HCI GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion under this Item 2 in conjunction with
our consolidated financial statements and related notes and information included
elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with
the
context requires otherwise, as used in this Form 10-Q, the terms "HCI," "we,"
"us," "our," "the Company," "our company," and similar references refer to
Group, Inc.
All dollar amounts in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are in whole dollars unless specified
otherwise.
Forward-Looking Statements
In addition to historical information, this quarterly report contains
forward-looking statements as defined under federal securities laws. Such
statements involve risks and uncertainties, such as statements about our plans,
objectives, expectations, assumptions or future events. These statements involve
estimates, assumptions, known and unknown risks, uncertainties and other factors
that could cause actual results to differ materially from any future results,
performances or achievements expressed or implied by the forward-looking
statements. Typically, forward-looking statements can be identified by
terminology such as "anticipate," "estimate," "plan," "project," "continuing,"
"ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and
similar expressions. The important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include but are not limited to the effects of governmental regulation; changes
in insurance regulations; the frequency and extent of claims; uncertainties
inherent in reserve estimates; catastrophic events; changes in the demand for,
pricing of, availability of or collectability of reinsurance; restrictions on
our ability to change premium rates; increased rate pressure on premiums; the
severity and impact of the novel coronavirus ("COVID-19") pandemic; and other
risks and uncertainties detailed herein and from time to time in our
reports.
OVERVIEW - General
and casualty insurance, reinsurance, real estate and information technology.
After the reorganization of our business in the first quarter of 2021, we now
manage our operations in the following organizational segments, based on
managerial emphasis and evaluation of financial and operating performances:
a)
HCPCI Insurance Operations
?
Property and casualty insurance
?
Reinsurance and other auxiliary operations
b)
?
Property and casualty insurance
? Information technology c) Real Estate Operations d) Other Operations ? Holding company operations
For the three months ended
insurance operations before intracompany elimination represented 69.8% and
77.7%, respectively, and revenues from
respectively, of total revenues of all operating segments. At
and 58.7%, respectively, and
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combined assets of all operating segments. See Note 13 -- "Segment Information"
to our unaudited consolidated financial statements under Item 1 of this
Quarterly Report on Form 10-Q for additional information.
HCPCI Insurance Operations
HCPCI provides various forms of residential insurance products such as
homeowners insurance, fire insurance, flood insurance and wind-only insurance.
HCPCI is authorized to write residential property and casualty insurance in the
states of
In 2021, HCPCI began providing quota share reinsurance on all in-force, new and
renewal policies issued by United in the
and/or replacing United policies in two states in
state in
In
where HCPCI provides 85% quota share reinsurance on all of United's personal
lines insurance business in the states of
Carolina
31, 2022
of premium and a provisional ceding commission of 25% of premium. That
percentage could increase up to 32% depending on the direct loss ratio results
from the reinsured business.
Reinsurance and other auxiliary operations
We have a
Casualty Insurance Company Ltd.
reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its
exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh
may mitigate a portion of its risk through retrocession contracts. Currently,
Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary
operations also include claim adjusting and processing services.
has four subsidiaries:
Company
primarily engaged in the property and casualty insurance business and is
currently using in-house developed technology to collect and analyze claims and
other supplemental data to generate savings and efficiency for its insurance
operations.
TypTap, TTIG's insurance subsidiary, has been the primary source of our organic
growth in gross written premium since 2016. TypTap's policies in force have
increased from 6,721 in
been successful in using internally developed proprietary technology to
underwrite, select and write policies efficiently. As of
has been approved to offer homeowners coverage in 18 states outside of
TypTap is currently operating in twelve states. In addition to the expansion in
TypTap business, we also expect continued growth from the United policies
assigned to TypTap through the renewal rights agreements acquired by HCI.
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In 2021, TypTap began providing quota share reinsurance on all in-force, new and
renewal policies issued by United in the
and/or replacing United policies in two states in
state in
Information Technology
Our information technology operations include a team of experienced software
developers with extensive knowledge in developing web-based products and
applications for mobile devices. The operations, which are in
Noida,
services that support in-house operations as well as our third-party
relationships with our agency partners and claim vendors. These products include
SAMSTM, HarmonyTM, AtlasViewer® and ClaimColonyTM.
Real Estate Operations
Our real estate operations consist of properties we own and use for our own
operations and multiple properties we own and operate for investment purposes.
