HCI Group, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021; filed August 6, 2021. Dollar amounts are in thousands unless otherwise stated. HCI is a Florida-based property and casualty insurance and InsurTech company operating through HCPCI, TypTap Group, real estate operations, and corporate activities.
Business Context
- HCI reorganized in the first quarter of 2021 and established TypTap Group as a separate reporting segment with minority investment from Centerbridge.
- TypTap Group includes TypTap Insurance Company, technology operations, and related management companies. TypTap policies in force increased to 44,585 at June 30, 2021 from 6,721 in January 2018.
- Beginning in 2021, HCI assumed United policy exposure in Connecticut, New Jersey, Massachusetts, and Rhode Island. A June 2021 quota-share agreement provides 100% reinsurance of United policies through May 31, 2022, split equally between HCPCI and TypTap.
Financial Performance and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $101,504 | $80,717 | $196,378 | $136,097 |
| Net premiums earned | $93,004 | $73,449 | $180,847 | $135,095 |
| Net investment income | $2,635 | $1,604 | $7,229 | $1,412 |
| Income before taxes | $5,097 | $11,823 | $15,199 | $12,480 |
| Net income | $3,830 | $8,936 | $10,675 | $9,483 |
| Net income after noncontrolling interests | $1,917 | $8,936 | $8,065 | $9,483 |
| Diluted EPS | $0.24 | $1.08 | $0.98 | $1.23 |
- Net premiums earned increased 26.6% in the quarter and 33.9% year to date, driven by TypTap growth and assumed United business.
- Gross premiums earned increased 29.4% in the quarter and 35.1% year to date. Net premiums written increased 0.7% in the quarter and 20.7% year to date.
- Losses and loss adjustment expenses increased 40.3% in the quarter and 49.7% year to date. Prior-period reserve development was unfavorable by $4,607 in the quarter and $8,438 year to date, primarily related to increased litigation in the 2020 loss year.
- The net-premiums-earned loss ratio rose to 60.1% from 54.2% in Q2 and to 56.2% from 50.3% year to date. The expense ratio increased to 43.5% from 39.6% in Q2 and to 44.0% from 41.2% year to date.
- The combined ratio on net premiums earned increased to 103.7% from 93.8% in Q2 and to 100.2% from 91.5% year to date. On gross premiums earned, the combined ratio was 69.1% versus 63.9% in Q2 and 67.0% versus 61.8% year to date.
- Q2 net income after noncontrolling interests declined primarily because losses, policy acquisition costs, and other operating expenses grew faster than premiums. Six-month net income increased modestly, aided by investment results.
Cash Flow, Liquidity, Debt, and Capital
- Cash and cash equivalents were $626,286 at June 30, 2021, compared with $431,341 at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $628,686.
- Six-month operating cash flow was $95,647, compared with $109,988 in the prior-year period. Investing cash flow was $37,805, and financing cash flow was $61,538.
- Cash flow from financing included $100,000 of Centerbridge proceeds for TypTap, net of $6,262 of issuance costs, partly offset by repayment of the $23,750 revolving credit facility, dividends, and share repurchases.
- The revolving facility was fully repaid in March 2021; $65,000 of borrowing capacity remained available and HCI was in compliance with covenants.
- Long-term debt was $160,569, including $139,200 principal of 4.25% convertible senior notes and $22,417 of promissory notes and finance lease obligations. The notes were convertible from July 1 through September 30, 2021 because the share-price conversion condition was met.
- Total assets were $1,080,210 and total equity was $218,049 at June 30, 2021. Redeemable noncontrolling interest was $88,071.
- The board declared a quarterly dividend of $0.40 per common share payable September 17, 2021. Insurance-subsidiary dividends to HCI totaled $27,400 during the first six months.
Material Changes and Unusual Items
- Centerbridge invested $100,000 in TypTap Group preferred stock. HCI issued warrants to purchase 750,000 HCI shares at $54.40 per share; the warrants were valued at $9,217 and expire four years after issuance.
- HCI issued 100,000 common shares to United for policy renewal rights and a non-compete agreement. The related intangible assets totaled $7,829, including estimated contingent consideration of $2,419. Amortization of the policy renewal rights had not begun because policy replacement was postponed.
- HCI early adopted ASU 2020-06, increasing long-term debt by $3,999 and reducing beginning retained income by $3,018. The change also reduced reported interest expense.
- Six-month investment results benefited from a $2,790 gain from a legal settlement with The Kroger Co. and improved limited partnership performance. Prior-year results were adversely affected by COVID-19-related investment losses.
- At June 30, 2021, losses and loss adjustment reserves totaled $203,785, including $154,219 of estimated incurred-but-not-reported losses. Approximately $23,500 of six-month incurred losses related to United-assumed policies.
Outlook, Risks, and Contingencies
- The filing provides no formal earnings or revenue guidance. Management expects liquidity needs to be funded primarily by insurance premiums, investment income, and operating cash flow, while additional debt or equity financing may be considered to support growth.
- Key risks include hurricanes and other catastrophes, reserve uncertainty, litigation and claim severity, reinsurance availability and pricing, reinsurer credit risk, insurance regulation, premium-rate restrictions, and COVID-19 effects.
- Two multi-year reinsurance contracts require estimated future premiums of $23,647. Unfunded limited-partnership commitments totaled $9,302.
- Retrospective reinsurance provisions generated $8,255 of premium benefits year to date; $455 remained accrued at June 30 and could be charged to earnings if qualifying catastrophic losses occur.
- Approximately 66.8% of gross reinsurance recoverables were concentrated with three reinsurers, including the Florida Hurricane Catastrophe Fund.
- Management stated that pending legal proceedings are ordinary-course matters and are not expected to materially affect financial position, results, or cash flows. Disclosure controls were assessed as effective.
Investor Verification Checklist
- Verify the sustainability of TypTap growth, the profitability of the United-assumed book, and the timing of the postponed policy replacement.
- Reconcile loss reserves, prior-period adverse development, litigation trends, and the impact of catastrophe activity on the combined ratio.
- Review the terms, conversion status, and potential dilution from the convertible notes, Centerbridge warrants, and TypTap preferred stock.
- Assess reinsurance limits, pricing, collateral, reinsurer concentrations, retrospective provisions, and the $23,647 of future contractual premiums.
- Confirm the effect of the $2,790 Kroger settlement and other investment gains on recurring earnings.
- Evaluate dividend capacity in light of insurance-subsidiary statutory capital and regulatory distribution restrictions.