HCI Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
HCI Group is a Florida-based InsurTech company operating through property and casualty insurance, reinsurance, information technology, real estate and related businesses. Its principal insurance platforms are HCPCI and TypTap. The filing covers the three and six months ended June 30, 2022; financial statements are unaudited and dollar amounts are in thousands unless otherwise stated.
TypTap continued expanding geographically and had approximately 75,421 policies in force at June 30, 2022. HCI also assumed or renewed United Property & Casualty policies in the Northeast and Southeast regions, including a new 100% quota-share agreement through TypTap effective June 1, 2022.
Financial Performance and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Gross premiums earned | $181,124 | $139,440 | $360,049 | $270,382 |
| Net premiums earned | $124,919 | $93,004 | $250,682 | $180,847 |
| Total revenue | $125,926 | $101,504 | $252,966 | $196,378 |
| Losses and LAE | $86,830 | $55,917 | $159,534 | $101,668 |
| Net income (loss) | $(8,542) | $3,830 | $(5,751) | $10,675 |
| Net income (loss) after noncontrolling interests | $(9,981) | $1,917 | $(9,078) | $8,065 |
| Diluted EPS | $(1.04) | $0.24 | $(0.92) | $0.98 |
- Q2 net premiums earned increased $31,915, or approximately 34%, primarily from TypTap growth and United-related business. Six-month net premiums earned increased $69,835, or approximately 39%.
- The Q2 loss ratio on net premiums earned rose to 69.5% from 60.1%; the six-month ratio rose to 63.6% from 56.2%.
- The Q2 combined ratio on net premiums earned was 110.1%, compared with 103.7% in the prior-year quarter. The six-month ratio was 103.9%, compared with 100.2%.
- The combined ratio measured against gross premiums earned was 75.9% for Q2 and 72.4% for the six-month period, versus 69.1% and 67.0%, respectively, in the comparable periods.
- Investment results weakened: Q2 included $4,234 of net unrealized investment losses and $6 of net realized losses; the six-month period included $7,810 of unrealized losses and $320 of realized losses.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $21,629 for the six months ended June 30, 2022, down from $95,647 in the prior-year period.
- Investing activities used $360,095, principally reflecting $377,638 of fixed-maturity securities purchases and $16,383 of equity securities purchases.
- Financing activities provided $70,267, primarily from $172,500 of 4.75% convertible senior notes issued in May 2022. Uses included $69,987 of common-stock repurchases, repayment of the $15,000 revolving credit facility, dividends and debt issuance costs.
- Cash, cash equivalents and restricted cash declined to $363,088 at June 30, 2022 from $631,343 at December 31, 2021. Cash and cash equivalents were $360,488, while restricted cash was $2,600.
- Total assets were $1,280,703, compared with $1,176,857 at year-end 2021. Fixed-maturity securities increased to $398,571 from $42,583, while equity securities declined to $35,719 from $51,740.
- Long-term debt increased to $211,648 from $45,504, primarily because of the new convertible notes. The revolving facility was fully repaid, and its available borrowing capacity was $65,000 at quarter-end.
- Total equity declined to $239,935 from $324,503, reflecting losses, investment-related accumulated other comprehensive losses and significant share repurchases.
- The company stated that it believes available liquidity is sufficient for claims, operating expenses and commitments, but insurance-subsidiary dividends are subject to Florida regulatory restrictions.
Material Changes Versus the Prior Comparable Period
- Revenue and premium volume grew substantially, particularly in TypTap. TypTap gross premiums earned increased to $67,443 in Q2 from $39,000 and to $128,065 for the six months from $67,811.
- Underwriting performance deteriorated as loss expenses increased faster than net premiums earned. Prior-period loss development, weather losses, Florida exposure and United-assumed policies contributed to the increase.
- Q2 included $5,811 of losses from Florida weather events and six-month losses of $11,932 from such events. Prior-period losses recognized were $8,382 in Q2 and $11,010 for the six-month period, primarily due to increased litigation.
- General and administrative personnel expense increased 45% in Q2 and 45% for the six-month period, driven by higher headcount, merit increases and stock-based compensation.
- The company issued $172,500 of 4.75% convertible senior notes and used $66,853 of net proceeds to repurchase 1,037,600 common shares from institutional investors. It also repurchased 29,465 shares under its 2022 repurchase plan.
- Common shares outstanding decreased to 9,047,972 at June 30, 2022 from 10,131,399 at December 31, 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects liquidity needs to be funded primarily through insurance premiums, investment income and operating cash flow, while retaining the option to raise additional debt or equity capital.
- Insurance results are seasonal and particularly exposed to hurricanes and tropical storms from June through November. Catastrophe frequency and severity, claims inflation, litigation and reserve development could materially affect results.
- At June 30, 2022, gross loss and LAE reserves were $238,824, including $177,320 of estimated IBNR. Management considered reserves adequate but emphasized that estimates are subject to significant variability.
- Reinsurance recoverables and receivables totaled approximately $53,482, with approximately 54.9% of the reinsurance recoverable balance concentrated among three reinsurers. HCI remains liable if reinsurers fail to perform.
- Retrospective reinsurance provisions generated $7,874 of premium reductions for the six-month period and created a $10,938 asset that could be reversed if qualifying catastrophic losses occur.
- The company had $182,700 of future minimum premiums payable under a multi-year reinsurance contract and $6,465 of unfunded limited-partnership commitments.
- HCI sold Tampa land to the Florida Department of Transportation on July 1, 2022 for net proceeds of $14,500 and expects to recognize a $13,402 realized gain in the third quarter.
- The board declared a $0.40-per-share quarterly dividend payable September 16, 2022.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting and no material changes to previously disclosed risk factors.
Most Important Facts for Investors to Verify
- Whether TypTap growth and United policy expansion can offset the deterioration in loss ratios and combined ratios.
- The adequacy and subsequent development of the $238,824 loss and LAE reserve, particularly the $177,320 IBNR component and litigation-related prior-period development.
- Catastrophe exposure, reinsurance limits, pricing and collectability, including the effect of the $10,938 retrospective-reinsurance asset.
- Liquidity after the substantial investment purchases, share repurchases, dividends and the decline in cash to $363,088.
- Terms, conversion features and potential dilution or refinancing requirements associated with the $172,500 4.75% convertible senior notes.
- Regulatory capital and dividend restrictions applicable to HCPCI and TypTap, as well as the company’s ability to fund parent-level obligations.
- Recognition and timing of the $13,402 gain from the July 2022 land sale and the operating impact of the new Southeast Region quota-share agreement.