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HCI > SEC Filings for HCI > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for HCI GROUP, INC.

Form 10-Q for HCI GROUP, INC.


6-Aug-2014

Quarterly Report


ITEM 2 - 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 Securities and Exchange Commission ("SEC") on March 12, 2014. 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., a Florida corporation incorporated in 2006, 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 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; and other risks and uncertainties detailed herein and from time to time in our SEC reports.

OVERVIEW - General

HCI Group, Inc. owns subsidiaries engaged in property and casualty insurance, information technology, real estate and reinsurance. Based on our organizational structure, revenue sources, and evaluation of financial and operating performances by management, we manage our operations under one business segment, which includes the following operations:

a) Insurance Operations

Property and casualty insurance

Reinsurance

b) Other Operations

Information technology

Real estate

For the three months ended June 30, 2014 and 2013, revenues from property and casualty insurance operations represented 95.6% and 94.9%, respectively, of total revenues of all operating


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segments. For the six months ended June 30, 2014 and 2013, revenues from property and casualty insurance operations represented 95.9% and 94.8%, respectively, of total revenues of all operating segments. As a result, our property and casualty insurance operations are our only reportable operating segment.

Insurance Operations

Property and Casualty Insurance

Our subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. ("HCPCI"), is a leading provider of property and casualty insurance in the state of Florida. HCPCI along with certain of our other subsidiaries currently provides 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, 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. 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. In January 2014, HCPCI began offering flood coverage on a limited basis as a policy endorsement to eligible new and pre-existing Florida customers.

As part of our plan for geographical expansion into other states, Homeowners Choice Assurance Company, Inc. ("HCA") was organized to enter the Alabama property and casualty insurance market. HCA was approved and licensed by the Alabama Department of Insurance in August 2013. HCA expects to begin writing policies during 2015.

Reinsurance

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd., which participates in HCPCI's reinsurance program.

Other Operations

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 primarily in India, are focused on developing cloud-based, innovative products or services that can be marketed to the public in addition to providing affiliates with back-office technology support services that can facilitate and improve ongoing operations.

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


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We recently introduced to a selected group of independent insurance agents our new web-based tool called PropletTM. Agents can search a property's insurance-related information such as wind mitigation reports, inspection reports, claims activity reports or flood zone areas by name, address or by dropping a pin on a specific location on a map interface. In addition, agents can get an instant insurance quote from HCPCI via Proplet. We plan to continually improve this technology as part of our commitment to exceptional service to policyholders and agents.

Real Estate

Our real estate operations consist of several properties we own including our headquarters building in Tampa, Florida and a secondary insurance operations site in Ocala, Florida. In addition, the Ocala location serves as our alternative site in the event we experience any significant disruption at our headquarters building. We also own investment real estate in Treasure Island, Florida and Tierra Verde, Florida with a combined 20 acres of waterfront property.

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 offer to the general public: a) one dry-stack boat storage facility 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.

In June 2014, the Company's wholly owned subsidiary, Greenleaf Capital, LLC, entered into an Acquisition, Development and Construction loan arrangement ("ADC Arrangement") under which it agreed to provide financing up to a maximum of $9,785 for the acquisition, development and construction of a retail shopping center and appurtenant facilities. Greenleaf Capital has an option to purchase the property when the construction project is completed contingent upon tenant rental commitments for at least 90% of rentable space being secured by the developer. We believe this opportunity will enable us to grow our real estate portfolio and diversify our future sources of income. See Note 3 - "Investments" under ADC Arrangement to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Recent Events

On June 26, 2014, our Board of Directors declared a quarterly dividend of $0.275 per common share. The dividends are payable on September 19, 2014 to stockholders of record on August 15, 2014.


