HCI Group, Inc. 2022 Form 10-K Summary
Business context and reporting period
HCI Group, Inc. is a Florida-based InsurTech company primarily engaged in residential property and casualty insurance through HCPCI and TypTap, with additional operations in reinsurance, information technology, insurance management and real estate. The filing covers the fiscal year ended December 31, 2022, and includes unaudited fourth-quarter results.
HCPCI remained the larger insurance segment, while TypTap continued to drive growth. At December 31, 2022, the Company had approximately 210,400 policies in force, excluding policies assumed from United Property & Casualty Insurance Company.
Financial performance and key metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Gross premiums earned | $724.7 million | $577.0 million |
| Net premiums earned | $463.6 million | $377.3 million |
| Total revenue | $499.6 million | $407.9 million |
| Losses and loss adjustment expenses | $371.5 million | $227.5 million |
| Net loss | $54.6 million | Net income of $7.2 million |
| Net loss after noncontrolling interests | $58.5 million | Net income of $1.9 million |
| Diluted earnings per share | $(6.24) | $0.21 |
| Net investment income | $32.4 million | $12.3 million |
| Net cash from operating activities | $(0.01) million | $96.5 million |
| Cash and cash equivalents | $234.9 million | $628.9 million |
| Total investments | $615.6 million | $196.7 million |
| Total assets | $1.803 billion | $1.177 billion |
| Total liabilities | $1.549 billion | $762.4 million |
| Total equity | $161.3 million | $324.5 million |
Revenue increased approximately 22.5%, primarily from TypTap growth and assumed or renewed United policies. However, losses and loss adjustment expenses increased approximately 63.3%, producing a net-premium loss ratio of 80.1% versus 60.3% and a combined ratio of 122.5% versus 105.1%. The combined ratio measured against gross premiums earned was 78.4% versus 68.7%.
Fourth-quarter 2022 net premiums earned were $105.9 million, total revenue was $119.9 million, net income was $2.7 million and diluted earnings per share were $0.18. The third quarter was the most significant quarterly loss period, with a net loss of $51.5 million, largely reflecting Hurricane Ian.
Material changes versus the prior comparable period
- TypTap gross premiums written increased to $348.2 million from $247.5 million, while HCPCI gross premiums written declined to $377.9 million from $426.9 million.
- TypTap Group revenue represented 29.9% of segment revenue before eliminations, up from 22.7%; HCPCI’s share declined to 66.1% from 74.6%.
- Hurricane Ian generated estimated gross losses and loss adjustment expenses of $847.5 million and approximately $65.3 million of retained losses after reinsurance, including $7.0 million of flood losses above available reinsurance coverage.
- Prior-year loss development increased 2022 loss expense by $40.6 million, primarily due to increased litigation.
- Premiums ceded increased to $261.1 million from $199.7 million, reflecting higher reinsurance costs, increased exposure and coverage, and the reversal of $12.6 million of previously accrued retrospective reinsurance benefits after Hurricane Ian.
- The Company issued $172.5 million of 4.75% convertible senior notes, repurchased $88.3 million of common stock and ended the year with $211.7 million of long-term debt, compared with $45.5 million in 2021.
- Cash declined by approximately $393.6 million, primarily because of $434.5 million of investing cash outflows, including substantial purchases of fixed-maturity securities.
- Net investment income increased substantially, but the Company recorded $1.2 million of net realized investment losses and $7.2 million of net unrealized investment losses, compared with gains in 2021.
Liquidity, debt and capital
The revolving credit facility had no balance outstanding at year-end, $50.0 million of available borrowing capacity and an expiration date of December 31, 2023. Long-term debt consisted primarily of the $172.5 million 4.75% convertible senior notes, $23.9 million of 4.25% convertible senior notes and several secured promissory notes. The Company was in compliance with its credit covenants.
Gross unpaid losses and loss adjustment expenses were $863.8 million, including $617.2 million of reinsurance recoverables; the net liability was $246.5 million. Total net amounts recoverable and receivable from reinsurers were $688.4 million, with approximately 65.6% of the reinsurance recoverable balance attributable to three reinsurers. The Company had $5.7 million of unfunded limited partnership commitments and $182.7 million of future minimum premiums under a multi-year reinsurance contract.
HCPCI and TypTap exceeded applicable statutory capital, surplus and risk-based capital requirements at December 31, 2022. The Company declared $1.60 per common share of dividends during 2022. Dividend capacity remains subject to subsidiary liquidity, statutory capital requirements and regulatory restrictions.
Outlook, management commentary, risks and unusual items
- Management expects to pursue organic growth, geographic expansion, policy assumptions and technology-driven operating efficiencies, but provided no specific financial guidance.
- HCPCI and TypTap plan to discontinue Florida flood insurance during 2023 because flood reinsurance became more costly and less available. Flood premiums represented less than 1% of HCPCI gross premiums earned and less than 5% of TypTap gross premiums earned in 2022.
- Florida Senate Bill 2-A repealed the one-way attorney fee provision, restricted assignment-of-benefits arrangements and shortened claim-notice periods. Management expects these provisions could reduce litigation and improve insurance affordability, but implementation may increase claims-processing requirements.
- On February 27, 2023, United was placed into receivership due to insolvency. HCI had a net amount due to United of $1.1 million and $48.8 million of funds withheld in trust for assumed business and third-party administrator services at December 31, 2022. The receiver could cancel policies, terminate services or restrict trust funds, potentially materially affecting HCI’s results and liquidity.
- The Company recognized a $2.3 million impairment loss on United-related renewal-rights intangible assets and a $3.1 million gain from remeasurement of related contingent liabilities.
- The Company established a $2.5 million valuation allowance against deferred tax assets; the 2022 income tax benefit was $13.8 million.
- The principal risks are catastrophe frequency and severity, Florida concentration, reserve inadequacy, reinsurance availability and collectability, regulatory changes, litigation, competition, capital requirements, investment volatility, cybersecurity and the financial condition of United.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective.
Important facts for investors to verify
- Reinsurance recoverability, collateral and concentration, particularly the $617.2 million recoverable related to unpaid losses.
- Hurricane Ian reserve development, including the $7.0 million flood amount above reinsurance coverage and the possibility of further adverse development.
- Implications of United’s receivership for assumed policies, claims obligations, trust funds and third-party administrator revenue.
- Future reinsurance pricing, coverage limits, reinstatement premiums and the $182.7 million multi-year premium commitment.
- Whether TypTap can convert premium growth into underwriting profitability after its 2022 combined ratio deterioration and prior-period loss development.
- Liquidity after the sharp cash reduction, ongoing claims payments, dividends, debt service and potential capital contributions to subsidiaries.
- Statutory capital and surplus, regulatory dividend capacity and compliance with Florida premium-to-surplus and risk-based capital requirements.
- Terms, conversion provisions and potential dilution from the convertible notes and 750,000 outstanding warrants.