HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI Group is primarily a Florida property and casualty insurer through Homeowners Choice Property & Casualty Insurance Company, Inc. It also operates reinsurance, real estate and information technology businesses. The filing covers the three and nine months ended September 30, 2017; financial statements are unaudited and reported in thousands except per-share amounts.
HCPCI received approval during 2017 to write residential property and casualty insurance in Arkansas, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Texas. Management expected to begin writing flood policies in those states during 2018.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $47,490 | $69,808 | $182,783 | $192,075 |
| Net premiums earned | $43,964 | $63,300 | $168,847 | $180,275 |
| Net investment income | $2,878 | $2,785 | $8,522 | $6,000 |
| Net income (loss) | $(40,546) | $11,333 | $(18,984) | $24,413 |
| Diluted EPS | $(4.44) | $1.10 | $(2.05) | $2.41 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $51,393 | $91,893 |
Q3 net loss margin was approximately 85% of total revenue, compared with a profit margin of approximately 16% in Q3 2016. The nine-month net loss margin was approximately 10%, compared with a profit margin of approximately 13% in the prior-year period.
- Q3 loss ratio on net premiums earned was 203.0%, versus 40.9%; expense ratio was 55.2%, versus 37.7%; and combined ratio was 258.2%, versus 78.6%.
- The combined ratio measured against gross premiums earned was 128.0% in Q3 2017, versus 53.8%, and 79.7% for the nine months, versus 52.8%.
- Gross premiums earned declined to $88,669 in Q3 and $270,376 for nine months, primarily due to policy attrition and prior rate decreases. Policies in force were approximately 141,000 at September 30, 2017, versus approximately 145,000 a year earlier.
- Cash and cash equivalents were $292,438 at September 30, 2017, compared with $280,531 at December 31, 2016. Total investments were $391,751, and total assets were $1,029,253.
- Total liabilities were $836,197 and stockholders’ equity was $193,056 at September 30, 2017, compared with $426,318 and $243,746, respectively, at year-end 2016.
Material changes versus the prior comparable period
- Hurricane Irma produced estimated gross losses of approximately $267,000 and estimated net losses of approximately $54,000 in the third quarter. The company also recorded approximately $2,500 of additional losses related to Hurricane Matthew.
- Losses and loss adjustment expenses increased to $89,231 in Q3 from $25,909 and to $142,425 for nine months from $79,261. The company also strengthened reserves for assignment-of-benefits trends and related litigation.
- Reinsurance recoverables for unpaid losses increased to $213,729 at September 30, 2017 from zero at year-end 2016. Approximately 31.3% of the reinsurance recoverable balance was concentrated with two reinsurers.
- Ceded premiums increased to $44,705 in Q3 from $29,242, partly because retrospective reinsurance provisions required adjustments related to Irma. The company recognized net ceded-premium increases of approximately $12,464 in Q3 and $5,508 for nine months.
- Long-term debt increased to $236,311 from $138,863. In March 2017, HCI issued $143,750 of 4.25% convertible senior notes; in April, it redeemed $40,250 of 8% senior notes. Interest expense increased to $4,408 in Q3 and $12,328 for nine months.
- Stockholders’ equity declined primarily because of the year-to-date net loss and share repurchases. The company repurchased $36,825 of common stock during the nine months and had approximately $13,818 remaining under its authorized repurchase plan at September 30.
- Net cash provided by operations fell to $51,393 from $91,893, while investing cash use increased to $90,959, primarily from purchases of securities. Financing cash flow was $51,442, largely reflecting convertible-note proceeds.
Outlook, risks, contingencies and unusual items
- No quantitative earnings or revenue guidance is provided in the filing. Management expects flood products and expansion into additional states to contribute to future results, but timing and financial impact are uncertain.
- Management considers reserves adequate but emphasizes that loss reserves, including $213,825 of estimated incurred-but-not-reported losses, are subject to significant variability. Reserve changes may materially affect future results.
- Catastrophe exposure, particularly hurricanes and tropical storms in Florida, is a principal risk. Insurance results are seasonal, with the principal hurricane season running from June 1 through November 30.
- The company remains liable if reinsurers fail to perform. Reinsurance recoverables include $7,400 related to Oxbridge Reinsurance Limited, a related party; management believes the balance is collectible based on available information.
- At September 30, 2017, contractual commitments included $26,471 of future minimum reinsurance premiums and $15,931 of unfunded limited-partnership commitments. Total disclosed contractual obligations were $343,768, including principal and interest on debt.
- HCI declared a quarterly dividend of $0.35 per share payable December 15, 2017. Insurance-subsidiary dividends are subject to Florida regulatory restrictions; HCPCI paid an $18,000 dividend to HCI during the nine months.
- An IRS examination of the company’s 2015 federal tax return was in the information-gathering stage. The company also acquired Tampa commercial real estate for approximately $9,215 in October 2017.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Irma-related loss estimates and the $213,729 reinsurance recoverable balance ultimately prove collectible and sufficient.
- Subsequent development of loss reserves, including assignment-of-benefits litigation and the large incurred-but-not-reported component.
- Future underwriting profitability and whether combined ratios return to profitable levels after the catastrophe-affected quarter.
- Liquidity, statutory capital and regulatory constraints at HCPCI, particularly after catastrophe claims, dividends and debt service.
- The maturity and refinancing implications of the $89,990 3.875% convertible notes due March 2019 and other debt obligations.
- Execution and profitability of expansion into new states and the expected 2018 rollout of flood policies.
- Impact of related-party reinsurance arrangements with Oxbridge and the company’s concentration of reinsurance recoverables.