SECURITIES & EXCHANGE COMMISSION EDGAR FILING
HCI Group, Inc.
Form: 10-K
Date Filed: 2020-03-06
Corporate Issuer CIK: 1400810
© Copyright 2020, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34126
HCI Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida
(State of Incorporation)
20-5961396
(IRS Employer
Identification No.)
5300 West Cypress Street, Suite 100
Tampa, FL 33607
(Address, including zip code, of principal executive offices)
(813) 849-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares, no par value
Trading Symbol
HCI
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2019, computed by reference to the price at which the common stock was last sold on
June 28, 2019, was $263,602,883.
The number of shares outstanding of the registrant’s common stock, no par value, on February 26, 2020 was 7,962,414.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-K is incorporated by reference from the registrant’s definitive proxy statement which will be filed not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I:
PART II:
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III:
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV:
Item 15
Exhibits, Financial Statement Schedules
Signatures
Certifications
Page
2-8
8-16
16
16-17
17
17
18-20
21-22
23-33
33-35
36-93
94
94
94
95
95
95
95
95
96-99
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ITEM 1 – Business
General
PART I
Incorporated in 2006, HCI Group, Inc. is a Florida-based company that, through its subsidiaries is engaged in property and casualty insurance,
reinsurance, real estate and information technology. References to “we,” “our,” “us,” “the Company,” or “HCI” in this Form 10-K generally refer to HCI Group, Inc.
and its subsidiaries. Our principal executive offices are located at 5300 West Cypress Street, Suite 100, Tampa, Florida 33607, and our telephone number is
(813) 849-9500. Our operations are classified as follows:
a)
Insurance Operations
•
•
Property and casualty insurance
Reinsurance
b)
c)
Real Estate Operations
Other Operations
•
•
Information technology
Other auxiliary operations
Insurance Operations
Property and Casualty Insurance
We sell our property and casualty insurance products through two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance
Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). HCPCI was incorporated and began operations in 2007. TypTap was incorporated and
began operations in 2016. We provide various forms of residential insurance products such as homeowners insurance, flood insurance and wind-only insurance
to homeowners, condominium owners and tenants for properties primarily located in Florida. HCPCI’s and TypTap’s operations are supported by HCI and its
wholly owned subsidiaries. Such operational support services consist of general administration, marketing, underwriting, accounting, policy administration, claim
adjusting, and information technology. In particular, we leverage our internally developed software technologies to drive efficiency in claim process and claims
settlement, identify underwriting profitability, and improve satisfaction of our policyholders and agents within our insurance business.
HCPCI began operations by participating in a “take-out program” through which we assumed insurance policies issued by Citizens Property Insurance
Corporation (“Citizens”), a Florida state-supported insurer. The take-out program is a legislatively mandated program designed to reduce the State’s risk
exposure by encouraging private companies to assume policies from Citizens. Opportunities to acquire large numbers of policies from Citizens meeting our strict
underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens, as we did in
October 2019, assuming 2,700 policies representing approximately $7.3 million of premiums in force.
As an established carrier, HCPCI has stood ready to accept the transfer of policies from troubled insurance companies in Florida and will continue to
do so in the future. In 2011, we accepted approximately 70,000 homeowners’ insurance policies representing $106 million in written premium from a carrier
placed into receivership, and in April 2020 will accept the transfer of approximately 43,000 homeowners’ insurance policies representing approximately $69
million of annualized premium from a ratings downgraded carrier that will no longer conduct insurance business.
HCPCI will focus on optimizing its existing book of business and take advantage of opportunities as they arise. It is also approved to write residential
property and casualty insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas.
Written premium generated in these states during 2019 totaled approximately $327,000.
In contrast, TypTap has grown its portfolio of policies organically from $2.5 million of gross written premium for homeowners’ and flood insurance in
Florida in 2016 to $60.2 million in 2019. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies
efficiently in Florida.
Since we currently write policies that primarily insure homes in Florida, we cover losses that may arise from, among other things, hurricanes and other
catastrophic events such as tornadoes and floods. The occurrence of any such catastrophes could have a significant adverse effect on our business, results of
operations, and financial condition. To mitigate the risk associated with catastrophic events, we purchase reinsurance from other large insurance companies.
