HCI Group, Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
HCI Group, Inc. filed an annual report for the fiscal year ended December 31, 2020. The company primarily operates through its Florida-domiciled property and casualty insurers, Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. It also conducts reinsurance, real estate and information technology operations. Florida remains the primary insurance market, although the company is expanding geographically.
The filing is an annual report rather than a standalone fourth-quarter filing; fourth-quarter information is included in the full-year results.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Gross premiums earned | $415.9 million | $342.1 million | Up 21.6% |
| Net premiums earned | $262.5 million | $216.3 million | Up 21.3% |
| Total revenue | $310.4 million | $242.5 million | Up 28.0% |
| Income before taxes | $36.9 million | $36.1 million | Up 2.3% |
| Net income | $27.6 million | $26.6 million | Up 3.8% |
| Diluted EPS | $3.49 | $3.31 | Up 5.4% |
| Net cash from operations | $77.3 million | $54.0 million | Up 43.1% |
| Cash and cash equivalents | $431.3 million | $229.2 million | Up 88.2% |
| Total investments | $225.7 million | $341.5 million | Down 33.8% |
| Total assets | $941.3 million | $802.6 million | Up 17.3% |
| Stockholders’ equity | $201.1 million | $185.5 million | Up 8.4% |
| Long-term debt | $156.5 million | $163.7 million | Down 4.4% |
Net income margin was approximately 8.9% of total revenue in 2020 versus 11.0% in 2019. The decline reflects higher catastrophe-related losses and lower investment income, partly offset by premium growth and a $37.0 million gain on involuntary conversion related to the eminent-domain sale of the former headquarters property.
The company declared dividends of $1.60 per share in 2020. It repurchased approximately 129,000 shares for $5.2 million under its repurchase plan and made total cash dividend payments of approximately $12.4 million.
Material Changes Versus the Prior Comparable Period
- TypTap gross written premium increased to approximately $104.9 million from $60.3 million, and policies in force increased to approximately 154,000 from 131,000.
- HCPCI accepted approximately 40,000 replacement policies from Anchor, contributing approximately $27.8 million of gross premiums earned.
- Net premiums written increased to $350.7 million from $239.2 million, while premiums ceded increased to $153.5 million from $125.8 million.
- Losses and loss adjustment expenses increased to $160.0 million from $107.5 million. The increase included $20.3 million of net Hurricane Sally losses, $10.0 million related to Tropical Storm Eta and $14.9 million related to Anchor policies.
- The loss ratio increased to 61.0% from 49.7%, and the combined ratio increased to 104.2% from 95.4%, indicating underwriting losses on a net-premium-earned basis.
- The expense ratio improved to 43.2% from 45.7%, but this was more than offset by higher losses and reinsurance costs.
- Net investment income declined to $4.6 million from $13.6 million, primarily because of lower income from limited partnerships, fixed-maturity securities and cash.
- The company sold its former headquarters to the Florida Department of Transportation through eminent domain and recognized a $37.0 million gain. It purchased a replacement Tampa office building for approximately $4.0 million.
- Investing activities provided $143.2 million, largely from securities sales, maturities and the headquarters-property proceeds. Financing activities used $16.7 million, primarily for debt repayment, dividends, share repurchases and convertible-note repurchases.
Debt, Liquidity and Capital
At December 31, 2020, the company had $23.8 million outstanding under a secured revolving credit facility with $65.0 million of borrowing capacity, plus $156.5 million of long-term debt. The revolving facility was extended in January 2021 through December 31, 2023. The company repaid the $23.8 million revolving balance on March 8, 2021.
The company reported sufficient liquidity to pay claims, operating expenses, interest and dividends. However, insurance-subsidiary assets are subject to regulatory restrictions. As of December 2020, approximately $139.7 million of consolidated retained earnings was available for dividends without prior insurance-regulatory approval, subject to applicable requirements.
Insurance subsidiaries remained compliant with minimum capital, surplus and risk-based-capital requirements. The company had $10.3 million of unfunded limited-partnership commitments at year-end.
Guidance, Outlook, Commentary and Risks
- No quantitative earnings or revenue guidance was provided.
- Management expects future liquidity needs to be funded primarily by operating cash flow, investment income and available capital, while retaining the ability to raise debt or equity for growth and investment opportunities.
- TypTap received approvals in ten states after beginning applications to expand into 23 states outside Florida.
- In January 2021, HCI entered into a quota-share arrangement with United covering personal-lines policies in Connecticut, New Jersey, Massachusetts and Rhode Island. The assumed business represented approximately $125 million of annual premiums, and HCI acquired renewal rights beginning June 1, 2021 or later.
- In February 2021, TypTap raised $100 million through preferred stock issued to a fund associated with Centerbridge Partners. The transaction included conversion, redemption and liquidation-preference rights and warrants for 750,000 HCI shares at an exercise price of $54.40.
- COVID-19 caused temporary office closures, investment-market volatility, potential premium-collection and rent-collection pressure, and higher reinsurance costs. Management reported no direct material COVID-19 claims impact at the reporting date, but the long-term effects remained uncertain.
- Key risks include Florida and Northeast catastrophe concentration, hurricanes and severe storms, adverse loss-reserve development, reinsurance availability and collectability, rising litigation and claim severity, regulatory restrictions, competition, interest-rate and investment-market volatility, cybersecurity, climate-related weather changes and dependence on key personnel.
- The company’s retrospective reinsurance arrangements produced $15.1 million of ceded-premium reductions in 2020. A $10.9 million benefit remained recorded at year-end and could be charged to earnings if specified catastrophic losses occur.
- The auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters included loss and loss-adjustment reserves and valuation of limited-partnership investments.
Investor Verification Checklist
- Verify the sustainability of premium growth from TypTap, Anchor replacement policies and the United quota-share and renewal-rights arrangements.
- Assess whether the 104.2% net combined ratio improves as catastrophe losses normalize and whether reinsurance pricing remains economically viable.
- Review reserve adequacy, including the $212.2 million gross loss and loss-adjustment reserve and the sensitivity of equity to changes in claim severity.
- Evaluate catastrophe exposure, reinsurance limits, reinsurer credit quality and the potential earnings impact of the $10.9 million retrospective-reinsurance benefit.
- Analyze liquidity after the March 2021 repayment of the revolving facility and the timing of potential repurchase or conversion of the 4.25% convertible senior notes.
- Consider dilution and priority risks associated with the TypTap preferred financing and the 750,000 HCI warrants.
- Confirm statutory capital and surplus, dividend capacity and regulatory restrictions at HCPCI and TypTap.
- Separate recurring operating earnings from the $37.0 million one-time involuntary-conversion gain and other investment-market effects.