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, reinsurance, real estate, and information technology businesses. Its reportable segments are HCPCI Insurance Operations, TypTap Group, Real Estate Operations, and Corporate and Other. This filing covers the three and nine months ended September 30, 2021; financial statements are unaudited and presented in thousands except per-share amounts.
- TypTap Group was established as a separate reporting segment in the first quarter of 2021.
- In February 2021, TypTap received a $100.0 million investment from an affiliate of Centerbridge Partners in exchange for preferred stock; HCI issued warrants to purchase 750,000 HCI shares.
- Beginning in 2021, HCI assumed United Property & Casualty business in Connecticut, New Jersey, Massachusetts, and Rhode Island under quota-share arrangements.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Gross premiums earned | $149.8 million | $106.7 million | $420.2 million | $306.9 million |
| Net premiums earned | $94.2 million | $62.5 million | $275.1 million | $197.6 million |
| Total revenue | $99.2 million | $104.0 million | $295.6 million | $240.1 million |
| Net income | $(4.9) million | $15.4 million | $5.8 million | $24.9 million |
| Net income after noncontrolling interests | $(6.2) million | $15.4 million | $1.8 million | $24.9 million |
| Diluted EPS | $(0.72) | $1.70 | $0.22 | $3.03 |
| Operating cash flow | Not separately provided | Not separately provided | $48.7 million | $77.5 million |
| Combined ratio on net premiums earned | 112.2% | 132.1% | 104.3% | 104.3% |
| Combined ratio on gross premiums earned | 70.6% | 77.3% | 68.3% | 67.2% |
Q3 2021 net loss attributable to HCI common stockholders was $6.2 million, compared with income of $15.4 million in the prior-year quarter. Nine-month net income attributable to HCI common stockholders was $1.8 million, compared with $24.9 million in the prior-year period. Approximate net margins were negative 6.3% in Q3 2021 and 0.6% for the first nine months of 2021, based on total revenue and income after noncontrolling interests.
- Q3 loss and loss adjustment expenses were $62.7 million, up from $51.7 million; nine-month expenses were $164.3 million, up from $119.7 million.
- Policy acquisition and other underwriting expenses increased to $23.3 million in Q3 and $69.6 million for nine months, primarily reflecting premium growth and United-related business.
- Net premiums written increased to $118.7 million in Q3 and $340.0 million for nine months, compared with $72.2 million and $255.5 million, respectively.
- At September 30, 2021, cash and cash equivalents were $569.1 million and total cash, including restricted cash, was $571.5 million, compared with $433.7 million at December 31, 2020.
- Total assets were $1.076 billion, compared with $941.3 million at year-end 2020. Total equity was $292.5 million, compared with $201.1 million.
- Long-term debt was $78.1 million, down from $156.5 million at December 31, 2020. The revolving credit facility was fully repaid, with no borrowings outstanding and $65.0 million of stated borrowing capacity.
Material changes versus the prior comparable period
- Premium growth was driven by TypTap expansion and the assumed United policies. TypTap gross premiums earned increased to $51.6 million in Q3 from $19.9 million and to $119.4 million for nine months from $54.8 million.
- Q3 2020 included a $37.0 million gain on involuntary conversion, which did not recur in 2021 and was the principal reason total revenue and earnings comparisons were unfavorable despite premium growth.
- Q3 2021 included approximately $1.3 million of debt conversion expense. During the quarter, holders converted approximately $82.5 million of convertible notes into HCI common shares and received $1.4 million of cash consideration.
- Losses included increased TypTap and United-related claims, hurricanes Henri and Ida, and additional development on Hurricane Sally and Tropical Storm Eta. Prior-period loss development was $8.8 million in Q3 and $17.3 million for nine months, primarily related to Hurricane Sally and Tropical Storm Eta litigation.
- The company early adopted ASU 2020-06 on January 1, 2021, increasing long-term debt by $4.0 million and reducing beginning retained income by $3.0 million. The change also reduced reported interest expense by eliminating amortization of the convertible-debt discount.
- Common shares outstanding increased materially as a result of convertible-note conversions and other issuances: 9.6 million shares were outstanding at September 30, 2021 versus 7.8 million at December 31, 2020.
Outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or premium guidance. Management expects future liquidity needs to be funded primarily through operating cash flow, while noting that additional debt or equity financing may be considered to support growth and investment opportunities.
- Insurance results are exposed to hurricanes, tropical storms, winter storms, claims severity and frequency, litigation, rate restrictions, reinsurance pricing and availability, reinsurer credit risk, reserve uncertainty, and COVID-19-related effects.
- Loss and loss adjustment expense reserves totaled $203.2 million at September 30, 2021, including $151.7 million of estimated incurred-but-not-reported losses. Management considers the reserves adequate but acknowledges significant variability.
- Reinsurance recoverables and receivables totaled approximately $49.1 million; approximately 66.4% of gross reinsurance recoverables were concentrated with three reinsurers, including the Florida Hurricane Catastrophe Fund.
- The company had $22.3 million of minimum future premiums payable under two multi-year reinsurance contracts and $14.0 million of unfunded limited-partnership commitments.
- HCI guarantees payment obligations relating to TypTap’s Series A preferred stock. The preferred stock had a September 30 carrying value of $87.7 million and is redeemable by holders beginning in 2025 under specified conditions.
- Subsequent events included a grant of options to purchase 6.45 million TypTap shares, acceleration of $7.1 million of restricted-stock compensation expense, further convertible-note conversions, and a declared $0.40 quarterly dividend.
- The company states that pending legal proceedings are routine and are not expected to have a material adverse effect. Disclosure controls and procedures were concluded to be effective.
Important facts for investors to verify
- Whether premium growth, particularly from TypTap and United-assumed business, can translate into sustainable underwriting profitability after acquisition costs, reinsurance costs, and claim development.
- The adequacy of reserves for Hurricane Sally, Tropical Storm Eta, Henri, Ida, litigation, and other catastrophe-related claims.
- The financial strength, collateralization, and concentration of HCI’s reinsurers and the collectability of reinsurance recoverables.
- The dilution and future obligations associated with convertible-note conversions, Centerbridge preferred stock, HCI warrants, and TypTap equity awards.
- The timing and economics of the United policy renewal-rights transaction, which had been postponed and whose related intangible asset had not begun amortization.
- Restrictions on dividends from HCI’s regulated insurance subsidiaries and the effect of future FIGA assessments and regulatory capital requirements.