Reinsurance is the largest cost to our property and casualty insurance business. Even without catastrophic events, we may incur losses and loss adjustment
expenses that deviate substantially from our estimates and that may exceed our reserves, in which case our net income and capital would decrease. Our
operating and growth strategies may also be impacted by regulation of our business by the State of Florida and other states in which we may operate. For
example, insurance regulators must approve our policy forms and premium rates as well as monitor our compliance with financial and regulatory requirements.
See Item 1A, “Risk Factors,” below.
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Competition
We operate in highly competitive markets where we face competition from national, regional and residual market insurance companies and, in the
case of flood insurance, a program backed by the U.S. government. Based on September 30, 2019 annualized premiums written data produced by the Florida
Office of Insurance Regulation (“FLOIR”) which excludes several insurance companies, the information of which was filed as trade secret, HCPCI is the seventh
largest provider of homeowners’ property and casualty insurance in the state. We may also face competition from new entrants in our markets, and such
entrants may create pricing pressure that could lead to overall premium reductions across the Florida market.
Our competitive strategies focus on the following key areas:
•
•
•
•
•
•
Exceptional service – We are committed to maintaining superior service to our policyholders and agents.
Claims settlement practices – We focus on fair and timely settlement of policyholder claims.
Disciplined underwriting – We analyze exposures and utilize available underwriting data to ensure policies meet our selective criteria.
New product offerings – We may cross-sell additional insurance products to our existing policyholders in order to broaden our lines of business
and product mix or identify other lines of insurance to offer.
Effective and efficient use of technology – We strive to add or improve technology that can effectively and efficiently enhance service to our
policyholders and agents. For instance, we use our internally developed application, Exzeo®, to increase the efficiency of our claims processing
and settlement. In addition, our on-line platform for quoting and binding residential flood policies streamlines the underwriting and policy
production processes.
Geographical expansion – We continue to seek opportunities to expand our business within the state of Florida and into other states to increase
overall geographic diversification. HCPCI has regulatory approval to write residential property and casualty insurance in the states of Arkansas,
California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas.
Seasonality of Our Business
Our insurance business is seasonal. Hurricanes and tropical storms affecting Florida typically occur during the period from June 1 through
November 30 each year. In addition, our reinsurance contracts are generally effective June 1 of each year, and 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 be reflected in our financial results beginning June 1
each year.
Government Regulation
We are subject to the laws and regulations in any state in which we conduct our insurance business. The regulations cover all aspects of our business
and are generally designed to protect the interests of insurance policyholders as opposed to the interests of shareholders. Such regulations relate to a wide
variety of financial and non-financial matters including:
•
•
•
•
•
•
•
•
•
•
authorized lines of business;
capital and surplus requirements;
approval of allowable rates and forms;
approval of reinsurance contracts;
investment parameters;
underwriting limitations;
transactions with affiliates;
dividend limitations;
changes in control; and
market conduct.
Our failure to comply with certain provisions of applicable insurance laws and regulations could have a material, adverse effect on our business,
results of operations or financial condition.
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State Licensure and Approval
All states require licensure and regulatory approval prior to the marketing of insurance products. Typically, licensure review is comprehensive and
includes a review of a company’s business plan, solvency, reinsurance, rates, and forms, the character of its officers and directors and other of its financial and
non-financial aspects. The regulatory authorities may prevent entry into a new market by not granting a license. In addition, regulatory authorities may preclude
or delay our entry into markets by disapproving or withholding approval of our product filings.
Statutory Reporting and Examination
All insurance companies must file quarterly and annual statements with certain regulatory agencies in any state in which they are licensed to transact
business and are subject to regular and special examinations by those agencies. The National Association of Insurance Commissioners mandates that all
insurance companies be examined a minimum of once every five years. However, the FLOIR has the authority to conduct an examination whenever it is deemed
appropriate. With regard to Florida-domiciled insurance companies such as TypTap that have held a certificate of authority for less than three years, the FLOIR
will conduct an examination at least once every year during the first three years of business. HCPCI’s latest financial examination by the FLOIR related to the
year ended December 31, 2015. TypTap’s latest limited scope examination by the FLOIR related to the year ended December 31, 2017.
Liability for Losses and Loss Adjustment Expenses
Our liability for losses and loss adjustment expenses represents our estimate of the total cost of (i) claims that have been incurred, but not yet paid
(“case reserves”), (ii) losses that have been “incurred but not yet reported” (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which are intended to cover the
ultimate cost of adjusting, investigating and settling claims, including investigation and defense of lawsuits resulting from such claims. We base our estimates on
various assumptions and actuarial data we believe to be reasonable under the circumstances. The process of estimating the liability is inherently subjective and
is influenced by many variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments.
