HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI is a Florida-based InsurTech company focused primarily on property and casualty insurance through Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. It also operates reinsurance, real estate, information technology, marina and restaurant businesses. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Florida remains the primary insurance market. In April 2020, HCI issued approximately 40,000 short-term replacement policies for Anchor policyholders. TypTap had approximately 33,825 policies in force at September 30, 2020, and began applying to offer homeowners coverage in 20 additional states in October 2020.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $104.0 million | $60.0 million | $240.1 million | $179.2 million |
| Net premiums earned | $62.5 million | $54.4 million | $197.6 million | $157.6 million |
| Net income | $15.4 million | $5.9 million | $24.9 million | $20.1 million |
| Diluted EPS | $1.70 | $0.73 | $3.03 | $2.49 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $77.5 million | $38.1 million |
- Gross premiums earned increased 24.1% in Q3 and 21.8% for the first nine months, driven by Anchor replacement policies and TypTap growth.
- Net income increased 162.9% in Q3 and 23.5% for the first nine months. Net income margins were approximately 14.8% versus 9.8% in Q3 and 10.4% versus 11.2% for the first nine months.
- Insurance underwriting deteriorated: the net-premiums-earned loss ratio rose to 82.8% from 50.2% in Q3 and to 60.6% from 49.9% for the first nine months.
- The combined ratio on net premiums earned increased to 132.1% from 96.0% in Q3 and to 104.3% from 96.4% for the first nine months. On gross premiums earned, the combined ratio was 77.3% versus 60.8% in Q3 and 67.2% versus 60.3% for the first nine months.
- Q3 losses and loss adjustment expenses increased to $51.7 million from $27.3 million; nine-month losses increased to $119.7 million from $78.6 million. Hurricane Sally accounted for approximately $17.7 million of net losses.
Financial position, liquidity and debt
- At September 30, 2020, total assets were $887.8 million, cash and cash equivalents were $410.7 million, and cash, cash equivalents and restricted cash totaled $413.1 million, compared with $229.9 million at December 31, 2019.
- Total investments were $238.7 million, including $92.7 million of available-for-sale fixed-maturity securities, $42.7 million of equity securities and $27.5 million of limited partnership investments.
- Stockholders’ equity was $199.7 million, compared with $185.5 million at year-end 2019.
- Revolving credit borrowings were $8.8 million. Long-term debt was $155.7 million, compared with $163.7 million at December 31, 2019. The company reported compliance with all revolving-credit covenants.
- Principal sources of nine-month cash generation included $77.5 million from operations, $133.8 million from investing activities and $44.0 million of compensation for property acquired through eminent domain. Financing activities used $28.2 million, including dividends, debt repayments, convertible-note repurchases and share repurchases.
- Long-term debt principal and finance lease obligations totaled approximately $162.3 million. The filing projects $140.2 million of maturities in 2021, primarily reflecting the assumed earliest call date of the convertible senior notes.
Material changes, outlook and unusual items
- The company recognized a $37.0 million gain on involuntary conversion after the Florida Department of Transportation acquired its Tampa headquarters property for a highway expansion project. This gain materially increased reported revenue and earnings and is nonrecurring.
- HCI repaid its 3.95% and 4% promissory notes, issued a new $10.0 million 3.90% promissory note, repurchased $4.6 million principal of convertible senior notes and recorded a $98,000 debt-extinguishment loss and a $150,000 convertible-note repurchase loss.
- COVID-19 primarily affected investment valuations and limited partnership results during the reported period. Nine-month investment results included a $2.1 million limited-partnership loss, compared with $1.3 million of income in 2019, and a $581,000 net unrealized investment loss, compared with a $7.3 million gain in 2019.
- Management stated that it currently foresees no direct material COVID-19 impact on insurance claims and losses, but identified risks involving investment losses, premium collection, policy renewals, reinsurance recoveries and costs, rental collections and future economic disruption. The medium- and long-term impact remains uncertain and unquantifiable.
- Loss reserves were $219.3 million at September 30, 2020, including $165.3 million of estimated incurred-but-not-reported losses. Management considered reserves adequate but emphasized that reserve estimates are subject to significant variability.
- Reinsurance recoverables totaled $75.0 million before allowances, with approximately 58.6% of the balance concentrated among three reinsurers. The company had $12.2 million of unfunded limited-partnership commitments.
- No specific earnings or premium guidance was provided. Management expects liquidity needs to be funded primarily through operations and anticipates uses for claims, reinsurance premiums, interest, dividends, operating expenses and real estate acquisitions.
- The board declared a quarterly dividend of $0.40 per share on October 16, 2020, payable December 18, 2020. Insurance-subsidiary dividends to HCI totaled $15.5 million during the first nine months.
Investor verification checklist
- Separate recurring underwriting performance from the $37.0 million eminent-domain gain when assessing earnings quality.
- Review Hurricane Sally losses, catastrophe exposure, reserve development and the unusually high 132.1% net combined ratio in Q3.
- Assess the effect of higher reinsurance costs, retrospective reinsurance provisions and reinsurer concentration on future margins and liquidity.
- Verify the sustainability of premium growth from Anchor replacement policies and TypTap expansion after the replacement policies expire.
- Monitor COVID-19 effects on investment portfolios, limited partnerships, policy renewals, premium collections, real estate tenants and reinsurance recoverables.
- Evaluate the 2021 debt maturity profile, including the assumed early call of the convertible senior notes, against available cash and operating cash flow.
- Consider dividend capacity and regulatory restrictions applicable to the insurance subsidiaries.