Properties used in operations consist of one
insurance operations site in
retail shopping centers, one office building, two marinas, and undeveloped land
near TTIG's headquarters in
Other Operations
Holding company operations
Activities of our holding company,
not meet the quantitative and qualitative thresholds for a reportable segment
comprise the operations of this segment.
Recent Events
On
per common share. The dividends are payable on
record on
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three months endedMarch 31, 2022 and 2021 (dollar amounts in thousands, except per share amounts): Three Months Ended March 31, 2022 2021 Revenue Gross premiums earned$ 178,925 $ 130,942 Premiums ceded (53,162 ) (43,099 ) Net premiums earned 125,763 87,843 Net investment income 2,868 4,594 Net realized investment (losses) gains (314 ) 1,113 Net unrealized investment losses (3,576 ) (269 ) Policy fee income 1,057 970 Other income 1,242 623 Total revenue 127,040 94,874
Expenses
Losses and loss adjustment expenses 72,704 45,751
Policy acquisition and other underwriting expenses 29,408 23,065
General and administrative personnel expenses
14,034 9,650 Interest expense 601 2,079 Other operating expenses 6,292 4,227 Total expenses 123,039 84,772 Income before income taxes 4,001 10,102 Income tax expense 1,210 3,257 Net income 2,791 6,845
Net income attributable to noncontrolling interests (1,888 ) (697 )
Net income after noncontrolling interests
$ 903 $ 6,148 Ratios to Net Premiums Earned: Loss Ratio 57.81 % 52.08 % Expense Ratio 40.02 % 44.91 % Combined Ratio 97.83 % 96.99 % Ratios to Gross Premiums Earned: Loss Ratio 40.63 % 34.94 % Expense Ratio 28.14 % 30.13 % Combined Ratio 68.77 % 65.07 % Earnings Per Share Data: Basic$ 0.09 $ 0.82 Diluted$ 0.09 $ 0.75
Comparison of the Three Months Ended
Our results of operations for the three months ended
income of approximately
with approximately
months ended
to a
in income from our investment portfolio (consisting of net investment income and
net realized and unrealized gains or losses) of
increase in personnel and other operating expenses, and a
policy acquisition and other underwriting expenses, offset by an increase in net
premiums earned of
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Revenue
Gross Premiums Earned on a consolidated basis for the three months ended
31, 2022
respectively. HCPCI gross premiums earned were
ended
31, 2021
for the three months ended
due to a greater number of policies in force from the organic growth in TypTap's
business and from the business assumed from United beginning
Premiums Ceded for the three months ended
approximately
32.9%, respectively, of gross premiums earned. The
primarily attributable to higher reinsurance costs effective
an increased overall reinsurance coverage amount as a result of premium growth
and expansion.
Our premiums ceded represent costs of reinsurance to cover losses from
catastrophes that exceed the retention levels defined by our catastrophe excess
of loss reinsurance contracts or to assume a proportional share of losses as
defined in a quota share agreement. The rates we pay for reinsurance are based
primarily on policy exposures reflected in gross premiums earned. Reinsurance
costs can be decreased by a reduction in premiums ceded attributable to
retrospective provisions under multi-year reinsurance contracts. For the three
months ended
related to retrospective provisions compared with a decrease of
the three months ended
Contracts with Retrospective Provisions" under "Critical Accounting Policies and
Estimates."
Net Premiums Written for the three months ended
approximately
represent the premiums charged on policies issued during a fiscal period less
any applicable reinsurance costs. The increase in 2022 resulted from an increase
in gross premiums written from the United insurance policies assumed and the
growth of TypTap business. We had approximately 211,800 policies in force at
approximately 154,000 policies in force at
Net Premiums Earned for the three months ended
approximately
premiums earned less reinsurance costs as described above.
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months endedMarch 31, 2022 and 2021 (amounts in thousands): Three Months Ended March 31, 2022 2021 Net Premiums Written$ 124,132 $ 82,749
Decrease in Unearned Premiums 1,631 5,094
Net Premiums Earned
$ 125,763 $ 87,843
Net Investment Income for the three months ended
approximately
was primarily attributable to a
investments, offset by a
investments. See Net Investment Income (loss) under Note 4 -- "Investments" to
our unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q.
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Net Realized Investment Losses for the three months ended
approximately
the three months ended
attributable to net gains from selling equity securities and other investments
during 2021.
