Business Context and Reporting Period
HCI Group, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates primarily through property and casualty insurance subsidiaries, with additional reinsurance, real estate and information technology operations. Florida remains the primary insurance market, while TypTap expanded rapidly during the first half of 2019.
Insurance operations represented 95.2% of segment revenue in the second quarter and 94.9% for the six months. The filing was signed August 7, 2019.
Key Financial Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $58.6 million | $58.8 million | $119.3 million | $116.6 million |
| Net premiums earned | $52.0 million | $53.0 million | $103.2 million | $106.5 million |
| Income before taxes | $10.3 million | $11.5 million | $19.6 million | $26.3 million |
| Net income | $7.6 million | $6.4 million | $14.3 million | $17.2 million |
| Diluted EPS | $0.90 | $0.92 | $1.72 | $2.03 |
| Net margin | 12.9% | 10.9% | 12.0% | 14.8% |
| Combined ratio on net premiums | 92.9% | 89.3% | 96.6% | 84.7% |
Six-month operating cash flow was $28.8 million, compared with $27.6 million in the prior-year period. Investing activities provided $45.8 million, versus cash used of $46.8 million in 2018. Financing activities used $97.0 million, primarily for $90.6 million of long-term debt repayment, $6.6 million of dividends and $9.0 million of share repurchases. Cash, cash equivalents and restricted cash ended at $217.9 million, down from $240.2 million at December 31, 2018.
At June 30, 2019, total assets were $752.1 million and stockholders’ equity was $186.5 million. Long-term debt was $162.3 million and the revolving credit facility had $9.5 million outstanding, with $55.5 million of unused capacity under the $65.0 million facility. The company reported compliance with its credit covenants.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 18.0% to $7.6 million, despite a 1.8% decline in total revenue. The improvement primarily reflected lower income taxes, lower interest expense and improved investment results.
- Six-month net income declined 16.9% to $14.3 million, and diluted EPS fell to $1.72 from $2.03.
- Net premiums earned declined 1.8% in the quarter and 3.1% year to date, principally due to fewer policies in force. Policies in force were approximately 124,000 at June 30, 2019, versus approximately 132,000 at June 30, 2018.
- Losses and loss adjustment expenses increased 11.4% in the quarter and 23.7% year to date. The six-month increase included approximately $5.3 million of losses from a severe March storm, adverse development associated with litigation, and additional Hurricane Matthew losses.
- The six-month loss ratio increased to 49.7% from 38.9%, while the combined ratio increased to 96.6% from 84.7%. The quarterly combined ratio also deteriorated to 92.9% from 89.3%.
- Interest expense declined by $1.6 million in the quarter and $1.8 million year to date following repayment of the $90.0 million 3.875% convertible senior notes on March 15, 2019.
- Investment results improved materially year to date: net unrealized investment gains were $6.6 million versus losses of $4.2 million in 2018, although net realized investment results changed from a $4.9 million gain to a $0.5 million loss.
- The effective tax rate declined to 26.8% from 44.4% in the quarter and to 27.1% from 34.7% year to date, largely because 2018 included deferred tax asset derecognition and nondeductible restricted-stock dividends.
- Stockholders’ equity increased from $181.4 million at December 31, 2018 to $186.5 million at June 30, 2019, notwithstanding $8.0 million of share repurchases and $6.4 million of dividends during the first half.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or premium guidance. Management expects TypTap expansion to continue and contribute to future growth. Future liquidity needs are expected to be funded primarily by insurance premiums, investment income and operating cash flow; additional debt or equity financing may be considered.
- Management considers reserves adequate, but reserve estimates are inherently uncertain. Of the $154.2 million gross loss reserve at June 30, 2019, $111.4 million represented estimated incurred-but-not-reported losses.
- The company primarily writes Florida property insurance and is exposed to hurricanes, tropical storms and other catastrophes. Hurricane season and annual June 1 reinsurance renewals can produce significant quarter-to-quarter volatility.
- The company remains liable if reinsurers fail to perform. Reinsurance recoverables and receivables totaled $78.1 million, with approximately 36% of the recoverable balance concentrated among five reinsurers.
- A retrospective reinsurance provision generated $1.7 million of reduced ceded premiums year to date and a $4.4 million accrued benefit asset. A major catastrophe exceeding applicable coverage could reduce or eliminate this benefit.
- Unfunded commitments to limited partnerships totaled $14.6 million. The company also had $3.8 million of minimum premiums payable under a multi-year reinsurance contract during the following 12 months.
- The revolving credit facility contains covenants restricting additional debt, distributions, liens, asset dispositions and certain affiliate transactions. Variable-rate borrowings expose the company to higher interest expense if rates rise.
- At June 30, 2019, fixed-maturity securities had a fair value of $209.9 million and equity securities had a fair value of $29.9 million. A hypothetical 100-basis-point increase in rates was estimated to reduce fixed-maturity fair value by approximately $3.9 million.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $0.8 million of operating lease assets and liabilities. Management did not expect the pending credit-loss standard effective January 1, 2020 to have a material impact.
- The board declared a quarterly dividend of $0.40 per share payable September 20, 2019. Insurance-subsidiary dividends remain subject to statutory restrictions and, in some cases, regulatory approval.
Most Important Facts to Verify
- Whether policy growth from TypTap offsets the decline in overall policies in force and net premiums earned.
- Subsequent catastrophe experience, litigation trends and reserve development, particularly for prior accident years.
- The collectability and concentration of reinsurance recoverables and the effect of any catastrophe on retrospective reinsurance benefits.
- Compliance with revolving-credit covenants and the timing of debt maturities, including the assumed early repurchase of the 4.25% convertible notes.
- The sustainability of the $0.40 quarterly dividend and remaining share-repurchase authorization of approximately $12.0 million.
- Investment portfolio volatility, interest-rate sensitivity and the effect of equity-market movements on earnings and equity.