HCI Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; filed August 3, 2016. Financial statements are unaudited and dollar amounts are in thousands except per-share data.
Business Context
HCI is a Florida-based holding company with property and casualty insurance, reinsurance, real estate, and information-technology operations. Property and casualty insurance is its only reportable segment and generated approximately 90.7% of total revenue in the second quarter and 89.9% year to date. Its principal insurance subsidiary is Homeowners Choice Property & Casualty Insurance Company, Inc., which primarily writes Florida homeowners coverage. TypTap began writing standalone flood coverage in Florida in March 2016.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $61,520 | $79,068 | $122,267 | $161,278 |
| Net premiums earned | $58,528 | $76,387 | $116,975 | $158,115 |
| Income before taxes | $11,229 | $35,583 | $20,926 | $76,629 |
| Net income | $7,024 | $22,022 | $13,080 | $47,400 |
| Diluted EPS | $0.71 | $1.93 | $1.31 | $4.14 |
| Operating cash flow | Not separately provided | Not separately provided | $70,391 | $77,775 |
| Combined ratio on net premiums | 85.93% | 56.93% | 86.63% | 53.54% |
| Combined ratio on gross premiums | 52.99% | 40.35% | 52.31% | 38.95% |
At June 30, 2016, total assets were $670,471, cash and cash equivalents were $309,274, available-for-sale securities were $185,419, total liabilities were $430,714, and stockholders’ equity was $239,757. Long-term debt was $128,123 carrying value, against principal of $139,290. The company paid $0.60 per share in dividends during the first six months and declared another $0.30 quarterly dividend payable in September 2016.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 22.2%, while year-to-date revenue declined 24.2%. Net premiums earned declined 23.4% in the quarter and 26.0% year to date.
- Gross premiums earned decreased primarily because of policy attrition and rate decreases effective January 2016. Policies in force declined to approximately 150,000 from approximately 170,000 a year earlier.
- Premiums ceded increased to 38.3% of gross premiums earned in the quarter and 39.6% year to date, versus 29.1% and 27.2%, respectively, in the prior periods.
- Losses and loss adjustment expenses increased 27.7% in the quarter and 34.7% year to date. The company cited weather-related losses, assignment-of-benefits trends, related litigation, and reserve strengthening.
- The loss ratio on net premiums increased to 44.9% from 26.9% in the quarter and to 45.6% from 25.0% year to date. The expense ratio increased to approximately 41.0% from 30.0% in the quarter and 28.5% year to date.
- Year-to-date investing cash use improved to $8,097 from $110,954, primarily because purchases of available-for-sale securities and limited partnership investments were substantially lower.
- The company repurchased $12,015 of common stock under its repurchase plan during the first six months, leaving approximately $8,000 available under the plan. It also repurchased $13,010 principal amount of convertible notes for $11,347 cash and recognized a $153 gain.
- Long-term debt principal decreased from $143,250 at December 31, 2015 to $139,290 at June 30, 2016, including a new $9,200 secured 4% promissory note and the convertible-note repurchases.
Outlook, Commentary, Risks and Unusual Items
- Management expects the flood products offered by TypTap and HCPCI to become significant contributors to future results. The filing does not provide formal earnings or revenue guidance.
- The 2016-17 reinsurance program covers a modeled probable maximum loss from a 1-in-165-year event, compared with 1-in-260-year coverage in the prior program year. Management expects approximately $48,000 of lower reinsurance costs for the 2016-17 program year compared with 2015-16.
- Retrospective reinsurance contracts terminated effective May 31, 2016, and generated $37,800 of cash benefits received in June. Remaining accrued benefits and deferred ceded premiums totaled $6,546 and $277, respectively, and could be charged to earnings if specified catastrophic losses occur.
- Loss reserves increased to $54,727 from $51,690 at December 31, 2015. The company recorded unfavorable prior-period development of $5,469 in the quarter and $5,932 year to date, primarily related to 2015 claims. Approximately $32,833 of reserves represented incurred-but-not-reported claims.
- Florida catastrophe exposure, hurricane and tropical-storm seasonality, reserve uncertainty, assignment-of-benefits litigation, reinsurance availability and pricing, reinsurer insolvency, premium-rate restrictions, and insurance regulation are material risks.
- The company had $15,776 of unfunded limited-partnership commitments and $38,800 of minimum premiums payable under multi-year reinsurance contracts. Total contractual obligations disclosed were $221,807, including debt principal and interest.
- Homeowners Choice Assurance voluntarily surrendered its Alabama certificate of authority effective June 30, 2016. The company also has related-party reinsurance arrangements with Oxbridge Reinsurance Limited involving the CEO, family members, and certain directors.
- Available-for-sale investments had $3,162 of gross unrealized losses at June 30, 2016, and the company recognized $1,217 of other-than-temporary impairment losses year to date.
Investor Verification Checklist
- Verify policy counts, rate changes, premium retention, and the sustainability of new flood-insurance growth.
- Review loss-reserve development, assignment-of-benefits litigation, weather-related claims, and the adequacy of the $54,727 reserve balance.
- Assess whether the projected $48,000 reinsurance-cost reduction is achieved while considering the lower modeled catastrophe protection.
- Monitor remaining retrospective reinsurance receivables and potential earnings exposure following a catastrophe.
- Evaluate debt maturities, particularly the approximately $90,492 scheduled for 2018, and the company’s ability to fund dividends, repurchases, and commitments.
- Review related-party Oxbridge reinsurance terms, collateral, governance implications, and concentrations of reinsurance risk.
- Reconcile statutory insurance-company surplus and dividend restrictions with the parent company’s liquidity and future dividend capacity.