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HCI > SEC Filings for HCI > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for HCI GROUP, INC.


7-Nov-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included under this Item 2 and elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 14, 2013. Unless 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 HCI Group, Inc. and its subsidiaries. All dollar amounts, except per share amounts stated in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands 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 effect of governmental regulation; changes in insurance regulations; the frequency and extent of claims; uncertainties inherent in reserve estimates; catastrophic events; a change 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; and other risks and uncertainties detailed herein and from time to time in our SEC reports.

OVERVIEW

General

HCI Group, Inc. is a Florida-based company established in 2006. We changed our name in May 2013 from Homeowners Choice, Inc. to HCI Group, Inc. Our property and casualty insurance operations began in 2007. Over the past few years, we have broadened and diversified our business portfolio through acquisitions to include information technologies and, also, real estate operations under which we operate one restaurant and two marina facilities. Based on the organizational structure, revenue sources, and evaluation of financial and operating performances by management, we have the following operating segments:

a) Insurance Operations

Property and casualty insurance

Reinsurance

b) Other Operations

Real estate

Information technology


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For the three months ended September 30, 2013 and 2012, revenues from property and casualty insurance operations represented 95.9% and 91.4%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2013 and 2012, revenues from property and casualty insurance operations represented 95.1% and 93.4%, respectively, of total revenues of all operating segments. As a result, we have determined the property and casualty insurance operations to be our only reportable operating segment.

Insurance Operations

Property and Casualty Insurance

Through certain subsidiaries, primarily Homeowners Choice Property & Casualty Insurance Company, Inc. ("HCPCI"), we provide property and casualty insurance to homeowners, condominium owners, and tenants in the state of Florida. Under our Homeowners Choice brand, HCPCI offers insurance products at competitive rates, while pursuing profitability using selective underwriting criteria.

HCPCI began operations in 2007 by participating in a "take-out program," which is a legislatively mandated program designed to encourage private insurance companies to assume policies from Citizens Property Insurance Corporation ("Citizens"), a Florida state-supported insurer. Our growth since inception has resulted primarily from a series of policy assumptions from Citizens and one from HomeWise Insurance Company ("HomeWise"). This growth track has been beneficial to us in terms of reduced policy acquisition costs and periods of lower reinsurance costs. Even though expanding our policyholder base through opportunistic assumptions continues to be important to our growth plan, we plan to seek other opportunities to expand and to provide new or additional product offerings.

Our preliminary phase to enter the property and casualty insurance market in the state of Alabama is now complete. Our subsidiary, Homeowners Choice Assurance Company, Inc. has been approved and licensed by the Alabama Department of Insurance. We expect to begin writing policies during 2014. Our presence in the state of Alabama will increase our geographic diversification and support our overall long-term growth strategy.

Reinsurance

We have a Bermuda-based reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd., which participates in HCPCI's reinsurance program under our Claddaugh brand.

Other Operations

Real Estate

Operating under our Greenleaf Capital brand, real estate operations consist of several properties we own including our headquarters building in Tampa, Florida and a secondary site in Ocala, Florida, which will be used by our insurance operations. In addition, the Ocala location will be used by our home office operations in the event we experience any disruption from a catastrophic event. We also own properties in Treasure Island, Florida and Tierra Verde, Florida with a combined 20 acres of waterfront property.


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With the exception of the Ocala location, we lease office or retail space at each location to non-affiliates on various terms. In addition, we own and operate one full-service restaurant and two marinas that we acquired in connection with our purchase of the waterfront properties. The combined marina facilities provide services to include: a) one dry stack boat storage building with capacity for approximately 180 boats; b) approximately 70 wet slips; c) two fuel facilities; and d) open areas for parking and storage. Dry stack boat storage space is generally rented on a monthly or annual basis while the wet slips are rented on a daily or monthly basis.

Information Technology

Our information technology segment includes a team of experienced programmers with extensive experience in developing web-based products and applications for mobile devices. The operations, which are primarily in India, are focused on developing innovative products or services that can be marketed to the public and also on providing affiliates with back-office technology support services that can facilitate and improve ongoing operations.

The technologies originally developed in-house for our own insurance operations were launched for use by third parties under our Exzeo brand. Exzeo is a free to join, web-based application available at Exzeo.com that enables seamless integration between organizations, co-workers and business partners. Exzeoallows users to manage projects through communication and collaboration with other participants in a real-time work environment.

Recent Developments

On October 17, 2013, our Board of Directors declared a quarterly dividend of $0.275 per common share. The dividends are payable on December 20, 2013 to stockholders of record on November 15, 2013.

