HCI Group, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
HCI Group is a Florida-based property and casualty insurance, reinsurance, real estate and information technology company. Insurance operations generated approximately 95.3% of segment revenue for the quarter and remain concentrated in Florida. The filing covers the three and nine months ended September 30, 2018; financial statements are unaudited and amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $61,743 | $47,490 | $178,295 | $182,783 |
| Net premiums earned | $54,177 | $43,964 | $160,664 | $168,847 |
| Net investment income | $5,054 | $2,878 | $11,671 | $8,522 |
| Income before taxes | $11,923 | $(66,018) | $38,247 | $(32,571) |
| Net income | $8,997 | $(40,546) | $26,191 | $(18,984) |
| Diluted EPS | $1.00 | $(4.44) | $3.03 | $(2.05) |
| Combined ratio on net premiums | 92.0% | 258.2% | 87.2% | 127.5% |
| Combined ratio on gross premiums | 57.8% | 128.0% | 54.3% | 79.7% |
At September 30, 2018, total assets were $816,337, stockholders’ equity was $192,135 and long-term debt was $248,544. Cash and cash equivalents were $249,083, restricted cash was $700, and total investments were $372,504, including $87,778 of short-term investments.
For the first nine months, operating cash flow was $29,449, investing cash flow was $(12,432), financing cash flow was $(23,731), and ending cash, cash equivalents and restricted cash were $249,783. The company paid $8,371 of cash dividends and repurchased $20,808 of common stock during the period.
Material changes versus the prior comparable period
- Q3 net income improved by $49,543, primarily because losses and loss adjustment expenses declined $63,462 from the prior-year quarter, which included approximately $54,000 of Hurricane Irma losses.
- Nine-month net income improved by $45,175. Losses and loss adjustment expenses declined $75,198, while net premiums earned decreased $8,183.
- Gross premiums earned declined 2.8% in Q3 and 4.6% for the nine-month period, primarily reflecting fewer policies in force. Policies in force were approximately 128,000 at September 30, 2018 versus 141,000 a year earlier.
- Net premiums earned increased 23.2% in Q3 because premiums ceded declined $12,719, largely reversing the prior-year unfavorable retrospective reinsurance adjustment related to Hurricane Irma. For nine months, net premiums earned declined 4.9%.
- Net investment income increased 75.6% in Q3 and 36.9% for nine months. Net realized investment gains were $1,626 in Q3 and $6,520 year to date, compared with a prior-year Q3 loss of $226 and prior-year nine-month gains of $2,276.
- Net unrealized investment losses were $390 in Q3 and $4,547 for nine months, primarily reflecting the 2018 adoption of accounting guidance requiring equity-security fair-value changes through earnings.
- Stockholders’ equity declined from $193,975 at December 31, 2017 to $192,135 at September 30, 2018, after dividends, share repurchases and a $2,483 decrease in accumulated other comprehensive income.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects liquidity needs to be funded primarily from insurance premiums, investment income and operating cash flow, with future uses including claims, reinsurance premiums, interest, dividends, operating expenses and real estate acquisitions.
- The company expects to repay the $89,990 principal amount of its 3.875% Convertible Senior Notes at maturity on March 15, 2019 unless converted. The filing reports $91,302 due within 12 months following September 30, 2018, including debt obligations.
- Hurricane Michael made landfall on October 10, 2018. The initial gross loss estimate was $6,000 to $18,000; case incurred losses were approximately $6,500 as of October 31. Losses above a $16,000 retention are recoverable from reinsurers, but ultimate losses remain uncertain.
- Loss reserves were $138,414 at September 30, 2018, including $101,213 of estimated incurred-but-not-reported losses. Management identified unfavorable prior-year development related primarily to assignment-of-benefits claims and litigation, plus approximately $980 of adverse Hurricane Matthew development.
- Reinsurance recoverables were $73,095, with approximately 30.7% of recoverables for paid losses concentrated in two reinsurers. The company remains liable if reinsurers fail to perform.
- Unfunded limited-partnership commitments totaled $18,663, and minimum premiums under one multi-year reinsurance contract totaled $6,071.
- Insurance operations are exposed to Florida catastrophe frequency and severity, reserve uncertainty, reinsurance pricing and collectability, insurance regulation, premium-rate restrictions, litigation and assignment-of-benefits trends.
- The company listed a Treasure Island waterfront property for sale for an asking price of $40,000; its carrying value at September 30, 2018 was approximately $9,700.
- The board declared a quarterly dividend of $0.375 per share payable December 21, 2018. Future dividends may be constrained by statutory restrictions applicable to insurance subsidiaries.
Most important facts for investors to verify
- Whether the $89,990 convertible-note maturity in March 2019 was repaid, refinanced or converted, and the resulting effect on liquidity and share dilution.
- Subsequent development of Hurricane Michael losses and the amount ultimately recovered from reinsurers.
- Claims severity, assignment-of-benefits litigation and adverse reserve development, especially for 2017 and prior loss years.
- Policy counts, premium rates and retention trends as Florida competition limits policy-assumption opportunities.
- Reinsurer credit quality and concentration, including collectability of the $50,895 unpaid-loss reinsurance recoverable balance.
- Funding requirements for the $18,663 of limited-partnership commitments and the sustainability of dividends and share repurchases.