HCI Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
HCI Group is a Florida-based insurance, reinsurance, real estate, and information technology company. Insurance operations, principally Florida residential property and casualty insurance, generated approximately 95.6% of segment revenue in the second quarter and 95.2% for the first six months. This unaudited report covers the three and six months ended June 30, 2018, compared with the same periods in 2017.
Key Financial Metrics
| Metric | Three Months 2018 | Three Months 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Total revenue | $58.8 million | $67.6 million | $116.6 million | $135.3 million |
| Net premiums earned | $53.0 million | $61.8 million | $106.5 million | $124.9 million |
| Net income | $6.4 million | $9.5 million | $17.2 million | $21.6 million |
| Diluted EPS | $0.92 | $0.93 | $2.03 | $2.07 |
| Net margin | 10.9% | 14.1% | 14.8% | 15.9% |
| Combined ratio on net premiums | 89.3% | 86.1% | 84.7% | 81.6% |
| Combined ratio on gross premiums | 55.0% | 59.1% | 52.6% | 56.1% |
| Operating cash flow | Not separately reported for the quarter | $27.6 million | $31.5 million |
At June 30, 2018, total assets were $841.7 million, total liabilities were $650.7 million, and stockholders’ equity was $191.0 million. Cash and cash equivalents were $216.5 million, or $217.3 million including restricted cash. Total investments were $407.0 million, including $110.0 million of short-term investments. Long-term debt had a carrying value of $241.0 million and principal outstanding of $259.5 million. Debt obligations due within 12 months, including principal and interest, were reported at $102.2 million.
Six-month investing cash outflows were $46.8 million, primarily reflecting purchases of short-term, fixed-maturity, and equity securities and real estate. Financing cash outflows were $20.1 million, including $14.7 million of share repurchases and $4.4 million of dividends. Cash, cash equivalents, and restricted cash declined $39.4 million to $217.3 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter net premiums earned declined 14.4%, and six-month net premiums earned declined 14.7%, primarily due to policy attrition and higher ceded reinsurance premiums. Policies in force declined to approximately 132,000 from approximately 143,000 a year earlier.
- Net income declined 32.9% in the quarter and 20.2% for the six-month period. The quarterly decline reflected lower premium revenue, reduced investment gains, and a higher effective tax rate.
- Losses and loss adjustment expenses declined to $21.8 million from $27.7 million in the quarter and to $41.5 million from $53.2 million for six months, reflecting fewer non-catastrophe claims and less adverse claims activity than in 2017.
- The net-premium combined ratio worsened because premium volume fell faster than expenses. The gross-premium combined ratio improved, primarily due to lower losses.
- Premiums ceded increased to 38.4% of gross premiums earned in the quarter and 38.0% for six months, versus 31.3% in both prior-year periods. The change reflected Hurricane Irma-related retrospective provisions and the termination of a related-party reinsurance contract.
- Effective January 1, 2018, equity-security unrealized gains and losses began flowing through earnings under ASU 2016-01. The company recorded unrealized investment losses of $1.6 million in the quarter and $4.2 million for six months.
- The company repurchased 359,522 shares for $13.7 million during the first six months, reducing outstanding shares from 8.76 million at year-end 2017 to 8.52 million at June 30, 2018.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects liquidity needs to be met primarily through operating cash flow, including premiums and investment income, while noting potential future debt or equity financing for growth and investments. A quarterly dividend of $0.375 per share was declared on July 6, 2018.
- Florida catastrophe exposure is material, particularly during the June 1 through November 30 hurricane season. Hurricane Irma gross loss estimates increased from $267 million to $326 million, but the $59 million increase was entirely ceded and did not affect current-period earnings.
- Gross loss reserves were $172.4 million at June 30, 2018, including $135.2 million of estimated incurred-but-not-reported losses. Management considers reserves adequate, but acknowledges substantial uncertainty and potential future revisions.
- Reinsurance recoverables were $96.0 million, with approximately 29.1% concentrated in two reinsurers. The company remains liable if reinsurers fail to perform.
- HCI terminated its related-party Oxbridge reinsurance contract effective June 1, 2018, paying a $0.6 million settlement fee and derecognizing $0.6 million of accrued benefits.
- The company had $15.8 million of unfunded limited-partnership commitments and $6.6 million of minimum premiums payable under a multi-year reinsurance contract.
- Second-quarter income taxes included a $1.6 million deferred-tax-asset derecognition and a $1.7 million nondeductible expense related to restricted-stock dividends, contributing to a 44.4% quarterly effective tax rate.
- HCI acquired Clearwater commercial real estate for approximately $6.8 million in June 2018. In July, it entered into a $6.0 million, 18-year secured loan at a fixed 4.55% rate.
- Material market risks include interest-rate sensitivity in fixed-maturity securities, equity-price volatility, issuer credit risk, catastrophe losses, reserve development, reinsurance pricing and collectability, regulation, and premium-rate pressure.
Most Important Facts for Investors to Verify
- Whether policy attrition stabilizes and whether flood products from TypTap and HCPCI become meaningful growth contributors.
- The adequacy and subsequent development of Hurricane Irma and other loss reserves, particularly the $135.2 million incurred-but-not-reported component.
- Reinsurance recoverability, concentration with the two largest reinsurers, and the financial effect of retrospective provisions and the Oxbridge contract termination.
- The company’s ability to meet approximately $102.2 million of debt obligations due within 12 months while continuing dividends, repurchases, and real estate investment.
- The effect of equity-market and interest-rate movements on reported earnings, comprehensive income, and investment values.
- Whether the higher net-premium combined ratio reflects a temporary reinsurance effect or a sustained deterioration in underwriting economics.