On October 17, 2013, our Board of Directors declared a dividend distribution of one preferred share purchase right ("Right") for each outstanding share of our common stock, no par value ("Common Shares"). The dividend is payable to the shareholders of record at the close of business on November 15, 2013. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, no par value ("Series B Preferred Share") at a price of $125.00 per one one-hundredth of a Series B Preferred Share, subject to adjustment. The description and terms of the Rights are set forth in a rights agreement, dated October 18, 2013, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Rights become exercisable in the event any person or group acquires 10% or more of the Common Shares without the approval of our Board of Directors, and until such time are inseparable from and trade with the Common Shares. The Rights have a de minimis fair value. The Rights Agreement expires October 18, 2018.

Effective November 5, 2013, we assumed approximately 35,000 policies upon completion of our ninth assumption transaction with Citizens representing approximately $78,000 in additional annualized premiums.


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RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine
months ended September 30, 2013 and 2012 (amounts in thousands, except per share
amounts):



                                              Three Months Ended                   Nine Months Ended
                                                 September 30,                       September 30,
                                            2013              2012              2013              2012

Operating Revenue
Gross premiums earned                     $  81,244            53,109           245,743           161,579
Premiums ceded                              (28,310 )         (22,506 )         (74,923 )         (53,475 )

Net premiums earned                          52,934            30,603           170,820           108,104

Net investment income                           380                47               814               871
Policy fee income                               815               624             3,013             2,167
Net realized investment gains
(losses)                                         31                (4 )              43                26
Gain on bargain purchase                         -                 -                 -                179
Other income                                    532               211             1,146               641

Total operating revenue                      54,692            31,481           175,836           111,988


Operating Expenses
Losses and loss adjustment expenses          14,489            15,017            47,775            50,382
Policy acquisition and other
underwriting expenses                         8,887             6,611            22,163            19,690
Interest expense                                847                -              2,379                -
Other operating expenses                      8,825             4,728            22,298            13,401

Total operating expenses                     33,048            26,356            94,615            83,473

Income before income taxes                   21,644             5,125            81,221            28,515
Income taxes                                  8,266             2,299            31,221            11,459

Net income                                $  13,378             2,826            50,000            17,056
Preferred stock dividends                       (22 )             (42 )             (88 )            (286 )

Income available to common
stockholders                              $  13,356             2,784            49,912            16,770


Ratios to Net Premiums Earned:
Loss Ratio                                    27.37 %           49.07 %           27.97 %           46.61 %
Expense Ratio                                 35.06 %           37.05 %           27.42 %           30.61 %

Combined Ratio                                62.43 %           86.12 %           55.39 %           77.22 %


Ratios to Gross Premiums Earned:
Loss Ratio                                    17.84 %           28.28 %           19.44 %           31.18 %
Expense Ratio                                 22.84 %           21.35 %           19.06 %           20.48 %

Combined Ratio                                40.68 %           49.63 %           38.50 %           51.66 %


Per Share Data:
Basic earnings per common share           $    1.17         $    0.30         $    4.46         $    2.08

Diluted earnings per common share         $    1.13         $    0.27         $    4.32         $    1.79


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Comparison of the Three Months ended September 30, 2013 to the Three Months ended September 30, 2012

Our results of operations for the three months ended September 30, 2013 reflect income available to common stockholders of $13,356, or $1.13 earnings per diluted common share, compared to income available to common stockholders of $2,784, or $0.27 earnings per diluted common share, for the three months ended September 30, 2012.

Revenue

Gross Premiums Earned for the three months ended September 30, 2013 and 2012 were $81,244 and $53,109, respectively, and primarily reflect the revenue from policies acquired from HomeWise and Citizens and subsequent renewals. The $28,135 increase over the corresponding period in 2012 was primarily attributable to $32,292 of revenue from the Citizens assumption we completed in November 2012.

Premiums Ceded for the three months ended September 30, 2013 and 2012 were approximately $28,310 and $22,506, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed the thresholds defined by our catastrophe excess of loss reinsurance treaties. For the three months ended September 30, 2013, premiums ceded include a benefit of $5,484 related to the provisions under certain reinsurance contracts. See "Economic Impact of Reinsurance Contracts with Retrospective Provisions" under "Critical Accounting Policies and Estimates" below. Our reinsurance rates are based primarily on policy exposures reflected in gross premiums earned. Premiums ceded were 34.8% and 42.4% of gross premiums earned during the three months ended September 30, 2013 and 2012, respectively.

