When HCI Group’s TypTap Insurance launched in 2016, it created a buzz in the industry and some skepticism, due to the company’s plan to rely heavily on mapping technology and property data. This month, Tampa-based HCI announced that, after a few years of steady growth but a pause in writing new Florida policies, TypTap had turned its first profit – at least by generally accepted accounting principles.
The company’s before-tax net income for the first quarter of this year was almost $1.2 million, compared with a loss of $3.3 million for Q1 2022, according to a recent filing with the U.S. Securities and Exchange Commission. TypTap has about 50,000 policies in force in the state, a few thousand less than last year at this time. The company now holds about 100,000 policies across 13 states.
Insurance Journal sat down with TypTap President Kevin Mitchell for an update on the company’s financial position, when it may return to selling new coverage in Florida, the cost of reinsurance, and what the secret sauce has been in the company’s recent profitability. He declined to talk about HCI’s new Florida property insurance startup, Tailrow Insurance Co. Mitchell’s comments, below, have been lightly edited for brevity and clarity.
Talk about the Q1 results.
In past earnings calls, our CEO mentioned having periods of profitability, which became months and months became quarters. It’s a good example of a balance between technology and insurance.
When you look back many years ago and what the promise of insurtech was, the promise was pretty simple: leveraging technology to drive a better underwriting result. And I think it’s been an interesting pivot in the overall market, where now, profitability is key. I think two years ago there were a lot of companies that just focused on growth. Growth is great, but you ultimately have to be profitable, especially in a world where cost of capital has increased.
In the May 9 earnings call, HCI’s officers mentioned that TypTap and Homeowners Choice Insurance had seen lower policy acquisition expenses, due in part to lower commissions paid. Does that mean you pay lower commissions to agents?
Not really. We’ve grown a fair amount and what we’d done, historically, is we paid an enhanced commission for new business and upon renewal it would adjust to a renewal commission. On top of that, we have made a decision to reduce commissions in Florida, so the combination of growing a fair amount and the business renewing and being adjusted, that will drive the policy acquisition costs lower.
Our commentary to the agent is, in an environment where the cost of everything is going up, reinsurance costs are going up, rates are going up, we try to optimize the business and make an adjustment to commissions. But they’re not at a revenue disadvantage.
In Florida, we pay a renewal commission of 8%. Some people pay 7%. Florida has gone through a transition, obviously. With rates going up, a lot of carriers have adjusted their commissions down to reflect the higher rates. Insurance companies across Florida had to make the difficult decision to make rate adjustments, and with those adjustments, because of the increased costs of claims, reinsurance and inflation, they made the difficult decision to make a reduction in the renewal commission.
But our goal is to make sure the amount of commission dollars that go to the agents is not less.
How have you grown and profited in recent months?
In the earnings call, for HCI group, our gross loss ratio was 33.6%, down from 40.6% in fourth quarter. That’s a pretty big move. Why? It’s a combination of a number of things. One, it’s rate action we took, along with additional underwriting decisions, and also the legislative reforms that the Legislature and the governor took bold action on.
Those reforms are already having an impact?
Yes. It does have an impact. But it’s a combination of our efforts and their guidance.
You paused writing new business in Florida last year. Where will you be a year from now? Will you grow in Florida again?
If I only had that crystal ball. Right now, in Florida, for homeowners, we’re on pause. We’re in the final stages of negotiation for reinsurance. Once we understand where that lands – it’s our largest cost – and we see how active or inactive the hurricane season is then we’ll make a decision on what we want to do, potentially in the back half of the year.
There was some talk early this year about how the Florida Legislature needed to take a final step and provide another layer of more affordable, state-backed reinsurance. That didn’t happen. Would that have helped?
I can only speak on behalf of ourselves. We talked about this in the earnings call. We had the benefit of starting the negotiations on reinsurance with 70% of our program already being placed, between Homeowners Choice and TypTap. So, how did we get to that 70%? That’s through the Cat fund, we elect both companies, at 90% election; and there’s the RAP layer (a Florida-backed reinsurance program created in 2022) for both companies. We didn’t take it last year because we had plenty of capacity from the private markets. We have to elect it this year.
So, we are in the process of negotiating that last 30% in the private market.
And that’s not going to break the bank?
