HCI(HCI) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The company's financial statements for the period ended June 30, 2024, reflect significant growth in revenue and net income, with total assets increasing to $1.91 billion and total equity rising to $453.2 million, despite a net decrease in cash due to investing and financing activities Consolidated Balance Sheets As of June 30, 2024, total assets increased to $1.91 billion, driven by investments, while total liabilities rose to $1.46 billion, and total equity grew substantially to $453.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Total investments | $789,491 | $520,251 | | Cash and cash equivalents | $445,829 | $536,478 | | Total assets | $1,911,381 | $1,811,316 | | Liabilities & Equity | | | | Losses and loss adjustment expenses | $571,646 | $585,073 | | Unearned premiums | $542,839 | $501,157 | | Long-term debt | $184,912 | $208,495 | | Total liabilities | $1,457,347 | $1,387,991 | | Total equity | $453,243 | $327,165 | Consolidated Statements of Income The company reported a significant increase in profitability for Q2 and H1 2024, with Q2 net income surging to $57.1 million and diluted EPS rising to $4.24, driven by a 61.7% increase in total revenue Key Income Statement Data (in thousands, except per share amounts) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $206,245 | $127,327 | $412,859 | $256,356 | | Net Premiums Earned | $186,848 | $115,556 | $375,386 | $225,115 | | Net Income | $57,099 | $14,882 | $114,055 | $32,675 | | Diluted Earnings Per Share | $4.24 | $1.28 | $8.04 | $2.81 | Consolidated Statements of Comprehensive Income Comprehensive income for Q2 2024 substantially increased to $57.6 million, primarily driven by higher net income and a positive swing in other comprehensive income from unrealized investment gains Comprehensive Income Summary (in thousands) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $57,099 | $14,882 | $114,055 | $32,675 | | Other Comprehensive Income (Loss) | $536 | $(1,680) | $599 | $3,283 | | Comprehensive Income | $57,635 | $13,202 | $114,654 | $35,958 | Consolidated Statements of Equity Total equity significantly increased to $453.2 million by June 30, 2024, primarily driven by net income and senior note conversions, partially offset by dividends and noncontrolling interest reductions - Total equity grew to $453.2 million at June 30, 2024, from $327.2 million at December 31, 2023[15] - Key drivers for the equity increase in the first six months of 2024 included net income ($111.2M) and conversion of senior notes to common stock ($23.4M), which were partially offset by common stock dividends ($8.2M)[15] Consolidated Statements of Cash Flows For H1 2024, the company generated $153.0 million in operating cash flow, but significant investing and financing activities, including a $100 million redemption, led to a net cash decrease of $90.6 million Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $152,985 | $5,944 | | Net cash (used in) provided by investing activities | $(179,433) | $59,675 | | Net cash used in financing activities | $(64,174) | $(6,402) | - A significant financing activity in H1 2024 was the $100 million redemption of redeemable noncontrolling interests, which was partially funded by $48 million in net borrowing under a revolving credit facility[20] Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, highlighting P&C insurance, real estate, and AIF operations, an increased investment portfolio, reduced long-term debt, improved reinsurance, and the $100 million redemption of TTIG Series A Preferred Stock, with a subsequent transfer of TypTap Insurance Company to HCI - The company is primarily engaged in property and casualty insurance through its subsidiaries HCPCI and TypTap, and also operates in real estate and provides attorney-in-fact (AIF) services for a reciprocal insurance exchange (CORE)[23] - In Q2 2024, the company assumed approximately 300 policies from Citizens Property Insurance Corporation, representing $120.1 million in annualized written premiums[24] - Total long-term debt decreased from $208.5 million to $184.9 million, mainly due to the conversion and redemption of the 4.25% Convertible Senior Notes in Q1 2024[78][80] - On January 22, 2024, the company's subsidiary TTIG redeemed all of its Series A Preferred Stock for a total of $100 million plus accrued dividends[121] - Subsequent to the quarter end, on July 1, 2024, subsidiary TTIG transferred its entire ownership of TypTap Insurance Company (TTIC) to the parent company, HCI, in exchange for the repayment of promissory notes totaling approximately $118 million[143] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant increase in net income and EPS for Q2 and H1 2024 to higher net premiums earned and improved underwriting profitability, while maintaining sufficient liquidity for strategic investments and financing activities Overview HCI Group operates through five segments, with HCPCI and TypTap insurance being primary revenue drivers, and recently completed a restructuring where HCI acquired TypTap Insurance Company from its subsidiary TTIG - The company operates through five main segments, with property and casualty insurance (HCPCI and TypTap) being the largest contributors to revenue and assets[146][147] - A significant post-quarter event on July 1, 2024, involved an internal restructuring where HCI acquired TypTap Insurance Company (TTIC) from its subsidiary TTIG, simplifying the corporate structure[156] Results of Operations The company's financial performance dramatically improved in H1 2024, with Q2 net income reaching $57.1 