Net Unrealized Investment Losses for the three months ended
2021 were approximately
unrealized investment loss for the three months ended
primarily attributable to an overall decline in the equity market compared with
the three months ended
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
respectively. HCPCI losses and loss adjustment expenses were
three months ended
ended
losses associated with growth in HCPCI's
increase in losses attributable to the United policies assumed due to an
increase in the number of policies assumed from United and weather-related
losses incurred during the first quarter of 2022. Losses and loss adjustment
expenses for TypTap were
period. The increase was attributable to the greater number of TypTap policies
in force. See "Reserves for Losses and Loss Adjustment Expenses" under "Critical
Accounting Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the three months ended
consolidated basis, respectively, and primarily reflect the amortization of
deferred acquisition costs such as commissions payable to agents for production
and renewal of policies, catastrophe allowance payable to United, and premium
taxes. Policy acquisition expenses for HCPCI insurance operations were
for the three months ended
of increased costs associated with the increase in the number of policies
assumed from United.
versus
attributable to amortization of increased commission costs related to the growth
of TypTap's policies in force over the past 12 months and the policies assumed
from United.
General and Administrative Personnel Expenses for the three months ended
31, 2022
Our general and administrative personnel expenses include salaries, wages,
payroll taxes, stock-based compensation expenses, and employee benefit costs.
Factors such as merit increases, changes in headcount, and periodic restricted
stock grants, among others, cause fluctuations in this expense. In addition, our
personnel expenses are decreased by the capitalization of payroll costs related
to a project to develop software for internal use and the payroll costs
associated with the processing and settlement of certain catastrophe claims
which are recoverable from reinsurers under reinsurance contracts. The
period-over-period increase of
increased stock-based compensation expense, an increase in the headcount of
temporary and full-time employees, and merit increases for non-executive
employees effective in late
Interest Expense for the three months ended
approximately
resulted from conversions of our 4.25% convertible senior notes during the
second half of 2021.
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Income Tax Expense for the three months ended
approximately
foreign income taxes resulting in an effective tax rate of 30.2% for 2022 and
32.2% for 2021. The decrease in the effective tax rate was primarily due to the
recognition of tax benefits attributable to restricted stock that vested in
Ratios:
The loss ratio applicable to the three months ended
loss adjustment expenses incurred related to net premiums earned) was 57.8%
compared with 52.1% for the three months ended
primarily due to the increase in losses and loss adjustment expenses as further
described above, offset in part by the increase in net premiums earned.
The expense ratio applicable to the three months ended
as total expenses excluding losses and loss adjustment expenses related to net
premiums earned) was 40.0% compared with 44.9% for the three months ended
31, 2021
increase in net premiums earned and the decrease in interest expense, offset by
the increase in policy acquisition, underwriting and personnel expenses.
The combined ratio (total of all expenses in relation to net premiums earned) is
the measure of overall underwriting profitability before other income. Our
combined ratio for the three months ended
97.0% for the three months ended
attributable to the factors described above.
Due to the impact our reinsurance costs have on net premiums earned from period
to period, our management believes the combined ratio measured to gross premiums
earned is more relevant in assessing overall performance. The combined ratio to
gross premiums earned for the three months ended
compared with 65.1% for the three months ended
2022 was primarily attributable to the increase in losses and loss adjustment
expenses, offset by the increase in gross premiums earned.
Seasonality of Our Business
Our insurance business is seasonal as hurricanes and tropical storms affecting
during the period from
storms in the northeast usually occur during the period
March 31st
effective
whether due to changes in reinsurance rates, coverage levels or changes in the
total insured value of our policy base, will occur and be reflected in our
financial results beginning
LIQUIDITY AND CAPITAL RESOURCES
Throughout our history, our liquidity requirements have been met through
issuances of our common and preferred stock, debt offerings and funds from
operations. We expect our future liquidity requirements will be met by funds
from operations, primarily the cash received by our insurance subsidiaries from
premiums written and investment income. We may consider raising additional
capital through debt and equity offerings to support our growth and future
investment opportunities.
Our insurance subsidiaries require liquidity and adequate capital to meet
ongoing obligations to policyholders and claimants and to fund operating
expenses. In addition, we attempt to maintain adequate levels of liquidity and
surplus to manage any differences between the duration of our liabilities and
invested assets. In
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the insurance industry, cash collected for premiums from policies written is
invested, interest and dividends are earned thereon, and losses and loss
adjustment expenses are paid out over a period of years. This period of time
varies by the circumstances surrounding each claim. With the exception of
litigated claims, substantially all of our losses and loss adjustment expenses
are fully settled and paid within 100 days of the claim receipt date. Additional
cash outflow occurs through payments of underwriting costs such as commissions,
taxes, payroll, and general overhead expenses.
