HCI Group, Inc. — FY2016 Form 10-K Summary
Business Context and Reporting Period
HCI Group is a Florida-based insurance holding company whose principal business is property and casualty insurance through Homeowners Choice Property & Casualty Insurance Company. It also operates reinsurance, real estate, marina and restaurant, and information technology businesses. The filing covers the fiscal year ended December 31, 2016; fourth-quarter figures are provided as unaudited supplemental information.
Insurance operations represented 95.5% of consolidated revenue and 87.9% of total assets in 2016. The company had approximately 150,000 policies in force and $375 million of premiums in force at year-end. TypTap Insurance Company launched Florida standalone flood insurance operations during 2016.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Gross premiums earned | $378.7 million | $423.1 million | -10.5% |
| Net premiums earned | $243.6 million | $282.5 million | -13.8% |
| Total revenue | $264.4 million | $286.0 million | -7.5% |
| Income before taxes | $46.9 million | $106.2 million | -55.9% |
| Net income | $29.0 million | $65.9 million | -55.9% |
| Diluted EPS | $2.92 | $5.90 | -50.5% |
| Net cash from operations | $88.0 million | $45.3 million | +94.3% |
| Cash and equivalents | $280.5 million | $267.7 million | +4.8% |
| Total investments | $298.7 million | $232.9 million | +28.3% |
| Total assets | $670.1 million | $637.0 million | +5.2% |
| Stockholders’ equity | $243.7 million | $237.7 million | +2.5% |
Net income margin declined to approximately 11.0% from 23.0% in 2015. The effective tax rate was 38.1%, compared with 38.0% in 2015.
Losses and loss adjustment expenses increased to $124.7 million from $87.2 million. The loss ratio rose to 51.2% from 30.9%, the expense ratio to 38.1% from 32.7%, and the combined ratio to 89.3% from 63.6%. The combined ratio measured against gross premiums earned was 57.5%, compared with 42.5% in 2015.
Fourth-quarter 2016 total revenue was $72.4 million and net income was $4.6 million, or $0.47 diluted EPS, compared with fourth-quarter 2015 revenue of $63.4 million and net income of $11.1 million, or $1.05 diluted EPS.
Liquidity, Debt and Capital Allocation
- Operating cash flow was $88.0 million. Investing activities used $49.0 million and financing activities used $26.2 million, resulting in a $12.8 million increase in cash.
- Long-term debt was $138.9 million at year-end, consisting principally of $40.3 million of 8% senior notes due 2020, $90.0 million of convertible notes due 2019, and two promissory notes totaling approximately $17.7 million.
- The company had a $9.5 million outstanding balance on a revolving credit facility and total principal debt of $148.0 million before discounts and issuance costs.
- HCI repurchased $20.0 million of common stock during 2016 and authorized another $20.0 million repurchase plan for 2017. It paid $11.7 million of common dividends and declared a quarterly dividend of $0.35 per share in January 2017.
- Insurance subsidiaries remained compliant with applicable statutory capital, surplus, and risk-based capital requirements. Approximately $149.0 million of net assets at year-end were restricted within insurance subsidiaries.
Material Changes Versus the Prior Period
- Premium volume declined because of policy attrition and a rate decrease implemented for new and renewal homeowners policies in January 2016. Policies in force declined from approximately 160,000 to 150,000.
- Hurricane Matthew contributed approximately $21.0 million of 2016 losses, including approximately $9.2 million of net unpaid losses and loss adjustment expenses at year-end. Weather events and reserve strengthening related to assignment-of-benefits trends and litigation also increased losses.
- The company’s 2016/17 reinsurance program provided modeled coverage for a 1-in-165-year probable maximum loss, versus 1-in-260-year coverage for 2015/16. Management expected the new program to cost approximately $48.0 million less than the prior program.
- Net investment income increased to $9.1 million from $4.0 million, primarily because limited partnership investments generated income in 2016 versus losses in 2015. Net realized investment results improved to a $2.6 million gain from a $0.6 million loss.
- HCI acquired the Sorrento Hills Village retail property and recognized a $2.1 million bargain purchase gain. It also acquired full ownership of the Melbourne retail property and recognized a $4.0 million gain on remeasurement of its previously held interest, followed by a $0.4 million impairment related to a tenant closure.
- The company repurchased $11.3 million of convertible senior notes for cash and recognized a $0.2 million gain on extinguishment.
- HCI voluntarily surrendered its Alabama insurance license and dissolved the inactive subsidiary. It also launched TypTap and expanded its flood-insurance strategy.
Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management states that future liquidity is expected to come primarily from operating cash flow, premiums, and investment income, while retaining flexibility to raise additional debt or equity capital.
- Results remain highly exposed to Florida hurricanes, tropical storms, and other catastrophes. Reinsurance may be unavailable, more expensive, or insufficient to cover severe or multiple events.
- Loss reserves are inherently uncertain. The company recorded $20.5 million of unfavorable prior-year development in 2016, compared with $8.9 million in 2015. Greater claim severity, litigation, or assignment-of-benefits activity could require additional reserve strengthening.
- Growth has historically depended substantially on policy assumptions from Citizens, but opportunities for large qualifying take-out transactions have diminished.
- Insurance rates, policy forms, dividends, capital, reinsurance, and market entry are subject to extensive state regulation, particularly in Florida. Regulatory restrictions could limit pricing, distributions, or expansion.
- TypTap’s private flood business is relatively new, with limited historical loss data and untested underwriting algorithms. Its future profitability and expansion are uncertain.
- The company faces investment, interest-rate, credit, real estate tenant, environmental, information technology, cybersecurity, and key-person risks.
- At year-end, HCI had $13.6 million of unfunded limited-partnership commitments, $19.4 million of future minimum premiums under multi-year reinsurance contracts, and total contractual obligations of approximately $237.6 million, including debt principal and interest.
- Retrospective reinsurance benefits declined materially during 2016. HCI received $43.5 million in cash benefits during the year and retained $5.8 million of accrued benefits plus $2.2 million of deferred ceded premiums that could be charged to earnings if specified catastrophe losses occur.
Important Facts for Investors to Verify
- Whether claim severity, litigation, and assignment-of-benefits trends lead to further adverse reserve development after 2016.
- The adequacy, pricing, and modeled protection of the 2017 catastrophe reinsurance program, including reinsurer collateral and credit quality.
- Premium retention, policy count, rate adequacy, and the availability of future Citizens take-out opportunities.
- TypTap’s policy growth, loss experience, regulatory approvals, and capital needs in private flood insurance.
- HCI’s ability to service 2019 and 2020 debt maturities while maintaining dividends, repurchases, and insurance-company statutory capital.
- Occupancy, tenant concentration, and impairment risk in the newly acquired retail properties.
- Related-party reinsurance arrangements with Oxbridge Reinsurance Limited and associated governance disclosures.
- The company’s audited financial statements and internal-control report, both of which received unqualified opinions for 2016.