HCI Group, Inc. quarterly report, Q1 FY2015

HCI Group, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2015; filed May 1, 2015. The unaudited results cover HCI Group and subsidiaries, whose principal business is Florida property and casualty insurance, with additional reinsurance, technology, and real estate operations. Property and casualty insurance generated 97.1% of total revenue.

Financial Performance and Position

Metric	Q1 2015	Q1 2014	Change
Gross premiums earned	$109.6 million	$93.9 million	+$15.7 million
Net premiums earned	$81.7 million	$66.4 million	+$15.3 million
Total revenue	$82.2 million	$68.1 million	+$14.1 million
Income before taxes	$41.0 million	$28.3 million	+$12.7 million
Net income	$25.4 million	$17.6 million	+$7.8 million
Diluted EPS	$2.21	$1.44	+$0.77
Operating cash flow	$59.0 million	$35.1 million	+$23.9 million

Net premiums written increased to $53.6 million from $51.4 million. Management attributed the premium growth primarily to Citizens Property Insurance assumptions completed in December 2014 and February 2015.
The loss ratio on net premiums earned improved to 23.3% from 28.0%; the expense ratio improved to 27.1% from 32.0%; and the combined ratio improved to 50.4% from 60.0%. On gross premiums earned, the combined ratio was 37.6% versus 42.4%.
Net investment income increased to $1.4 million from $1.1 million, primarily reflecting a larger available-for-sale investment portfolio.
Cash and cash equivalents were $271.4 million at March 31, 2015, down from $314.4 million at December 31, 2014. Total assets increased to $642.3 million from $602.2 million, mainly due to investment purchases and limited partnership investments.
Available-for-sale securities totaled $218.1 million at fair value, compared with $142.6 million at year-end 2014. The portfolio included $158.3 million of fixed-maturity securities and $59.8 million of equity securities.
Stockholders’ equity increased to $206.0 million from $182.6 million, while retained income increased to $183.8 million from $161.5 million.
Long-term debt was $130.2 million, consisting of $40.3 million of 8% senior notes due 2020 and $90.0 million carrying value of 3.875% convertible senior notes due 2019.

Material Changes Versus the Prior Comparable Period

Net income increased approximately 44%, and diluted EPS increased approximately 53%, driven principally by premium growth and improved underwriting ratios.
Gross premiums earned increased approximately 17%, while net premiums earned increased approximately 23%.
Losses and loss adjustment expenses increased modestly to $19.0 million from $18.6 million, reflecting a larger policy base, but declined as a percentage of earned premiums.
Other-than-temporary impairment losses of $1.7 million were recognized on four equity securities; there were no such losses in Q1 2014.
Net cash provided by operating activities increased to $59.0 million. Investing cash outflows increased substantially to $97.0 million, primarily due to purchases of available-for-sale securities, $19.5 million invested in limited partnerships, and $0.5 million funded under the real estate development arrangement.
The company repurchased 37,869 shares under its repurchase plan for $1.6 million, compared with 210,836 shares repurchased for $7.8 million in Q1 2014. The plan expired March 31, 2015.
The quarterly common dividend increased to $0.30 per share from $0.275 per share. A further $0.30 per share dividend was declared on April 20, 2015.

Liquidity, Outlook, Risks, and Unusual Items

Management expects future liquidity needs to be funded primarily through operating cash flow, including premiums and investment income. It stated that liquidity is considered sufficient for claims, operating expenses, and unforeseen events, but additional debt or equity financing may be considered.
Management expected to receive approximately $14.1 million in June 2015 under a retrospective reinsurance contract terminating May 31, 2015.
Retrospective reinsurance provisions produced $34.5 million of accrued benefits and $6.5 million of deferred ceded premiums at March 31, 2015. These amounts could be adversely affected if a catastrophic loss occurs or coverage limits are exceeded.
Loss reserves increased to $51.2 million from $48.9 million at year-end. The quarter included $0.2 million of unfavorable prior-period reserve development. IBNR reserves were $23.2 million.
Florida hurricane and catastrophe exposure is a significant risk. The insurance business is seasonal, with hurricanes and tropical storms generally occurring from June through November. Reinsurance treaties generally renew June 1 annually.
Material commitments included $77.4 million of minimum reinsurance premiums, $13.4 million of unfunded limited partnership commitments, and $6.9 million of unused commitments under the real estate acquisition, development, and construction arrangement. In April 2015, the company subscribed to an additional $10.0 million private equity fund investment.
A Florida premium-tax dispute involving approximately $1.9 million of proposed adjustments remained pending, although management reported an agreement in principle and had accrued approximately $0.1 million for the estimated net obligation.
The company recognized $1.7 million of investment impairment and $0.3 million of limited partnership investment losses during the quarter. The filing provides no formal earnings or premium guidance.
Principal market risks include interest-rate, credit, and equity-price risk. A hypothetical 100-basis-point increase in interest rates would reduce the estimated fair value of fixed-maturity securities by approximately $6.7 million, or 4.2%.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes were reported to previously disclosed risk factors.

Most Important Facts for Investors to Verify

Whether premium growth from Citizens assumptions is sustainable and how policy mix changes affect future loss frequency and severity.
The adequacy of the $51.2 million loss reserve, including the $23.2 million IBNR component and unfavorable prior-period development.
The terms, pricing, limits, and counterparty credit quality of the reinsurance program renewing June 1, including exposure to reinsurer insolvency and catastrophe losses.
The recoverability and timing of the $34.5 million retrospective reinsurance benefit and the potential earnings impact of a major catastrophe.
The liquidity impact of $77.4 million of contractual reinsurance premiums, $13.4 million of unfunded partnership commitments, the $6.9 million ADC commitment, and the additional $10.0 million private equity subscription.
The effect of investment-market movements on the $218.1 million available-for-sale portfolio and stockholders’ equity.
Restrictions on dividends from the regulated insurance subsidiary, which could affect the parent company’s ability to fund future dividends.