HCI Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
HCI Group, Inc. is a Florida-based InsurTech company primarily operating through property and casualty insurance subsidiaries HCPCI and TypTap, with additional real estate and technology operations. Florida remains the primary insurance market. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Financial statements are unaudited and presented in accordance with U.S. GAAP.
- TypTap policies in force increased to 29,861 at March 31, 2020, from 6,721 in January 2018.
- Total company policies in force were approximately 133,000, compared with approximately 125,000 a year earlier.
- Insurance operations represented 94.2% of segment revenue before intracompany eliminations and 85.4% of combined segment assets.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Gross premiums earned | $92.365 million | $82.597 million | 12% increase |
| Net premiums earned | $61.646 million | $51.184 million | 20% increase |
| Total revenue | $55.380 million | $60.634 million | 9% decrease |
| Income before income taxes | $0.657 million | $9.283 million | 93% decrease |
| Net income | $0.547 million | $6.738 million | 92% decrease |
| Diluted EPS | $0.07 | $0.82 | Decrease |
| Operating cash flow | $55.403 million | $10.595 million | Increase |
- Net income margin was approximately 1.0% of total revenue, compared with 11.1% in Q1 2019.
- Net premiums written increased to $45.799 million from $36.197 million.
- Loss ratio on net premiums earned improved to 45.55% from 52.74%; expense ratio improved to 43.22% from 47.58%.
- Combined ratio on net premiums earned improved to 88.77% from 100.32%. The combined ratio on gross premiums earned improved to 59.25% from 62.17%.
- Net investment loss was $0.192 million, compared with net investment income of $3.278 million. Net realized investment losses were $2.244 million, and net unrealized investment losses were $4.805 million.
- Cash, cash equivalents and restricted cash totaled $317.778 million at March 31, 2020, compared with $229.918 million at December 31, 2019.
- Total assets were $836.339 million and stockholders’ equity was $179.256 million at March 31, 2020.
- Revolving credit borrowings were $23.750 million, and long-term debt was $165.416 million. Total principal long-term debt was $174.535 million.
Material Changes Versus the Prior Comparable Period
- Premium growth, driven primarily by TypTap, increased net premiums earned by $10.462 million, but did not offset a $15.440 million unfavorable change in investment portfolio results.
- Investment results deteriorated because of COVID-19-related market declines, including a $4.805 million unrealized investment loss versus a $5.293 million gain in Q1 2019 and a $2.935 million loss from limited partnership investments versus a $0.211 million loss.
- Policy acquisition and underwriting expenses increased by $2.153 million, primarily because of higher agent commissions and property inspection costs associated with TypTap growth.
- Losses and loss adjustment expenses increased by $1.082 million to $28.078 million. The company recorded $2.275 million of unfavorable prior-period development related to litigation and a 2019 hail event.
- General and administrative personnel expenses increased by $1.003 million, partly due to higher stock-based compensation, headcount and merit increases.
- Interest expense declined by $1.367 million, primarily following repayment of convertible senior notes in March 2019.
- Operating cash flow increased substantially, but included $30.000 million of advance premiums received from Anchor and therefore was higher than usual.
- The company repurchased 76,851 shares for $3.041 million and paid a quarterly dividend of $0.40 per share. A new plan authorized up to $20.000 million of additional repurchases.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance.
- Management expects TypTap expansion to continue contributing to growth. HCPCI issued approximately 41,000 short-term replacement policies for former Anchor policyholders effective April 1, 2020; HCI received $30.000 million of advance premiums as of March 31, 2020, subject to adjustment in June 2020.
- COVID-19 caused office, restaurant and marina closures and a transition to remote work. Management reported no current plan to reduce the workforce and did not foresee a direct material increase in insurance claims at the filing date.
- COVID-19 materially affected investment values and could adversely affect premium collections, policy renewals, reinsurance recoveries and costs, rental income, real estate values and limited partnership investments. The medium- and long-term financial effect remained uncertain and unquantifiable.
- Investment balances declined during the quarter, including equity securities falling to $24.131 million from $35.285 million and limited partnership investments falling to $25.634 million from $28.346 million.
- The company adopted the CECL credit-loss standard on January 1, 2020, recording a $0.453 million cumulative-effect reduction to retained income and recognizing a $0.439 million allowance for credit losses on available-for-sale securities.
- Loss reserves totaled $207.108 million at March 31, 2020, including $165.651 million of estimated incurred-but-not-reported losses. Management considered reserves adequate but emphasized their significant uncertainty.
- Reinsurance recoverables before allowances totaled approximately $118.132 million, with approximately 61.1% attributable to the Florida Hurricane Catastrophe Fund. The company remains liable if reinsurers fail to perform.
- Unfunded limited partnership commitments were $14.211 million. A minimum $1.034 million reinsurance premium obligation was due in April 2020.
- The company sued Kroger to enforce a lease guaranty after Lucky’s Market filed for bankruptcy. The company also agreed to acquire a Tampa office building for $4.000 million and offered a Riverview investment property for sale.
- Insurance operations are seasonal, with hurricanes and tropical storms generally occurring from June through November. Catastrophes could materially affect quarterly results and liquidity.
Most Important Facts for Investors to Verify
- Whether TypTap and the Anchor replacement policies produce sustained premium growth without corresponding deterioration in claims or acquisition costs.
- The subsequent performance, liquidity and credit quality of equity securities, fixed-maturity securities and limited partnership investments after the March 31, 2020 market disruption.
- Whether COVID-19 affects premium collections, renewals, rent receipts, reinsurance recoveries or reinsurance pricing beyond the first quarter.
- The adequacy of loss reserves, particularly the $165.651 million incurred-but-not-reported component and the $2.275 million of unfavorable prior-period development.
- The company’s ability to meet debt, reinsurance and unfunded investment commitments while maintaining insurance subsidiary capital and surplus.
- The cash flow impact of the $30.000 million Anchor advance premium, which made Q1 operating cash flow unusually strong.
- Regulatory restrictions on dividends from insurance subsidiaries, which may affect HCI’s ability to fund corporate dividends and other uses of cash.