HCI Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
HCI Group, Inc. is a Florida-based InsurTech company primarily engaged in property and casualty insurance through Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. It also operates information technology, insurance management, reinsurance, real estate, and marina businesses. The filing covers the unaudited quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
As of September 30, 2023, TypTap had 89,831 policies in force, while the consolidated company had approximately 194,000 policies in force, down from approximately 246,000 at September 30, 2022.
Financial Results and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $131.6 million | $126.7 million | $388.0 million | $379.6 million |
| Gross premiums earned | $188.3 million | $181.7 million | $550.3 million | $541.8 million |
| Net premiums earned | $122.2 million | $107.0 million | $347.3 million | $357.7 million |
| Net income | $15.7 million | $(51.5) million | $48.3 million | $(57.3) million |
| Net income after noncontrolling interests | $13.2 million | $(51.0) million | $40.9 million | $(60.0) million |
| Diluted EPS | $1.34 | $(5.66) | $4.16 | $(6.26) |
| Net cash from operating activities | Not separately provided | Not separately provided | $77.3 million | $(18.3) million |
Net investment income was $9.4 million in Q3 and $35.9 million for the nine months, compared with $18.5 million and $25.1 million, respectively, in the prior-year periods. The prior-year third quarter included a $13.4 million gain from an eminent-domain property sale. Nine-month 2023 investment income included $8.9 million of gains on real estate sales.
Losses and loss adjustment expenses declined to $66.7 million in Q3 and $189.2 million for the nine months, from $139.8 million and $299.3 million, respectively. The 2022 periods included substantial Hurricane Ian losses.
| Underwriting ratio | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Loss ratio to net premiums earned | 54.6% | 130.7% | 54.5% | 83.7% |
| Expense ratio to net premiums earned | 36.7% | 47.2% | 39.0% | 42.3% |
| Combined ratio to net premiums earned | 91.3% | 177.9% | 93.5% | 126.0% |
| Combined ratio to gross premiums earned | 59.2% | 104.7% | 59.0% | 83.2% |
At September 30, 2023, total assets were $1.72 billion, including $324.0 million of cash and cash equivalents, $3.0 million of restricted cash, and $458.6 million of fixed-maturity and equity securities. Total liabilities were $1.43 billion, including $709.1 million of losses and loss adjustment expenses, $395.8 million of unearned premiums, and $208.3 million of long-term debt. Stockholders’ equity was $199.9 million and total equity was $201.1 million.
Cash, cash equivalents, and restricted cash increased to $327.0 million from $237.8 million at December 31, 2022. Operating activities provided $77.3 million, investing activities provided $25.7 million, and financing activities used $13.8 million. Financing uses included $10.3 million of common dividends and $6.8 million of dividends paid to redeemable noncontrolling interests.
The company had no borrowings outstanding under its revolving credit facility at September 30, 2023, with $50.0 million of available capacity and compliance with covenants. Long-term debt principal was $213.1 million, net carrying value was $208.3 million, and the largest expected maturity is associated with the convertible notes in 2026 under the company’s stated maturity assumptions.
Material Changes Versus the Prior Comparable Period
- HCI returned to profitability: Q3 net income after noncontrolling interests was $13.2 million versus a $51.0 million loss; nine-month income was $40.9 million versus a $60.0 million loss.
- Gross premiums earned increased modestly, but nine-month net premiums earned declined 2.9% because ceded premiums increased to $203.1 million from $184.1 million.
- TypTap’s nine-month gross premiums earned increased to $258.9 million from $210.8 million, while HCPCI’s declined to $291.4 million from $331.0 million.
- Reinsurance costs were higher for the 2023–2024 contract year, although retrospective reinsurance provisions reduced ceded premiums by $21.0 million for the nine months.
- Loss reserves declined by $154.7 million from December 31, 2022, primarily due to the runoff of catastrophe reserves related to Hurricane Ian and Hurricane Irma.
- The company sold two Florida retail shopping center properties in March 2023, recognized aggregate real estate gains of approximately $8.9 million, and acquired land and associated leases in Haines City for development of a retail center.
- In March 2023, the buyer of the Melbourne property assumed approximately $9.0 million of debt, and the company repaid its $6.8 million callable promissory note secured by the Sorrento property.
- Management released the full deferred-tax-asset valuation allowance during 2023 based on its conclusion that realization was more likely than not.
- The company discontinued most flood insurance activity after receiving regulatory approval, citing reduced availability and increased cost of flood reinsurance.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings or premium guidance. Management expects future liquidity needs to be funded primarily through insurance operations, investment income, and available capital resources. Future uses of funds are expected to include claims, reinsurance premiums, interest, dividends, operating expenses, and possible real estate acquisitions.
- Catastrophe exposure remains significant because the company primarily writes property insurance in Florida and other hurricane-prone states. Hurricane and tropical-storm seasonality typically affects results from June through November.
- Loss and loss adjustment expense reserves are highly judgmental. At September 30, 2023, $645.5 million of the $709.1 million reserve was estimated incurred-but-not-reported, and management cautioned that reserves may change materially with claims, litigation, inflation, legal developments, and catastrophe experience.
- The company remains exposed to reinsurer credit risk. Net reinsurance recoverables and receivables totaled approximately $492.0 million, with approximately 69.9% of the recoverable balance due from six reinsurers.
- United Property & Casualty Insurance Company entered receivership in February 2023. HCI had $44.8 million of funds withheld for assumed United business and a net amount due from or to United of approximately $10.3 million at September 30, 2023. Restrictions on trust funds or receiver actions could materially affect financial position and results.
- A multi-year reinsurance contract requires minimum aggregate premiums of $91.4 million during the 12 months following September 30, 2023.
- Retrospective reinsurance benefits included in other assets totaled $37.3 million and could be charged to earnings if a qualifying catastrophe occurs.
- The company had $4.9 million of unfunded limited-partnership commitments and $1.2 million of FIGA assessments payable.
- Available-for-sale fixed-maturity securities had $8.4 million of gross unrealized losses at September 30, 2023. A hypothetical 100-basis-point increase in interest rates would reduce their estimated fair value by approximately $4.0 million.
- On November 3, 2023, after quarter-end, the company amended its credit agreement to extend the facility through November 3, 2028, increase borrowing capacity to $75.0 million, and permit up to $50.0 million to refinance redeemable noncontrolling interests before March 31, 2025.
- The board declared a $0.40 per-share quarterly dividend payable December 15, 2023.
Most Important Facts for Investors to Verify
- Whether improved underwriting results and the 93.5% nine-month combined ratio are sustainable after the favorable comparison with Hurricane Ian-affected 2022 results.
- The adequacy and development of the $709.1 million loss and LAE reserve, particularly the $645.5 million IBNR component and litigation-related reserve increases.
- The collectability and availability of the approximately $492.0 million of reinsurance recoverables and $44.8 million of United-related funds withheld.
- The economic impact of higher reinsurance costs, retrospective provisions, flood-insurance withdrawal, and future catastrophe events.
- Liquidity and capital requirements associated with claims, the $91.4 million minimum reinsurance premium commitment, convertible-note obligations, dividends, and potential refinancing of redeemable noncontrolling interests.
- Regulatory restrictions on dividends from the insurance subsidiaries and the effect of Florida statutory capital requirements on future distributions to HCI.