We believe that we maintain sufficient liquidity to pay claims and expenses, as
well as to satisfy commitments in the event of unforeseen events such as
reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We
maintain a comprehensive reinsurance program at levels management considers
adequate to diversify risk and safeguard our financial position.
In the future, we anticipate our primary use of funds will be to pay claims,
reinsurance premiums, interest, and dividends and to fund operating expenses and
real estate acquisitions.
Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and
Finance Leases
The following table summarizes the principal and interest payment obligations of
our indebtedness at
Maturity Date Payment Due Date
4.25% Convertible Senior March 2037 March 1 and September 1
Notes
3.75% Callable Through September 2036 1st day of each month
Promissory Note
4.55% Promissory Note Through August 2036 1st day of each month
3.90% Promissory Note Through April 2032 1st day of each month
Finance leases Through October 2024 Various
Revolving credit Through December 2023 January 1, April 1, July 1, October 1
facility
See Note 10 -- "Long-Term Debt" to our unaudited consolidated financial
statements under Item 1 of this Quarterly Report on Form 10-Q.
Share Repurchase Plan
In
common shares during 2022 under which we may purchase shares of common stock in
open market purchases, block transactions and privately negotiated transactions
in accordance with applicable federal securities laws. See Note 18 -- "Equity"
to our unaudited consolidated financial statements under Item 1 of this
Quarterly Report on Form 10-Q for more information.
Limited Partnership Investments
Our limited partnership investments consist of six private equity funds managed
by their general partners. Four of these funds have unexpired capital
commitments which are callable at the discretion of the fund's general partner
for funding new investments or expenses of the fund. Although capital
commitments for two of the remaining funds have expired, the general partners
may request additional funds under certain circumstances. At
there was an aggregate unfunded capital balance of
Partnership Investments under Note 4 -- "Investments" to our unaudited
consolidated financial statements under Item 1 of this Quarterly Report on Form
10-Q for additional information.
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Real estate has long been a significant component of our overall investment
portfolio. It diversifies our portfolio and helps offset the volatility of other
higher-risk investments. Thus, we may consider increasing our real estate
investment portfolio should an opportunity arise.
We currently have a 90% equity interest in
liability company for which we are not the primary beneficiary. FMKT Mel JV's
real estate portfolio consists of an outparcel for ground lease or sale. We have
the option to take full ownership of this outparcel by acquiring the remaining
10% interest. Alternatively, we may sell this outparcel and allocate the profits
from the sale before liquidating FMKT Mel JV.
Sources and Uses of Cash
Cash Flows for the Three Months Ended
Net cash provided by operating activities for the three months ended
2022
from net premiums written, reinsurance recoveries (of approximately
less cash disbursed for operating expenses, losses and loss adjustment expenses
and interest payments. Net cash used in investing activities of
primarily due to the purchases of fixed-maturity and equity securities of
the purchases of property and equipment of
from sales of fixed-maturity and equity securities of
from calls, repayments and maturities of fixed-maturity securities of
primarily due to
to redeemable noncontrolling interest of
repurchases, and repayments of long-term debt of
Cash Flows for the Three Months Ended
Net cash provided by operating activities for the three months ended
2021
from net premiums written, reinsurance recoveries (of approximately
less cash disbursed for operating expenses, losses and loss adjustment expenses
and interest payments. Net cash provided by investing activities of
was primarily due to the proceeds from sales of fixed-maturity and equity
securities of
fixed-maturity securities of
limited partnership investments of
fixed-maturity and equity securities of
property and equipment of
totaled
Centerbridge for investment in TTIG, offset by
payments, and net repayment of our revolving credit facility of
Investments
The main objective of our investment policy is to maximize our after-tax
investment income with a reasonable level of risk given the current financial
market. Our excess cash is invested primarily in money market accounts,
certificates of deposit, and fixed-maturity and equity securities.
At
which are carried at fair value. Changes in the general interest rate
environment affect the returns available on new fixed-maturity investments.
While a rising interest rate environment enhances the returns available on new
investments, it reduces the market value of existing fixed-maturity investments
and thus the availability of gains on disposition. A decline in interest rates
reduces the returns available on new fixed-maturity investments but increases
the
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market value of existing fixed-maturity investments, creating the opportunity
for realized investment gains on disposition.