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RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six
months ended June 30, 2014 and 2013 (dollar amounts in thousands, except per
share amounts):



                                              Three Months Ended                 Six Months Ended
                                                   June 30,                          June 30,
                                            2014             2013             2014             2013

Operating Revenue
Gross premiums earned                     $  91,221        $  81,952        $ 185,109        $ 164,499
Premiums ceded                              (28,572 )        (24,617 )        (56,080 )        (46,613 )

Net premiums earned                          62,649           57,335          129,029          117,886

Net investment income                         1,481              295            2,540              434
Policy fee income                               638            1,426              895            2,198
Net realized investment gains
(losses)                                      1,167               (8 )          1,171               12
Other income                                    349              285              766              614

Total operating revenue                      66,284           59,333          134,401          121,144


Operating Expenses
Losses and loss adjustment expenses          18,383           17,414           36,948           33,286
Policy acquisition and other
underwriting expenses                         9,559            7,308           18,688           13,276
Interest expense                              2,609              846            5,183            1,532
Other operating expenses                      9,350            7,358           18,889           13,473

Total operating expenses                     39,901           32,926           79,708           61,567

Income before income taxes                   26,383           26,407           54,693           59,577
Income tax expense                            9,953           10,172           20,643           22,955

Net income                                $  16,430        $  16,235        $  34,050        $  36,622
Preferred stock dividends                         1              (32 )              4              (66 )

Income available to common
stockholders                              $  16,431        $  16,203        $  34,054        $  36,556


Ratios to Net Premiums Earned:
Loss Ratio                                    29.34 %          30.37 %          28.64 %          28.24 %
Expense Ratio                                 34.35 %          27.06 %          33.14 %          23.99 %

Combined Ratio                                63.69 %          57.43 %          61.78 %          52.23 %


Ratios to Gross Premiums Earned:
Loss Ratio                                    20.15 %          21.25 %          19.96 %          20.23 %
Expense Ratio                                 23.59 %          18.93 %          23.10 %          17.20 %

Combined Ratio                                43.74 %          40.18 %          43.06 %          37.43 %


Per Share Data:
Basic earnings per common share           $    1.53        $    1.44        $    3.14        $    3.31

Diluted earnings per common share         $    1.39        $    1.40        $    2.84        $    3.20


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Comparison of the Three Months ended June 30, 2014 to the Three Months ended June 30, 2013

Our results of operations for the three months ended June 30, 2014 reflect income available to common stockholders of $16,431, or $1.39 earnings per diluted common share, compared with $16,203, or $1.40 earnings per diluted common share, for the three months ended June 30, 2013.

Revenue

Gross Premiums Earned for the three months ended June 30, 2014 and 2013 were $91,221 and $81,952, respectively. The $9,269 increase over the corresponding period in 2013 was primarily attributable to revenue from the Citizens assumption completed in November 2013.

Premiums Ceded for the three months ended June 30, 2014 and 2013 were approximately $28,572 and $24,617, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed thresholds defined by our catastrophe excess of loss reinsurance treaties. For the three months ended June 30, 2014 and 2013, premiums ceded reflect reductions of $5,056 and $1,301, respectively, related to the provisions under certain reinsurance contracts. See "Economic Impact of Reinsurance Contracts with Retrospective Provisions" under "Critical Accounting Policies and Estimates." Our reinsurance rates are based primarily on policy exposures reflected in gross premiums earned. Premiums ceded were 31.3% and 30.0% of gross premiums earned during the three months ended June 30, 2014 and 2013, respectively.

Net Premiums Written during the three months ended June 30, 2014 and 2013 totaled $112,348 and $107,830, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

Net Premiums Earned for the three months ended June 30, 2014 and 2013 were $62,649 and $57,335, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended June 30, 2014 and 2013:

                                                 Three Months Ended
                                                      June 30,
                                                2014           2013
              Net Premiums Written            $ 112,348      $ 107,830
              Increase in Unearned Premiums     (49,699 )      (50,495 )

              Net Premiums Earned             $  62,649      $  57,335

Net Investment Income for the three months ended June 30, 2014 and 2013 was $1,481 and $295, respectively. The increase in 2014 is primarily due to the increase in our investment portfolio, which has grown from $66,468 at June 30, 2013 to $179,180 at June 30, 2014.

