded primarily through insurance operations, investment income and available capital, while continuing to pursue Citizens assumptions, geographic expansion, technology development, real estate opportunities and cost management.

• HCI expects catastrophe exposure, especially hurricanes and other severe weather in Florida and the Southeast, to remain a principal source of earnings volatility.
• Loss reserves are inherently uncertain. A 5% increase in claim severity would reduce equity by an estimated 6.70% after tax, according to the company’s sensitivity analysis.
• At December 31, 2023, the company had $44.3 million of accrued benefits under retrospective reinsurance provisions that could be charged to earnings if qualifying catastrophic losses occur.
• The company had a contractual minimum premium obligation of $91.4 million due in 2024 under a multi-year reinsurance contract, plus $4.2 million of unfunded limited-partnership commitments.
• CORE’s maximum exposure to HCI was $25.0 million at year-end, represented by HCI’s subordinated surplus note. CORE had no operating activity during 2023 but subsequently assumed Citizens policies.
• Subsequent to year-end, HCI redeemed all TTIG preferred stock held by Centerbridge for $102.9 million, funded with cash and $50.0 million drawn under the revolving credit facility. HCI also established a shelf registration and a potential $75.0 million at-the-market equity facility.
• HCI elected to redeem the remaining $23.9 million principal amount of its 4.25% convertible notes in March 2024 and expected to issue approximately 397,000 common shares.
• Other significant risks include reinsurance availability and collectability, regulatory restrictions on insurance rates and dividends, competition, litigation and social inflation, cybersecurity incidents, interest-rate and investment-market volatility, and dependence on key personnel and technology systems.

Important Facts for Investors to Verify

• Whether 2023’s improved combined ratio and loss experience are sustainable after adjusting for the unusually favorable comparison with Hurricane Ian-affected 2022.
• The adequacy of the $585.1 million gross loss and LAE reserve and the collectability and timing of the $330.6 million of reinsurance recoverables.
• The financial impact of the United receivership, including access to the $30.1 million of funds withheld and subsequent withdrawals or settlements.
• The funding, leverage and liquidity impact of the $102.9 million TTIG preferred-stock redemption and the $50.0 million revolving-credit draw.
• The potential dilution from the 4.25% convertible-note conversion, outstanding warrants and the potential $75.0 million ATM equity facility.
• The cost, coverage limits and renewal terms of catastrophe reinsurance, including the $91.4 million 2024 minimum premium obligation and the $44.3 million retrospective reinsurance asset.
• Regulatory capital, dividend capacity and premium-to-surplus ratios at HCPCI and TypTap as policy assumptions and written premiums continue to grow.
• The company’s ability to develop CORE profitably and manage its $25.0 million maximum exposure to the consolidated variable interest entity.

The consolidated financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2023.