Net Premiums Earned for the three months ended September 30, 2013 and 2012 were $52,934 and $30,603, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.

Net Premiums Written during the three months ended September 30, 2013 and 2012 totaled $49,609 and $31,020, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended September 30, 2013 and 2012 (dollars in thousands):

                                                      Three Months Ended
                                                         September 30,
                                                       2013          2012
         Net Premiums Written                       $   49,609       31,020
         Decrease (Increase) in Unearned Premiums        3,325         (417 )

         Net Premiums Earned                        $   52,934       30,603

Policy Fee Income for the three months ended September 30, 2013 and 2012 was $815 and $624, respectively. The increase in 2013 from the corresponding period is primarily attributable to an increase in policy renewals, resulting from the November 2012 assumption from Citizens.


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Expenses

Our Losses and Loss Adjustment Expenses amounted to $14,489 and $15,017, respectively, during the three months ended September 30, 2013 and 2012. Our losses for the three months ended September 30, 2012 included approximately $3,200 related to claims from Tropical Storm Debby and Tropical Storm Isaac, which occurred in June and August 2012, respectively. See "Reserves for Losses and Loss Adjustment Expenses" under "Critical Accounting Policies and Estimates" below.

Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2013 and 2012 of $8,887 and $6,611, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for production and renewal of policies, premium taxes, marketing costs, and policy fees. The $2,276 increase from the corresponding period in 2012 is primarily attributable to an increase in commissions and premium taxes related to the increase in policy renewals in 2013.

Other Operating Expenses for the three months ended September 30, 2013 and 2012 were $8,825 and $4,728, respectively. The $4,097 increase is primarily attributable to a $3,459 increase in compensation and related expenses, of which $1,635 is non-cash expense related to our restricted stock grants, and a $638 increase in our other administrative costs, which include a variety of professional service fees, license fees, corporate insurance, lease expense, information system expense, and other general expenses. As of September 30, 2013, we had 171 permanent and temporary employees located at our headquarters in Tampa, Florida compared to 137 employees as of September 30, 2012. We also have 68 employees located in Noida, India at September 30, 2013 versus 62 at September 30, 2012.

Income Taxes for the three months ended September 30, 2013 and 2012 were $8,266 and $2,299, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 38.2% for 2013 and 44.9% for 2012.

Ratios:

The loss ratio applicable to the three months ended September 30, 2013 (losses and loss adjustment expenses incurred related to net premiums earned) was 27.4% compared to 49.1% for the three months ended September 30, 2012. Our loss ratio was positively impacted by a significant increase in our net premiums earned during 2013 (See Gross Premiums Earned above).

The expense ratio applicable to the three months ended September 30, 2013 (defined as underwriting expenses, interest and other operating expenses related to net premiums earned) was 35.0% compared to 37.0% for the three months ended September 30, 2012. The decrease in our expense ratio is primarily attributable to the significant increase in 2013 in our net premiums earned.

The combined loss and expense ratio (total of all expenses related to net premiums earned) is the key measure of underwriting performance traditionally used in the property and casualty industry. A combined ratio that is less than 100% generally reflects favorable underwriting results. A combined ratio over 100% generally reflects unprofitable underwriting results. Our combined ratio for the three months ended September 30, 2013 was 62.4% compared to 86.1% for the three months ended September 30, 2012. Our combined ratio was positively impacted by a significant increase in our net premiums earned during 2013 (see Gross Premiums Earned above) and, also, by continued favorable trends in 2013 related to our losses and loss adjustment expenses.


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Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined loss and expense ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined loss and expense ratio to gross premiums earned for the three months ended September 30, 2013 was 40.7% compared to 49.6% for the three months ended September 30, 2012.

Comparison of the Nine Months ended September 30, 2013 to the Nine Months ended September 30, 2012

Our results of operations for the nine months ended September 30, 2013 reflect income available to common stockholders of $49,912, or $4.32 earnings per diluted common share, compared to income available to common stockholders of $16,770, or $1.79 earnings per diluted common share, for the nine months ended September 30, 2012.

Revenue

Gross Premiums Earned for the nine months ended September 30, 2013 and 2012 were $245,743 and $161,579, respectively, and primarily reflect the revenue from policies acquired from HomeWise and Citizens and subsequent renewals. The $84,164 increase over the corresponding period in 2012 was primarily attributable to $97,724 of revenue from the Citizens assumption we completed in November 2012.