Policy Fee Income for the three months ended June 30, 2014 and 2013 was $638 and $1,426, respectively. The decrease in 2014 from the corresponding period is primarily attributable to the change in the fourth quarter of 2013 in the method of recognizing policy fees, which are recognized ratably over the policy coverage period.


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Expenses

Our Losses and Loss Adjustment Expenses amounted to $18,383 and $17,414, respectively, during the three months ended June 30, 2014 and 2013. 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 June 30, 2014 and 2013 of $9,559 and $7,308, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for production and renewal of policies, premium taxes and brokerage fees. The $2,251 increase from the corresponding period in 2013 is primarily attributable to commissions and premium taxes related to the policies assumed from Citizens in 2012 and 2013 that have renewed and are included in 2014 direct written premiums.

Interest Expense for the three months ended June 30, 2014 and 2013 was $2,609 and $846, respectively. The $1,763 increase was a result of the 3.875% convertible debt offering completed in December 2013.

Other Operating Expenses for the three months ended June 30, 2014 and 2013 were $9,350 and $7,358, respectively. The $1,992 increase is primarily attributable to a $2,075 increase in compensation and related expenses of which $1,485 relates to stock-based compensation and accrued bonus expense. As of June 30, 2014, we had 176 employees located at our headquarters in Florida compared with 161 employees as of June 30, 2013. We also had 82 employees located in Noida, India at June 30, 2014 versus 64 at June 30, 2013.

Income Tax Expense for the three months ended June 30, 2014 and 2013 were $9,953 and $10,172, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 37.7% for 2014 and 38.5% for 2013. The slight decrease in the 2014 effective tax rate was primarily attributable to investment income on tax-exempt securities.

Ratios:

The loss ratio applicable to the three months ended June 30, 2014 (losses and loss adjustment expenses incurred related to net premiums earned) was 29.3% compared with 30.4% for the three months ended June 30, 2013. (See Gross Premiums Earned and Losses and Loss Adjustment Expenses above).

The expense ratio applicable to the three months ended June 30, 2014 (defined as underwriting expenses, interest and other operating expenses related to net premiums earned) was 34.4% compared with 27.0% for the three months ended June 30, 2013. The increase in our expense ratio is primarily attributable to the increase in 2014 specific to compensation and related costs and interest expense.

The combined ratio (total of all expenses in relation to net premiums earned) is the measure of underwriting profitability before other income. Our combined ratio for the three months ended June 30, 2014 was 63.7% compared with 57.4% for the three months ended June 30, 2013.

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 June 30, 2014 was 43.7% compared with 40.2% for the three months ended June 30, 2013.


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Comparison of the Six Months ended June 30, 2014 to the Six Months ended June 30, 2013

Our results of operations for the six months ended June 30, 2014 reflect income available to common stockholders of $34,054, or $2.84 earnings per diluted common share, compared with $36,556, or $3.20 earnings per diluted common share, for the six months ended June 30, 2013.

Revenue

Gross Premiums Earned for the six months ended June 30, 2014 and 2013 were $185,109 and $164,499, respectively. The $20,610 increase over the corresponding period in 2013 was primarily attributable to revenue from the Citizens assumption completed in November 2013.

Premiums Ceded for the six months ended June 30, 2014 and 2013 were approximately $56,080 and $46,613, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed thresholds defined by our catastrophe excess of loss reinsurance treaties. During the six months ended June 30, 2014 and 2013, premiums ceded reflect reductions of $10,540 and $1,301, respectively, that relate to the provisions under certain reinsurance contracts. See "Economic Impact of Reinsurance Contracts with Retrospective Provisions" under "Critical Accounting Policies and Estimates." Our reinsurance rates are based primarily on policy exposures reflected in gross premiums earned. Premiums ceded were 30.3% and 28.3% of gross premiums earned during the six months ended June 30, 2014 and 2013, respectively.

