HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI Group is a Florida-based InsurTech company operating through property and casualty insurance subsidiaries, TypTap Group, reinsurance operations, information technology activities, and real estate investments. The filing covers the three and nine months ended September 30, 2022, with comparative periods ended September 30, 2021. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $126.7 million | $99.2 million | $379.6 million | $295.6 million |
| Net premiums earned | $107.0 million | $94.2 million | $357.7 million | $275.1 million |
| Net investment income | $18.5 million | $2.5 million | $25.1 million | $9.7 million |
| Losses and LAE | $139.8 million | $62.7 million | $299.3 million | $164.3 million |
| Net loss after noncontrolling interests | $51.0 million | $6.2 million | $60.0 million | $1.8 million net income |
| Diluted EPS | $(5.66) | $(0.72) | $(6.26) | $0.22 |
| Combined ratio on net premiums earned | 177.9% | 112.2% | 126.0% | 104.3% |
| Combined ratio on gross premiums earned | 104.7% | 70.6% | 83.2% | 68.3% |
Q3 net loss margin was approximately negative 40.3% of revenue, compared with approximately negative 6.3% in the prior-year quarter. The nine-month net loss margin was approximately negative 15.8%, compared with approximately 0.6% net income margin in the prior-year period.
- Gross premiums earned increased 21.3% in Q3 and 28.9% for the nine-month period. TypTap gross premiums earned increased to $82.7 million in Q3 from $51.6 million and to $210.8 million for the nine-month period from $119.4 million.
- Premiums ceded increased to $74.7 million in Q3 from $55.6 million and to $184.1 million for the nine-month period from $145.1 million, reflecting higher reinsurance costs and the reversal of previously accrued retrospective reinsurance benefits.
- Cash and cash equivalents were $355.7 million at September 30, 2022, compared with $628.9 million at December 31, 2021. Cash, cash equivalents, and restricted cash totaled $358.6 million.
- Operating cash flow was negative $18.3 million for the first nine months of 2022, compared with positive $48.7 million in the prior-year period. Investing cash flow was negative $311.4 million, primarily because of purchases of fixed-maturity and equity securities. Financing cash flow was positive $57.0 million.
- Total assets increased to $2.145 billion from $1.177 billion at year-end 2021, largely reflecting reinsurance recoverables and increased investments. Stockholders’ equity declined to $174.2 million from $323.4 million.
- Losses and LAE reserves increased to $1.202 billion from $237.2 million at December 31, 2021. Reinsurance recoverable for unpaid losses was $938.4 million, net of an allowance for credit losses.
Material changes versus the prior comparable period
- Hurricane Ian drove a substantial deterioration in underwriting results. Estimated gross losses, including LAE, were $970.0 million, with an estimated net loss after anticipated reinsurance recoveries of approximately $65.0 million. HCPCI and TypTap gross loss estimates were $550.5 million and $419.5 million, respectively.
- Q3 losses and LAE increased $77.1 million year over year, while the nine-month increase was $135.0 million. Prior-period loss development was $13.3 million in Q3 and $24.3 million for the nine-month period, primarily related to increased litigation reserves.
- Investment income increased significantly, partly because of a $13.4 million gain on the involuntary conversion sale of land to the Florida Department of Transportation. This was a non-recurring item. Net unrealized investment losses were $8.2 million for the nine-month period, compared with $0.6 million in 2021.
- HCI issued $172.5 million of 4.75% convertible senior notes in May 2022 and received net proceeds of approximately $166.5 million. Long-term debt increased to $211.7 million from $45.5 million at year-end 2021.
- The Company repurchased $68.1 million of common stock outside the 2022 plan and $8.1 million under the plan during the first nine months. It also paid $11.7 million in common dividends and $5.5 million in dividends to redeemable noncontrolling interests.
- TypTap policies in force increased to 85,781 at September 30, 2022, from 6,721 in January 2018. The Company reported approximately 214,000 total policies in force excluding policies assumed from United.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings, premium, or loss-ratio guidance. Management expects future liquidity needs to be funded primarily through insurance premiums, investment income, and potentially additional debt or equity offerings. Management stated that liquidity was sufficient to pay claims, expenses, and commitments, but noted risks from reinsurer insolvency, inadequate premium rates, reserve deficiencies, catastrophic events, regulation, and reinsurance availability and pricing.
- Approximately 74.7% of the September 30, 2022 reinsurance recoverable balance was due from three reinsurers, including the Florida Hurricane Catastrophe Fund. The Company remains liable for claims if reinsurers do not perform.
- The Company had $14.8 million of accrued benefits under retrospective reinsurance provisions that could be charged to earnings if specified catastrophic loss conditions occur. Hurricane Ian reduced previously accrued benefits by $12.6 million.
- The Company had a $182.7 million minimum aggregate premium obligation under a multi-year reinsurance contract, an unfunded limited-partnership commitment of $6.3 million, and $91.4 million of redeemable noncontrolling interest.
- At September 30, 2022, the revolving credit facility had no borrowings, $65.0 million of available capacity, and the Company was in covenant compliance. A November 7, 2022 amendment subsequently reduced borrowing capacity to $50.0 million and set a maximum defined debt-to-capital ratio of 67.5%.
- Florida emergency rules temporarily restricted policy cancellations and non-renewals following Hurricane Ian. Florida insurance subsidiaries are also subject to statutory limits and regulatory approval requirements governing dividends to HCI.
- Management identified loss and LAE reserves, reinsurance recoverables, retrospective reinsurance provisions, deferred taxes, and acquired intangible assets as significant estimates. At September 30, 2022, approximately $1.110 billion of reserves represented estimated IBNR claims.
- The filing states that there were no material changes to previously disclosed risk factors and no pending legal proceedings expected to have a material adverse effect, although ordinary-course claims and litigation remain possible.
Important facts for investors to verify
- Whether Hurricane Ian gross loss estimates, the approximately $65 million net loss estimate, and the $938.4 million reinsurance recoverable balance develop favorably as claims are resolved.
- The collectability and concentration of reinsurance recoverables, including exposure to the Florida Hurricane Catastrophe Fund and other major reinsurers.
- Development of prior-period reserves and litigation-related claims, particularly given the $24.3 million nine-month prior-period adverse development.
- Whether TypTap’s premium growth can continue without further deterioration in loss ratios, reinsurance costs, or capital requirements.
- The Company’s ability to maintain liquidity and statutory surplus while funding claims, reinsurance premiums, debt service, dividends, and share repurchases.
- The terms and conversion or repurchase features of the $172.5 million 4.75% convertible senior notes and the amended revolving credit facility.
- The sustainability of investment income and the extent to which reported results benefited from the $13.4 million land-sale gain and other unusual items.