HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI Group, Inc. is a Florida-based holding company whose principal subsidiary provides property and casualty insurance to Florida homeowners, condominium owners and tenants. Other operations include reinsurance, information technology and real estate. The filing covers the unaudited three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
- Property and casualty insurance represented 95.4% of second-quarter revenue and 96.2% of six-month revenue.
- Growth was driven primarily by policies assumed from Citizens Property Insurance Corporation in December 2014 and February 2015.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gross premiums earned | $107.8 million | $91.2 million | $217.3 million | $185.1 million |
| Net premiums earned | $76.4 million | $62.6 million | $158.1 million | $129.0 million |
| Total revenue | $79.1 million | $66.3 million | $161.3 million | $134.4 million |
| Net income | $22.0 million | $16.4 million | $47.4 million | $34.1 million |
| Diluted EPS | $1.93 | $1.39 | $4.14 | $2.84 |
| Operating cash flow | Not separately provided | Not separately provided | $77.8 million | $59.9 million |
- Reported combined ratio on net premiums earned was 56.9% in Q2 and 53.5% for the first six months, compared with 63.7% and 61.8%, respectively, in 2014.
- Combined ratio on gross premiums earned was 40.4% in Q2 and 39.0% for the first six months, compared with 43.7% and 43.1% in 2014.
- Q2 net margin was approximately 27.9%; six-month net margin was approximately 29.4%, based on reported total revenue and net income.
- Net investment income was $1.8 million in Q2 and $3.2 million for the first six months.
- Other-than-temporary impairment losses were $0.3 million in Q2 and $2.0 million for the first six months; none were recorded in 2014.
Balance sheet, debt and liquidity
- At June 30, 2015, total assets were $701.7 million, investments were $275.7 million, cash and cash equivalents were $274.7 million, and stockholders’ equity was $225.7 million.
- Long-term debt was $130.9 million, consisting of $40.3 million of 8% senior notes due 2020 and $90.7 million carrying value of 3.875% convertible senior notes due 2019.
- Cash decreased by $39.7 million during the first six months to $274.7 million. Operating cash flow of $77.8 million was more than offset by $111.0 million of investing outflows and $6.5 million of financing outflows.
- Investing outflows included $101.8 million of purchases of available-for-sale securities, $20.6 million of limited partnership investments and $3.3 million funded under the real estate ADC arrangement.
- Available-for-sale securities had a fair value of $225.8 million at June 30, 2015, up from $142.6 million at December 31, 2014.
Material changes versus the prior comparable period
- Q2 total revenue increased approximately 19%, while six-month revenue increased approximately 20%.
- Q2 net income increased approximately 34%; six-month net income increased approximately 39%.
- Gross premiums earned increased approximately 18% in Q2 and 17% for the first six months, primarily from Citizens policy assumptions.
- Net premiums earned increased approximately 22% in Q2 and 23% for the first six months.
- Loss and expense ratios improved, although losses and loss adjustment expenses increased to $20.6 million in Q2 and $39.6 million for the first six months because of the larger policy base.
- Stock-based compensation declined, contributing to lower other operating expenses, while salaries and wages increased with employee headcount.
- Limited partnership investments increased to $22.7 million from $2.6 million at year-end 2014, with $22.2 million of unfunded commitments.
Guidance, outlook, risks and unusual items
- Management expected net ceded premiums of approximately $40 million to $42 million in each of the remaining two quarters of 2015 as the full 2015-2016 reinsurance program affected results.
- The Florida insurance business is seasonal, with hurricane and tropical-storm exposure concentrated from June 1 through November 30.
- Loss reserves increased to $54.3 million at June 30, 2015 and included $26.4 million of incurred-but-not-reported reserves. The company recorded unfavorable prior-period development of $0.3 million in Q2 and $0.6 million for the first six months, partly due to late-reported claims.
- Reinsurance contracts with retrospective provisions generated accrued benefits of $40.5 million and deferred ceded premiums of $6.7 million. These amounts could negatively affect earnings if catastrophe losses exceed applicable coverage limits.
- Key commitments included $43.9 million of future multi-year reinsurance premiums, $22.2 million of unfunded limited partnership commitments and $4.1 million of unused ADC financing commitments.
- The company declared a quarterly dividend of $0.30 per common share payable September 18, 2015. HCPCI paid a $16.7 million dividend to HCI during the second quarter.
- Management stated that liquidity was sufficient for claims, expenses and commitments, but insurance-subsidiary dividends are subject to Florida regulatory restrictions.
- Material risks include hurricanes and other catastrophes, reserve-estimate uncertainty, reinsurer insolvency or uncollectibility, changes in reinsurance pricing and availability, Florida rate regulation, competition and dependence on future policy assumptions from Citizens.
- The company disclosed related-party reinsurance involving Oxbridge Reinsurance Limited, whose shareholders included the chief executive officer, family members and certain directors.
- The Florida premium-tax contingency remained accrued at approximately $0.1 million; management reported an agreement in principle with the Florida Department of Revenue.
Important facts for investors to verify
- Whether the improved combined ratios persist after the full cost of the 2015-2016 catastrophe reinsurance program is reflected.
- The adequacy and subsequent development of the $54.3 million loss reserve, including the $26.4 million IBNR component.
- Exposure to Florida hurricanes, policy concentration and the effectiveness and collectability of reinsurance coverage.
- The sustainability of premium growth given the company’s reliance on Citizens policy assumptions and regulatory approval of premium rates.
- Liquidity after funding reinsurance premiums, limited partnership commitments, real estate projects, debt service and dividends.
- The performance and liquidity restrictions of the $22.7 million limited partnership portfolio and related $22.2 million unfunded commitments.
- The terms and potential effects of the convertible senior notes, including dilution at the stated conversion price of approximately $62.43 per share.