Net Premiums Written during the six months ended June 30, 2014 and 2013 totaled $163,779 and $155,083, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

Net Premiums Earned for the six months ended June 30, 2014 and 2013 were $129,029 and $117,886, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the six months ended June 30, 2014 and 2013:

                                                  Six Months Ended
                                                      June 30,
                                                2014           2013
              Net Premiums Written            $ 163,779      $ 155,083
              Increase in Unearned Premiums     (34,750 )      (37,197 )

              Net Premiums Earned             $ 129,029      $ 117,886

Net Investment Income for the six months ended June 30, 2014 and 2013 was $2,540 and $434, respectively. The increase in 2014 is primarily due to the increase in our investment portfolio, which has grown from $66,468 at June 30, 2013 to $179,180 at June 30, 2014.

Policy Fee Income for the six months ended June 30, 2014 and 2013 was $895 and $2,198, respectively. The decrease in 2014 from the corresponding period is primarily due to the change in the fourth quarter of 2013 in the method of recognizing policy fees, which are recognized ratably over the policy coverage period.


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Expenses

Our Losses and Loss Adjustment Expenses amounted to $36,948 and $33,286, respectively, during the six months ended June 30, 2014 and 2013. See "Reserves for Losses and Loss Adjustment Expenses" under "Critical Accounting Policies and Estimates."

Policy Acquisition and Other Underwriting Expenses for the six months ended June 30, 2014 and 2013 of $18,688 and $13,276, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for production and renewal of policies, premium taxes and brokerage fees. The $5,412 increase from the corresponding period in 2013 is primarily attributable to commissions and premium taxes related to the policies assumed from Citizens in 2012 and 2013 that have renewed and are included in 2014 direct written premiums.

Interest Expense for the six months ended June 30, 2014 and 2013 was $5,183 and $1,532, respectively. The $3,651 increase was a result of the 3.875% convertible debt offering completed in December 2013.

Other Operating Expenses for the six months ended June 30, 2014 and 2013 were $18,889 and $13,473, respectively. The $5,416 increase is primarily attributable to a $5,386 increase in compensation and related expenses of which $4,098 relates to stock-based compensation and accrued bonus expense. As of June 30, 2014, we had 176 employees located at our headquarters in Florida compared to 161 employees as of June 30, 2013. We also have 82 employees located in Noida, India at June 30, 2014 versus 64 at June 30, 2013.

Income Tax Expense for the six months ended June 30, 2014 and 2013 were $20,643 and $22,955, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 37.7% for 2014 and 38.5% for 2013.

Ratios:

The loss ratio applicable to the six months ended June 30, 2014 (losses and loss adjustment expenses incurred related to net premiums earned) was 28.6% compared with 28.2% for the six months ended June 30, 2013. (See Gross Premiums Earned and Losses and Loss Adjustment Expenses above).

The expense ratio applicable to the six months ended June 30, 2014 (defined as underwriting expenses, interest and other operating expenses related to net premiums earned) was 33.2% compared with 24.0% for the six months ended June 30, 2013. The increase in our expense ratio is primarily attributable to the increase in 2014 specific to compensation and related costs and interest expense.

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 six months ended June 30, 2014 was 61.8% compared with 52.2% for the six months ended June 30, 2013.

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 six months ended June 30, 2014 was 43.1% compared with 37.4% for the six months ended June 30, 2013.


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Seasonality of Our Business

Our insurance business is seasonal as hurricanes and tropical storms typically occur during the period from June 1 through November 30 each year. Moreover, with our reinsurance treaty year effective June 1 each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1 each year.

LIQUIDITY AND CAPITAL RESOURCES

Over the years, our liquidity requirements have been met through issuance 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 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 subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. ("HCPCI") requires 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 the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and loss and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. A substantial portion . . .

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