HCI(US:HCI)2023-08-09 20:02PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for Q2 2023 show a significant turnaround in profitability, with positive net income and cash flow Consolidated Balance Sheets Total assets decreased slightly to $1.73 billion, while total equity increased to $188.6 million, reflecting positive net income Table: Balance Sheet Item | Balance Sheet Item | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $1,726,837 | $1,803,328 | | Total Investments | $549,682 | $615,592 | | Cash and cash equivalents | $293,991 | $234,863 | | Reinsurance recoverable, net | $550,691 | $688,359 | | Total Liabilities | $1,443,001 | $1,548,521 | | Losses and loss adjustment expenses | $748,955 | $863,765 | | Unearned premiums | $385,870 | $368,047 | | Long-term debt | $208,156 | $211,687 | | Total Equity | $188,634 | $161,254 | Consolidated Statements of Income The company reported a significant improvement in profitability, with net income of $14.9 million for Q2 2023, reversing prior-year losses Table: Metric ($ thousands, except EPS) | Metric ($ thousands, except EPS) | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 127,327 | 125,926 | 256,356 | 252,966 | | Net Premiums Earned | 115,556 | 124,919 | 225,115 | 250,682 | | Losses and LAE | 61,890 | 86,830 | 122,455 | 159,534 | | Total Expenses | 107,061 | 137,486 | 212,954 | 260,525 | | Net Income (Loss) | 14,882 | (8,542) | 32,675 | (5,751) | | Diluted EPS | $1.28 | $(1.04) | $2.81 | $(0.92) | Consolidated Statements of Cash Flows Net cash from operations was $5.9 million for H1 2023, with significant cash provided by investing activities Table: Cash Flow Activity ($ thousands) | Cash Flow Activity ($ thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | 5,944 | 21,629 | | Net cash provided by (used in) investing activities | 59,675 | (360,095) | | Net cash (used in) provided by financing activities | (6,402) | 70,267 | | Net increase (decrease) in cash | 59,215 | (268,255) | Notes to Consolidated Financial Statements Notes provide detailed accounting policies, investment portfolio, debt, reinsurance, and segment performance, highlighting key business changes - The company's primary business is property and casualty insurance through its subsidiaries HCPCI and TypTap, emphasizing internally developed technologies for underwriting and claims analysis39 - In March 2023, the company sold two retail shopping center investment properties in Melbourne and Sorrento, Florida, for a total of $31.9 million, resulting in a net realized gain of $8.9 million6870 - The company is discontinuing its flood insurance policies written in Florida by its subsidiaries HCPCI and TypTap, citing increased costs and reduced availability of flood reinsurance9697 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved Q2 and H1 2023 results to decreased losses and higher investment income, significantly improving the combined ratio - The company operates through four main segments: HCPCI Insurance Operations, TypTap Group (InsurTech), Real Estate Operations, and Corporate/Other112169 - The company's insurance business is seasonal, with hurricane risk concentrated from June to November and winter storm risk from December to March, and reinsurance costs typically reflected starting June 1st each year215 Results of Operations Q2 2023 net income was $14.9 million, driven by decreased losses and higher investment income, improving the combined ratio to 92.4% Table: Ratio to Net Premiums Earned | Ratio to Net Premiums Earned | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Loss Ratio | 53.56% | 69.51% | 54.40% | 63.64% | | Expense Ratio | 38.79% | 40.55% | 40.05% | 40.29% | | Combined Ratio | 92.35% | 110.06% | 94.45% | 103.93% | - The increase in profitability for Q2 2023 was primarily due to a decrease in losses and LAE, higher investment income, and lower policy acquisition expenses, partially offset by higher reinsurance costs (premiums ceded)184 - Gross premiums earned remained stable in Q2 2023 vs Q2 2022, as premium rate increases were offset by a reduction in policies in force from approximately 261,700 to 200,000185187 Liquidity and Capital Resources Liquidity needs are met by operations and investment portfolio, with sufficient cash for claims and expenses, supported by various debt instruments - Future liquidity requirements are expected to be met by funds from operations, primarily cash from premiums and investment income216 - The company has an unfunded capital commitment of $5.8 million for its limited partnership investments as of June 30, 2023223 Critical Accounting Policies and Estimates The most material accounting estimate is the reserve for losses and LAE, totaling $749.0 million, primarily due to prior-year claim settlements - Reserves for losses and loss adjustment expenses are a material estimate, with IBNR representing the largest and most judgmental component235236 - The company's reinsurance contracts with retrospective provisions can adjust premiums based on loss experience, resulting in a $14.0 million reduction in ceded premiums for H1 2023240241 Quantitative and Qualitative Disclosures About Market Risk The investment portfolio is exposed to interest rate, credit, and equity price risk, with strategies to maximize income and mitigate risk Table: Hypothetical Change in Interest Rates | Hypothetical Change in Interest Rates | Change in Estimated Fair Value ($ thousands) | % Change in Estimated Fair Value | | :--- | :--- | :--- | | 300 basis point increase | $(14,062) | -3.17% | | 100 basis point increase | $(4,688) | -1.06% | | 100 basis point decrease | $4,688 | 1.06% | | 300 basis point decrease | $(14,065) | 3.18% | - Credit risk is managed by investing in high-quality securities, with 97% of the fixed-maturity portfolio rated A- or higher as of June 30, 2023249250 Controls and Procedures Disclosure controls and procedures are effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures are effective as of the end of the reporting period253 - No changes in internal controls over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls254 PART II – OTHER INFORMATION Legal Proceedings Routine legal actions are not expected to materially affect financial position, operations, or cash flows - The company does not believe that any currently pending legal proceedings will have a material adverse effect on its consolidated financial position, results of operations or cash flows257 Risk Factors No material changes to previously disclosed risk factors were reported since the last Form 10-K filing - No material changes in risk factors were reported since the last Form 10-K filing258 Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased shares from employees for tax liabilities, and insurance subsidiaries face dividend restrictions from Florida regulations - In May 2023, 8,614 shares were repurchased from employees to cover tax liabilities from vesting restricted stock; these were not part of a publicly announced plan260 - The company's insurance subsidiaries are subject to dividend payment restrictions by the Florida Office of Insurance Regulation (FLOIR), which could impact the parent company's ability to pay future dividends261262 Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period Mine Safety Disclosures This item is not applicable to the company Other Information The company reported no other information required to be disclosed under this item Exhibits This section lists all exhibits filed as part of the quarterly report, including articles of incorporation, debt indentures, and officer certifications