Premiums Ceded for the nine months ended September 30, 2013 and 2012 were approximately $74,923 and $53,475, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed the thresholds defined by our catastrophe excess of loss reinsurance treaties. For the nine months ended September 30, 2013, premiums ceded include a benefit of $6,785 related to the provisions under certain reinsurance contracts. See "Economic Impact of Reinsurance Contracts with Retrospective Provisions" under "Critical Accounting Policies and Estimates" below. Our reinsurance rates are based primarily on policy exposures reflected in gross premiums earned. Premiums ceded were 30.5% and 33.1% of gross premiums earned during the six months ended June 30, 2013 and 2012, respectively.

Net Premiums Earned for the nine months ended September 30, 2013 and 2012 were $170,820 and $108,104, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.

Net Premiums Written during the nine months ended September 30, 2013 and 2012 totaled $204,692 and $120,273, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.


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The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months ended September 30, 2013 and 2012 (dollars in thousands):

                                                 Nine Months Ended
                                                   September 30,
                                                2013           2012
              Net Premiums Written            $ 204,692        120,273
              Increase in Unearned Premiums     (33,872 )      (12,169 )

              Net Premiums Earned             $ 170,820        108,104

Policy Fee Income for the nine months ended September 30, 2013 and 2012 was $3,013 and $2,167, respectively. The increase in 2013 from the corresponding period is primarily due to an increase in policy renewals.

Expenses

Our Losses and Loss Adjustment Expenses amounted to $47,775 and $50,382, respectively, during the nine months ended September 30, 2013 and 2012. During the nine months ended September 30, 2013, we experienced favorable development of $2,438 with respect to our net unpaid losses and loss adjustment expenses established as of December 31, 2012, which contributed to the overall favorable variance of $2,607 with respect to the total losses and loss adjustment expenses incurred during the nine months ended September 30, 2013 as compared to the corresponding period in 2012. In addition, our losses for the nine months ended September 30, 2012 included approximately $4,000 related to claims from Tropical Storm Debby and Tropical Storm Isaac, which occurred in June and August 2012, respectively. See "Reserves for Losses and Loss Adjustment Expenses" under "Critical Accounting Policies and Estimates" below.

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2013 and 2012 of $22,163 and $19,690, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for production and renewal of policies, premium taxes, marketing costs, and policy fees. The $2,473 increase from the corresponding period in 2012 is primarily attributable to an increase in commissions and premium taxes related to the increase in policy renewals in 2013, the effect of which is offset by a one-time charge of $1,200 in 2012 resulting from a U.S. GAAP change in accounting for deferred acquisition costs.

Other Operating Expenses for the nine months ended September 30, 2013 and 2012 were $22,298 and $13,401, respectively. The $8,897 increase is primarily attributable to a $7,089 increase in compensation and related expenses, of which $2,945 is non-cash expense related to our restricted stock grants, and a $1,808 increase in our other administrative costs, which include a variety of professional service fees, license fees, corporate insurance, lease expense, information system expense, and other general expenses. As of September 30, 2013, we had 171 permanent and temporary employees located at our headquarters in Tampa, Florida compared to 137 employees as of September 30, 2012. We also have 68 employees located in Noida, India at September 30, 2013 versus 62 at September 30, 2012.

Income Taxes for the nine months ended September 30, 2013 and 2012 were $31,221 and $11,459, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 38.4% for 2013 and 40.2% for 2012.


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Ratios:

The loss ratio applicable to the nine months ended September 30, 2013 (losses and loss adjustment expenses incurred related to net premiums earned) was 28.0% compared to 46.6% for the nine months ended September 30, 2012. Our loss ratio was positively impacted by a significant increase in our net premiums earned during 2013 (See Gross Premiums Earned and Losses and Loss Adjustment Expenses above).

The expense ratio applicable to the nine months ended September 30, 2013 (defined as underwriting expenses, interest and other operating expenses related to net premiums earned) was 27.4% compared to 30.6% for the nine months ended September 30, 2012. The decrease in our expense ratio is primarily attributable to the significant increase in 2013 in our net premiums earned.

The combined loss and expense ratio (total of all expenses related to net premiums earned) is the key measure of underwriting performance traditionally used in the property and casualty industry. A combined ratio that is less than 100% generally reflects favorable underwriting results. A combined ratio over 100% generally reflects unprofitable underwriting results. Our combined ratio for the nine months ended September 30, 2013 was 55.4% compared to 77.2% for the nine months ended September 30, 2012. Our combined ratio was positively impacted by a significant increase in our net premiums earned during 2013 (see Gross Premiums Earned above) and, also, by continued favorable trends in 2013 related to our losses and loss adjustment expenses.

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