Significant time can elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. Our liability for
losses and LAE, which we believe represents the best estimate at a given point in time based on facts, circumstances and historical trends then known, may
necessarily be adjusted to reflect additional facts that become available during the loss settlement period.
For a discussion and summary of the activity in the liability for losses and LAE for the years ended December 31, 2019, 2018 and 2017, see Note 15 --
“Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Loss Development
Our liability for losses and LAE represents estimated costs ultimately required to settle all claims for a given period. The following table illustrates
development of the estimated liability for losses and LAE as of December 31 for the years 2009 through 2019 (amounts in thousands):
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Schedule of Loss Development
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$ 19,178 $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 97,818 $ 94,826 $ 98,174
18,399 26,776
19,866 26,003
19,361 27,226
19,617 26,544
18,969 26,871
19,020 27,732
19,426 26,838
18,961 27,064
19,002 27,224
19,062
27,309
28,536
28,499
29,038
30,788
29,505
29,844
30,124
38,712
40,015
42,976
45,279
43,403
44,496
45,026
47,344
50,280
54,696
52,404
55,656
56,466
57,807
65,367
66,211
71,495
74,675
72,229
78,511
89,017
92,987
89,199
104,097
110,329
110,286
116,406
105,385
116
(5,078)
(2,700)
(3,858)
(12,780)
(25,767)
(41,297)
(39,837)
(18,588)
(10,559)
15,652
21,707
25,350
26,772
28,052
29,967
29,297
29,826
10,481 16,833
15,336 20,708
17,065 23,732
17,992 25,063
18,375 25,681
18,465 26,238
18,506 26,478
18,653 26,628
18,668 27,155
19,010
$ 110,011 $ 119,757 $ 143,606 $ 233,607 $ 337,113 $ 365,488 $ 423,120 $ 378,678 $ 358,253 $ 343,065 $ 342,089
22,365
31,824
37,041
40,152
42,303
43,789
44,461
26,595
38,695
45,655
49,924
53,678
55,279
33,347
49,122
58,141
66,558
71,741
41,053
61,947
77,876
87,080
50,533
80,279
78,216
57,621
87,390
55,711
$ 19,178 $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 198,578 $ 207,586 $ 214,697
—
—
—
—
—
—
—
— (100,760) (112,760) (116,523)
$ 19,178 $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 97,818 $ 94,826 $ 98,174
Original net liability for losses
and LAE (a)
Re-estimated net losses and
LAE (b) as of:
1 year later
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative net redundancy
(deficiency) (c)
Cumulative amount of net
liability paid as of:
1 year later
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Gross premiums earned
Gross liability for unpaid
losses and LAE
Ceded liability for unpaid
losses and LAE
Net liability for unpaid losses
and LAE
(a) Represents management’s original net estimated liability for (i) unpaid claims, (ii) IBNR, and (iii) loss adjustment expenses.
(b) Represents the re-estimated net liabilities in later years for unpaid claims, IBNR and loss adjustment expenses for each of the respective years.
(c) Represents the difference between the latest net re-estimate and the original net estimate. A redundancy indicates the original net estimate is higher than the current net
estimate whereas a deficiency indicates the original net estimate is lower than the current net estimate.
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Reinsurance
We have a Bermuda domiciled wholly owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in
Claddaugh, reducing the cost of third party reinsurance. Claddaugh fully collateralizes its exposure to our insurance subsidiaries by depositing funds into a trust
account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance to non-affiliates.
For the years ended December 31, 2019, 2018 and 2017, revenues from insurance operations before intracompany elimination represented 95.0%,
95.0% and 96.2%, respectively, of total revenues of all operating segments. At December 31, 2019, 2018 and 2017, insurance operations’ total assets
represented 85.5%, 85.9% and 87.1%, respectively, of the combined assets of all operating segments. See Note 16 -- “Segment Information” to our consolidated
financial statements under Item 8 of this Annual Report on Form 10-K.
Real Estate Operations
Our real estate operations consist of multiple properties we own and operate for investment purposes and also properties we own and use for our own
operations.
Properties Used in Operations
Our real estate used in operations consists of our headquarters building which has a gross area of 122,000 square feet in Tampa, Florida, and our
secondary insurance operations site with gross area of approximately 16,000 square feet in Ocala, Florida. At our headquarters, we lease available space to
non-affiliates at various terms. The Ocala location, in addition to day-to-day operational use, serves as our alternative site in the event we experience any
significant disruption at our headquarters building.