In the future, we may alter our investment policy as to investments in federal,
state and municipal obligations, preferred and common equity securities and real
estate mortgages, as permitted by applicable law, including insurance
regulations.
OFF-BALANCE SHEET ARRANGEMENTS
As of
partnerships in which we hold interests. Such commitments are not recognized in
the financial statements but are required to be disclosed in the notes to the
financial statements. See Note 20 -- "Commitments and Contingencies" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q for additional information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in
GAAP"). The preparation of these consolidated financial statements requires us
to make estimates and judgments to develop amounts reflected and disclosed in
our financial statements. Material estimates that are particularly susceptible
to significant change in the near term are related to our losses and loss
adjustment expenses, which include amounts estimated for claims incurred but not
yet reported. We base our estimates on various assumptions and actuarial data we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates.
We believe our accounting policies specific to losses and loss adjustment
expenses, reinsurance recoverable, reinsurance with retrospective provisions,
deferred income taxes, stock-based compensation expense, limited partnership
investments, acquired intangible assets, warrants, and redeemable noncontrolling
interest involve our most significant judgments and estimates material to our
consolidated financial statements.
Reserves for Losses and Loss Adjustment Expenses
Our liability for losses and loss adjustment expense ("Reserves") is specific to
property insurance, which is our insurance subsidiaries' only line of business.
The Reserves include both case reserves on reported claims and our reserves for
incurred but not reported ("IBNR") losses. At each period end date, the balance
of our Reserves is based on our best estimate of the ultimate cost of each claim
for those known cases and the IBNR loss reserves are estimated based primarily
on our historical experience. Changes in the estimated liability are charged or
credited to operations as the losses and loss adjustment expenses are adjusted.
The IBNR represents our estimate of the ultimate cost of all claims that have
occurred but have not been reported to us, and in some cases may not yet be
known to the insured, and future development of reported claims. Estimating the
IBNR component of our Reserves involves considerable judgment on the part of
management. At
reserved for losses and loss adjustment expenses is attributable to our estimate
of IBNR. The remaining
reported but not yet fully settled in which case we have established a reserve
based on currently available information and our best estimate of the cost to
settle each claim. At
for known cases relates to claims incurred during prior years.
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Our Reserves decreased from
Reserves of
Sally and Tropical Storm Eta, and reductions in our non-catastrophe Reserves of
established for 2022 claims is primarily driven by an allowance for those claims
that have been incurred but not reported to the company as of
The decrease of
due to settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at
to be adequate to cover our claims for losses that have occurred as of that date
including losses yet to be reported to us. However, these estimates are
continually reviewed by management as they are subject to significant
variability and may be impacted by trends in claim severity and frequency or
unusual exposures that have not yet been identified. As part of the process, we
review historical data and consider various factors, including known and
anticipated regulatory and legal developments, changes in social attitudes,
inflation and economic conditions. As experience develops and other data becomes
available, these estimates are revised, as required, resulting in increases or
decreases to the existing unpaid losses and loss adjustment expenses.
Adjustments are reflected in the results of operations in the period in which
they are made, and the liabilities may deviate substantially from prior
estimates.
Economic Impact of Reinsurance Contracts with Retrospective Provisions
Two of our reinsurance contracts include retrospective provisions that adjust
premiums in the event losses are minimal or zero. In accordance with accounting
principles generally accepted in
an asset in the period in which the absence of loss experience obligates the
reinsurer to pay cash or other consideration under the contract. In the event
that a loss arises, we will derecognize such asset in the period in which a loss
arises. Such adjustments to the asset, which accrue throughout the contract
term, will negatively impact our operating results when a catastrophic loss
event occurs during the contract term.
For the three months ended
as a reduction in ceded premiums.
As of
would be charged to earnings in the event we experience a catastrophic loss that
exceeds the coverage limit provided under such agreement.
We believe the credit risk associated with the collectability of accrued
benefits is minimal based on available information about the reinsurer's
financial position and the reinsurer's demonstrated ability to comply with
contract terms.
The above and other accounting estimates and their related risks that we
consider to be our critical accounting estimates are more fully described in our
Annual Report on Form 10-K, which we filed with the
the three months ended
with respect to any of our critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in recent
accounting pronouncements during the three months ended
compared to those described in our Annual Report on Form 10-K for the fiscal
year ended
significance, to the Company.
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ELEPHANT INSURANCE PROVIDES NOTICE OF DATA EVENT
UNIVERSAL HEALTH SERVICES INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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