HCI Group, Inc. — Form 10-Q Summary
Business context and reporting period
HCI Group, Inc. is a Florida-based InsurTech company operating primarily through homeowners property and casualty insurers Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. The company also operates information technology, reinsurance, real estate and marina businesses. This unaudited filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $127.3 million | $125.9 million | $256.4 million | $253.0 million |
| Net premiums earned | $115.6 million | $124.9 million | $225.1 million | $250.7 million |
| Net investment income | $8.8 million | $3.7 million | $26.5 million | $6.6 million |
| Net income | $14.9 million | $(8.5) million | $32.7 million | $(5.8) million |
| Net income after noncontrolling interests | $12.4 million | $(10.0) million | $27.8 million | $(9.1) million |
| Diluted EPS | $1.28 | $(1.04) | $2.81 | $(0.92) |
| Loss ratio on net premiums earned | 53.6% | 69.5% | 54.4% | 63.6% |
| Expense ratio on net premiums earned | 38.8% | 40.6% | 40.1% | 40.3% |
| Combined ratio on net premiums earned | 92.4% | 110.1% | 94.5% | 103.9% |
Net profit margins were approximately 11.7% in Q2 2023 and 12.8% for the first six months, compared with negative margins in the comparable 2022 periods.
- Gross premiums earned increased slightly to $181.9 million in Q2 and $362.0 million for the first six months. Premium rate increases offset fewer policies in force.
- Premiums ceded rose to $66.4 million in Q2 and $136.9 million year to date, representing 36.5% and 37.8% of gross premiums earned, respectively, versus 31.0% and 30.4% in the prior-year periods.
- Losses and loss adjustment expenses declined 28.7% in Q2 and 23.2% year to date, primarily due to fewer claims and less Florida litigation.
- TypTap gross premiums earned increased to $85.1 million in Q2 and $172.7 million year to date, while HCPCI gross premiums earned declined to $96.9 million and $189.3 million, respectively.
- At June 30, 2023, cash and cash equivalents were $294.0 million and restricted cash was $3.0 million. Total investments were $549.7 million, including $443.0 million of fixed-maturity securities and $39.7 million of equity securities.
- Net cash provided by operating activities was $5.9 million for the first six months, compared with $21.6 million in 2022. Investing activities provided $59.7 million, while financing activities used $6.4 million.
- Long-term debt was $208.2 million, versus $211.7 million at December 31, 2022. The company also had no borrowings under its revolving credit facility, $50.0 million of available capacity, and compliance with its covenants.
- Total stockholders’ equity was $188.4 million and total equity was $188.6 million at June 30, 2023, compared with $162.6 million and $161.3 million, respectively, at year-end 2022.
Material changes versus the prior comparable period
- The company moved from losses to profitability in both Q2 and the first half of 2023, driven by lower claims costs, improved investment results and lower underwriting and personnel expenses.
- Net premiums earned declined despite stable gross premiums because reinsurance costs increased materially. Management attributed the increase to higher 2023–2024 reinsurance pricing and increased Florida coverage.
- Net investment income increased by $5.1 million in Q2 and $20.0 million year to date, primarily from higher yields on cash and fixed-maturity securities and gains from real estate investments.
- The company completed sales of retail shopping center properties in Melbourne and Sorrento, Florida in March 2023, recognizing combined real estate gains of approximately $8.9 million for the six-month period. It also derecognized $2.2 million of related intangible assets.
- In March 2023, a buyer assumed an $8.98 million principal balance on one promissory note, and the company repaid its $6.78 million 3.75% callable promissory note, recording a $177,000 loss on extinguishment.
- On June 2, 2023, the company amended its revolving credit agreement, extending its expiry to December 31, 2024. A maximum debt-to-capital ratio of 65% applies beginning in the first quarter of 2024.
- The company’s policy count declined to approximately 200,000 at June 30, 2023 from approximately 261,700 a year earlier, while TypTap policies in force increased to 91,931 from 6,721 in January 2018.
Outlook, risks, contingencies and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects liquidity needs to be funded primarily by insurance premiums, investment income and operating cash flow, while retaining the option to raise additional debt or equity capital.
- Insurance results are seasonal and exposed to hurricanes, tropical storms, winter storms and other catastrophes. The primary hurricane season runs from June 1 through November 30.
- Loss reserves totaled $749.0 million at June 30, 2023, including $675.5 million of estimated incurred-but-not-reported losses. Management considers the reserves adequate but emphasizes that estimates may change materially because of claims severity, litigation, inflation, regulation and other developments.
- Reinsurance recoverables totaled approximately $550.7 million, with 53.8% of the balance due from five reinsurers. The company remains liable if reinsurers fail to perform.
- The company has $30.3 million of accrued benefits under retrospective reinsurance provisions that could be charged to earnings if qualifying catastrophic losses occur. It also has a minimum aggregate premium obligation of $91.4 million under one multi-year reinsurance contract for the following 12 months.
- United Property & Casualty’s Florida subsidiary entered receivership in February 2023. HCI had a net amount due from or to United of $10.3 million as described in the filing and $45.8 million of funds withheld for assumed business. Actions by the receiver, including possible restrictions on trust funds, could materially affect HCI.
- HCI and TypTap are phasing out flood insurance because of increased costs and reduced availability of flood reinsurance. Management states that the discontinuation is not expected to have a material impact.
- The company had $5.8 million of unfunded limited-partnership commitments and $3.1 million of FIGA assessments payable at June 30, 2023.
- Available-for-sale securities had $9.4 million of gross unrealized losses, and a hypothetical 100-basis-point increase in interest rates would reduce their estimated fair value by approximately $4.7 million.
- A quarterly dividend of $0.40 per common share was declared for payment on September 15, 2023. Florida insurance subsidiaries are subject to regulatory limits on dividends to HCI.
- The company incorporated Tailrow Insurance Company in April 2023; it had no operations as of the filing date. HCI also agreed to purchase vacant land in Haines City, Florida for a planned retail shopping center, with closing expected in August 2023.
Most important facts for investors to verify
- Whether lower claims frequency and litigation costs persist through the 2023 hurricane season and subsequent quarters.
- The adequacy and development of the $749.0 million loss reserve, particularly the $675.5 million IBNR component and reserves associated with United policies.
- The impact of higher reinsurance pricing and coverage levels on net premiums earned, underwriting margins and future combined ratios.
- The collectability and availability of the $550.7 million of reinsurance recoverables and $45.8 million of funds withheld related to United.
- Liquidity after claims payments, the $91.4 million reinsurance premium commitment, dividends, debt service and potential real estate investment spending.
- The timing and terms of any required repurchases or refinancing of the convertible notes, including potential noteholder repurchase dates beginning in 2027.
- Whether TypTap’s growth and geographic expansion offset policy declines in HCPCI and the discontinuation of flood products.
- Future regulatory restrictions on insurance-subsidiary dividends and the company’s ability to maintain adequate statutory surplus.