Investment Properties
Our portfolio of investment properties includes two waterfront properties consisting of a total of 17 acres and a five-acre submerged land lease. One
waterfront property contains a full-service restaurant and a marina while the other houses retail space and a marina with high and dry storage. We acquired the
restaurant and marina operations in connection with our purchase of the waterfront properties and we continue to operate them to enhance the property values.
The table below sets forth information concerning our investment properties.
Year
Acquired
Net Rentable
Space (SF)
Anchor Tenant
2011
2012
2016
2016
2017
2018
2018
2018
22,761 Tierra Verde Marina (a)
12,790 Gators Café & Saloon (a)
61,400 Publix supermarket
49,995 Fresh Market supermarket
68,867 Bank of America
8,400 Thorntons, LLC
56,000 (b) To be determined
(c)
(c)
Description/Location
Waterfront property
Tierra Verde, Florida
Waterfront property
Treasure Island, Florida
Retail shopping center
Sorrento, Florida
Retail shopping center
Melbourne, Florida
Office building
Tampa, Florida
Retail shopping center
Riverview, Florida
Retail shopping center
Clearwater, Florida (under redevelopment)
Vacant land
Tampa, Florida
(a)
(b)
(c)
Affiliate.
Net rentable space is approximated.
Not applicable.
Other Real Estate Investments
Melbourne FMA, LLC, our wholly owned subsidiary, has a 90% interest in a company which owns two outparcels aggregating approximately 2.1 acres
for sale or ground lease. See Investment in Unconsolidated Joint Venture in Note 5 -- “Investments” to our consolidated financial statements under Item 8 of this
Annual Report on Form 10-K for additional information.
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Other Operations
Information Technology
Our information technology operations include a team of experienced software developers with extensive knowledge in designing and creating web-
based applications and products for mobile devices. The operations, which are located in Tampa, Florida and Noida, India, are focused on developing cloud-
based, innovative products and services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors.
Products created thus far have been solely for internal use.
SAMSTM
SAMS is an online policy administration platform used by HCPCI. SAMS processes the full life cycle of a policy from policy quoting and issuance to
agency management, cash receipts/disbursements, claims reserving and claim payments.
Harmony
Harmony is the next generation policy administration platform for both HCPCI and TypTap. The innovative Harmony system easily supports multiple
companies and their products. In addition to the standard policy management functionality, Harmony also provides advanced underwriting capabilities as well as
a simplified user experience for quoting and binding.
ClaimColony®
ClaimColony (formerly known as Exzeo) is a cloud-based application that provides intelligent automation for the business processes of the insurance
industry. ClaimColony specifically supports property claim assignments, logistics, and accountability reporting with our third party partners. ClaimColony has rich
system integration through an application program interface (API), which allows hands-free data transfer from other API-capable applications such as SAMS and
Harmony.
Financial Highlights
The following table summarizes our financial performance during the years ended December 31, 2019, 2018 and 2017:
(Amounts in millions except per share amounts)
For the year ended December 31:
Net premium earned
Total revenue
Losses and loss adjustment expenses
Income (loss) before income taxes
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Dividends per share
Net cash provided by operating activities
Cash dividends paid on common stock*
At December 31:
Total investments
Cash and cash equivalents
Total assets
Total stockholders’ equity
Common shares outstanding (in millions)
2019
2018
2017
216.3 $
242.5 $
107.5 $
36.1 $
26.6 $
3.32 $
3.31 $
1.600 $
54.0 $
12.7 $
341.5 $
229.2 $
802.6 $
185.5 $
7.8
213.4 $
231.3 $
109.3 $
26.9 $
17.7 $
2.34 $
2.34 $
1.475 $
28.6 $
10.4 $
387.8 $
239.5 $
832.9 $
181.4 $
8.4
224.6
244.4
165.6
(15.6 )
(6.9)
(0.75 )
(0.75 )
1.40
16.6
12.8
380.3
255.9
842.3
194.0
8.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
*
Net of cash dividends received under share repurchase forward contract
Environmental Matters
As a property owner, we are subject to regulations under various federal, state, and local laws concerning the environment, including laws addressing
the discharge of pollutants into the air and water and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites.
Cybersecurity
We rely on digital technology to conduct our businesses and interact with customers, policyholders, agents, and vendors. With this reliance on
technology comes the associated security risks from using today’s communication technology and networks.