You have to look at it in a couple of ways. The Florida Cat fund prices haven’t moved a lot. The RAP layer is free, but you have to do a rate filing and take a rate reduction for that. And a multi-year deal was set last year. So it’s only 30% on the private market. We have had strong trading relationships with these reinsurers for last 15 years. I feel we’ll come to a fair middle ground based on the increased cost of capital.
We keep hearing there will be another 40% increase in reinsurance costs with the June 1 renewals.
It’s a very interesting thing when you start to talk about increases with reinsurance. Because it’s 40% of what? Is it 40% risk-adjusted, on the overall risk? Is it a 40% increase from what you paid last year? Companies have grown, companies have shrunk. I think everything depends on so many different factors. The best way to look at it is percentage of gross written premium. You write “X” amount of premium, and how much reinsurance do you have to buy for that premium?
TypTap last year had planned an initial public offering, then backed off, raising some questions about the company’s viability. Will that IPO happen?
Well, it’s something we monitor closely. It’s important to look at the overall market right now. There’s not a lot of companies going public. What TypTap focuses on day in and day out is making sure that we’re ready when that window opens back up. So our focus in 2023 is really to optimize the business and drive profitability.
For the 50,000 policies you have in Florida, did you have many claims from Hurricane Ian?
Sure we did. I don’t know if we disclose this, but yes, we had claims. Homeowners Choice and TypTap had policyholders in southwest Florida that saw the brunt of the impact. What we’ve said is that we’re very comfortable with the reinsurance we’ve purchased and are working diligently to wrap up the last bit of open claims we have for Ian.
Were the recent legislative insurance and tort reform changes enough, or will they have to come back next year and tweak some things?
We view those reforms as historic. We applaud the Legislature and the (Florida) CFO and the governor for taking that bold step. I think the important thing when you sit back and reflect on those reforms is it really went to the core of the problem in trying to eliminate fraudulent claims. It was a pretty bold step. Senate Bill 2D in May and Senate Bill 2A in December. There were three main parts of that bill: Ending AOBs, ending one-way attorney fees, and reducing the time to file a claim. That combination will go a long way to stabilize the Florida insurance market.
Altering independent adjusters’ estimates. That’s something that has been in the news quite a bit this year. Is that something TypTap ever does?
We don’t alter adjustments. We try to be transparent. We run an in-source model and have our own claims department. So we have a fair amount of oversight. We’re here to pay claims fairly. You have to give the insurance company benefit of the doubt.
Some in the industry may be looking at what you guys are doing and how you’re making a profit now in a still-turbulent market. Do you want to talk about what the secret sauce is?
I don’t know about the secret sauce. I think that there are a number of things that drive the success of HCI Group. One of the main items is we have a working management team. People are here every day, rolling up their sleeves and are very much in the weeds of the business. We’ve made a series of investments in technology and people that we feel are starting to pay off.
One of the pieces on the technology side, we have technology that allows us to underwrite down to the rooftop level. Not many people have that technology. It’s built internally through Exzeo and we have 150 employees in our technology group: data scientists and developers that have been there since 2012, developing a full-stack technology platform that drives a better underwriting result. Now we’re starting to see the true benefits of that.
Down to the rooftop level?
What I mean is, the technology geo-codes to the rooftop, not just the parcel. And then we collect data on that home: what year it was built; f it’s one-story, two-story, nearness to a fire station; if it’s frame or masonry, if the roof is shingle, tile, metal, the shape of roof, the square footage, replacement costs, if the home has a pool and a pool cage. All of these data points ultimately factor into how we price the risk. And we make sure we price the risk appropriately, so when we do have a loss, we want to make sure we’re charging the appropriate premium for the risk we’re taking.
What will take to start selling new policies in Florida again?
HCI Group has a commitment to Florida. It’s been operating in Florida for the last 15 years. TypTap has been operating in the state since 2016. We’re trying to balance a couple of different things. We have to make sure we can secure reinsurance at a price that we can run a business profitably. We’re very conscious of the hurricane season, and we have to make sure we have ample capital.
It’s important to grow and write new business, but we also have a commitment to the policyholders we currently have. And I think our job, first and foremost, is to make sure we’re making the appropriate decisions for our current policyholders before we take on new ones.
I think there’s going to be an opportunity to grow in the back half of 2023. We just want to temper everyone’s expectations in case there’s some sort of change in the market that doesn’t allow us to follow through with that opportunity.