HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI Group, Inc. is a Florida-based InsurTech company operating through property and casualty insurance, reinsurance, real estate and information technology businesses. Its principal insurance subsidiaries are Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. The company also provides quota-share reinsurance and renewal rights related to United Property & Casualty Insurance policies.
This report covers the quarter ended March 31, 2022, with comparative results for the quarter ended March 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Gross premiums earned | $178.9 million | $130.9 million |
| Net premiums earned | $125.8 million | $87.8 million |
| Total revenue | $127.0 million | $94.9 million |
| Income before income taxes | $4.0 million | $10.1 million |
| Net income | $2.8 million | $6.8 million |
| Net income after noncontrolling interests | $0.9 million | $6.1 million |
| Diluted earnings per share | $0.09 | $0.75 |
| Net cash provided by operating activities | $57.3 million | $36.1 million |
| Net cash used in investing activities | $(109.9) million | $19.1 million provided |
| Net cash used in financing activities | $(7.3) million | $66.8 million provided |
Total revenue increased approximately 33.9%, while net income after noncontrolling interests declined approximately 85.3%. The implied net margin after noncontrolling interests was approximately 0.7% versus 6.5% in the prior-year quarter.
- Underwriting ratios: The loss ratio was 57.8% versus 52.1%; the expense ratio was 40.0% versus 44.9%; and the combined ratio was 97.8% versus 97.0%, based on net premiums earned.
- Gross-premium combined ratio: 68.8% versus 65.1% in the prior-year quarter.
- Cash and liquidity: Cash and cash equivalents were $569.0 million and restricted cash was $2.4 million at March 31, 2022. Total assets were $1.175 billion.
- Investments: Total investments were $293.8 million, including $150.7 million of available-for-sale fixed-maturity securities and $41.2 million of equity securities. Fixed-maturity securities had $3.3 million of gross unrealized losses.
- Debt: The company had $15.0 million outstanding under its revolving credit facility and $45.3 million of long-term debt, for approximately $60.3 million of reported borrowings excluding lease liabilities. The company was in compliance with credit-facility covenants.
- Equity and dividends: Total equity was $322.0 million. The company paid a $0.40 per-share quarterly dividend and declared another $0.40 per-share dividend payable June 17, 2022.
Material changes versus the prior comparable period
- Net premiums earned increased $37.9 million, driven by TypTap’s organic growth and business assumed from United. TypTap gross premiums earned increased to $60.6 million from $28.8 million.
- Gross premiums earned from assumed United policies increased to $30.1 million from $20.7 million. The Southeast Region agreement provided 85% quota-share reinsurance in Georgia, North Carolina and South Carolina through May 31, 2022.
- Losses and loss adjustment expenses increased $27.0 million to $72.7 million. The quarter included approximately $13.0 million of losses related to United-assumed policies and $6.1 million of Florida weather-related losses.
- Prior-period loss development was unfavorable by $2.6 million, primarily due to increased litigation. The gross loss and LAE reserve was $234.8 million at March 31, 2022, including $173.0 million of estimated IBNR.
- Investment results deteriorated. Net investment income decreased to $2.9 million from $4.6 million, realized investment results shifted to a $0.3 million loss from a $1.1 million gain, and unrealized investment losses increased to $3.6 million from $0.3 million.
- Policy acquisition and underwriting expenses increased $6.3 million, while general and administrative personnel expenses increased $4.4 million, partly due to higher stock-based compensation, headcount and merit increases.
- Interest expense declined $1.5 million, primarily because of conversions of the 4.25% convertible senior notes during the second half of 2021.
- Cash flow from operations improved, but significant purchases of fixed-maturity and equity securities resulted in $109.9 million of investing cash outflow and a $59.9 million net decrease in cash, cash equivalents and restricted cash during the quarter.
Outlook, risks, contingencies and unusual items
Management did not provide quantitative full-year earnings or revenue guidance in the filing. Management expects liquidity needs to be funded primarily through operating cash flows, including premiums and investment income, while retaining the option to raise additional debt or equity capital to support growth and investments.
- Insurance results are seasonal, with hurricane and tropical-storm exposure generally concentrated from June through November and northeastern winter-storm exposure generally concentrated from December through March.
- Management stated that reserves were adequate based on information available at March 31, 2022, but emphasized that reserve estimates, including IBNR, are highly judgmental and may change materially with claims development, litigation, inflation, regulation and economic conditions.
- The company remains exposed to catastrophe losses, reinsurance pricing and availability, reinsurer credit risk, premium-rate restrictions, claim severity and frequency, and potential reinsurer insolvencies. Approximately 66.1% of reinsurance recoverables at March 31, 2022 were due from three reinsurers.
- Two multi-year reinsurance contracts included retrospective provisions. The company accrued $1.5 million of benefits in Q1 2022 and had $4.5 million of accrued benefits that could be charged to earnings if qualifying catastrophic losses occur.
- The company submitted notice of its intention to commute both multi-year reinsurance contracts ending May 31, 2022; the filing does not provide the final economic impact of the proposed commutation.
- Unfunded limited-partnership commitments totaled $7.8 million. FIGA assessments payable were $1.0 million at March 31, 2022.
- The company authorized a $20.0 million 2022 common-share repurchase plan, but no shares were repurchased under the plan during the quarter. A separate 6,207-share surrender occurred to satisfy employee payroll-tax obligations.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether the United Southeast Region business and renewal-rights transactions produce sustainable premium growth and acceptable loss ratios after the May 31, 2022 agreement end date.
- The development of Q1 2022 weather losses, litigation-related prior-period reserve strengthening and the $173.0 million IBNR estimate.
- The final terms and financial consequences of commuting the two multi-year reinsurance contracts.
- Renewal pricing, reinsurance costs and catastrophe coverage beginning with the June 1, 2022 treaty year.
- TypTap’s ability to continue expanding while improving profitability; TypTap reported a $3.3 million pretax segment loss in Q1 2022.
- The effect of interest-rate and equity-market movements on investment values, earnings and accumulated other comprehensive income.
- Regulatory capital and dividend restrictions applicable to the insurance subsidiaries, which may limit future upstream dividends to HCI Group.