million, driven by an 80% increase in gross premiums earned and a significant improvement in underwriting profitability, reducing the combined ratio to 67.8% Financial Performance Summary (in thousands) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Premiums Earned | $186,848 | $115,556 | $375,386 | $225,115 | | Net Income | $57,099 | $14,882 | $114,055 | $32,675 | | Diluted EPS | $4.24 | $1.28 | $8.04 | $2.81 | | Combined Ratio (excl. interest) | 67.85% | 90.34% | 67.35% | 92.17% | - The increase in gross premiums earned in Q2 2024 was primarily driven by $61.8 million from policies assumed from Citizens Property Insurance Corporation[159] - The loss ratio improved to 41.9% in Q2 2024 from 53.5% in Q2 2023, primarily due to the significant increase in net premiums earned[168] Liquidity and Capital Resources The company maintains liquidity through operations, debt, and equity, generating $153.0 million in operating cash flow in H1 2024, though significant investing and financing activities, including a $100 million stock redemption, resulted in a net cash decrease Sources and Uses of Cash for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $152,985 | $5,944 | | Net cash (used in) provided by investing activities | $(179,433) | $59,675 | | Net cash used in financing activities | $(64,174) | $(6,402) | - The company anticipates its primary use of funds will be to pay claims, reinsurance premiums, interest, dividends, and to fund real estate acquisitions[185] Critical Accounting Policies and Estimates Reserves for losses and loss adjustment expenses are a critical accounting estimate, totaling $571.6 million as of June 30, 2024, with reinsurance contracts having accrued a $58.3 million benefit from retrospective provisions - Reserves for losses and loss adjustment expenses are a critical estimate. At June 30, 2024, reserves for incurred but not reported (IBNR) losses constituted $505.8 million of the total $571.6 million reserve[197][198] - The company's reinsurance contracts with retrospective provisions resulted in an accrued benefit of $58.3 million as of June 30, 2024. This amount represents a potential charge to earnings if a catastrophic loss occurs that exceeds the coverage limit[202] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio faces interest rate, credit, and equity price risks, managed through diversification and high-grade securities, with a 100 basis point interest rate increase hypothetically decreasing fixed-maturity fair value by $7.0 million Fixed-Maturity Securities Interest Rate Sensitivity (as of June 30, 2024) | Hypothetical Change in Interest Rates | Change in Estimated Fair Value (in thousands) | % Change in Estimated Fair Value | | :--- | :--- | :--- | | 100 basis point increase | $(6,975) | -1.09% | | 100 basis point decrease | $6,977 | 1.09% | - The company mitigates credit risk by investing primarily in investment-grade securities. As of June 30, 2024, 96% of the fixed-maturity portfolio's amortized cost was rated A- or better[208] - The equity portfolio is diversified across various sectors, with the largest concentrations in Financials (13%), Consumer (14%), and Technology (9%), as well as debt and equity mutual/exchange-traded funds[209] Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective as of June 30, 2024, with no material changes to internal control over financial reporting during the second quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of the end of the reporting period[210] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls[211] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal actions, with management not anticipating any material adverse effect on its financial position, results, or cash flows from pending proceedings - The company does not expect any currently pending legal actions to have a material adverse effect on its consolidated financial position, results of operations, or cash flows[211] Item 1A. Risk Factors No material changes have occurred in the risk factors previously disclosed in the company's Annual Report on Form 10-K filed on March 8, 2024 - No material changes have occurred in the risk factors previously disclosed in the Form 10-K filed on March 8, 2024[212] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered equity sales, repurchased 4,722 shares for employee tax obligations, and detailed regulatory restrictions on dividend payments from its insurance subsidiaries by FLOIR Share Repurchases (Q2 2024) | Month | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2024 | 0 | N/A | | May 2024 | 4,445 | $102.33 | | June 2024 | 277 | $91.54 | | Total | 4,722 | $101.70 | - The company's insurance subsidiaries are subject to Florida law restricting the amount of dividends they can pay to the parent company without prior approval from the Florida Office of Insurance Regulation (FLOIR)[214][215] - During the first six months of 2024, the insurance subsidiaries paid dividends of $11,000,000 to the parent company, HCI[216] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the reporting period - None[216] Item 4. Mine Safety Disclosures This item is not applicable to the company - None[216] Item 5. Other Information The company reported no other information for this item - None[216] Item 6. Exhibits This section lists all exhibits filed with the quarterly report, including reinsurance contracts, employment agreements, officer certifications, and interactive data files - The report includes numerous exhibits, such as new reinsurance contracts for the 2024-2025 treaty year, an executive employment agreement for the CEO, and required CEO/CFO certifications[216][232][233]