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To defend our computer systems from cyber-attacks, we utilize tools such as firewalls, anti-malware software, multifac tor authentication, e-mail
security services, virtual private networks, third party security experts, and timely applied software patches, among others. We engage third-party consultants to
conduct penetration tests to identify potential security vulnerabilities. Although we believe our defenses against cyber-intrusions are sufficient, we continually
monitor our computer networks for new types of threats.
Employees
As of February 22, 2020, we employed a total of 413 full-time individuals. In addition, we leased 78 employees through an employee leasing agency.
Available Information
We file annual, quarterly, and current reports with the U.S. Securities and Exchange Commission (“SEC”). These filings are accessible free of charge
on our website, www.hcigroup.com (click “SEC filings” at the “Investor Information” tab), as soon as reasonably practicable after they have been electronically
filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding
issuers, which can be accessed via the SEC’s website at www.sec.gov. In addition, these filings are accessible at the SEC’s Public Reference Room, which is
located at 100 F Street, NE, Washington, DC 20549-0213. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-
800-SEC-0330.
ITEM 1A – Risk Factors
Our business is subject to a number of risks, including those described below, which could have a material effect on our results of operations, financial
condition or liquidity and could cause our operating results to vary significantly from period to period.
Our historical revenue growth was derived primarily through policy assumptions and acquisitions. We cannot guarantee that future policy
assumptions and acquisitions will be available to the extent they have in the past.
Substantially all of our historical revenue has been generated from policies assumed from Citizens, our acquisition of policies from one Florida
insurance company and subsequent renewals of these policies. Our ability to grow our premium base may depend upon the availability of future policy
assumptions and acquisitions upon acceptable terms. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria
have diminished in recent years. We cannot provide assurance that such opportunities will arise in the future.
Although we began selling insurance products in other states, our insurance business is primarily in Florida. Thus, any catastrophic event or other
condition affecting losses in Florida could adversely affect our financial condition and results of operations.
Any catastrophic event, a destructive weather pattern, a general economic trend, regulatory developments or other conditions specifically affecting the
state of Florida could have a disproportionately adverse impact on our business, financial condition, and results of operations. While we actively manage our
exposure to catastrophic events through our underwriting process and the purchase of reinsurance, the fact that our business is concentrated in the state of
Florida subjects it to increased exposure to certain catastrophic events and destructive weather patterns such as hurricanes, tropical storms, and tornados.
Changes in the prevailing regulatory, legal, economic, political, demographic and competitive environment, and other conditions in the state of Florida could also
make it less attractive for us to do business in Florida and would have a more pronounced effect on our business than it would on other insurance companies that
are geographically diversified. Since our business is concentrated in this manner, the occurrence of one or more catastrophic events or other conditions affecting
losses in the state of Florida could have an adverse effect on our business, financial condition, and/or results of operations.
Changing climate conditions could have an adverse impact on our business, results of operations or financial condition.
There is an emerging scientific consensus on climate change, which may affect the frequency and severity of storms, floods and other weather events,
and negatively affect our business, results of operations, and/or financial condition.
Our results may fluctuate based on many factors including cyclical changes in the insurance industry.
The insurance industry historically has been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity, as
well as periods when shortages of capacity permitted an increase in pricing and, thus, more favorable underwriting profits. As premium levels increase, there
may be new entrants to the market, which could subsequently lead to a decrease in premium levels. Any of these factors could lead to a significant reduction in
premium rates in future periods, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material, adverse effect on
our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers
may affect the cycles of the insurance business significantly.
We cannot predict whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability to write
insurance at rates that we consider appropriate relative to the risk assumed. If we cannot write insurance at appropriate rates, our business would be materially
and adversely affected.
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Our business could be harmed if we lose the services of our key personnel.
Our operations are highly dependent on the efforts of our senior executive officers, particularly our chief executive officer, Paresh Patel, as well as our
chief financial officer, Mark Harmsworth, and the President of our Real Estate Division, Anthony Saravanos. The loss of their leadership, industry knowledge and
experience could negatively impact our operations. However, we have management succession plans to lessen any such negative impact. Apart from Mr. Patel
and Mr. Harmsworth, we have no employment agreements with any of our personnel nor do we offer any guarantee of any employee’s ongoing service. We
maintain key-man life insurance on Mr. Patel although such policy may be insufficient to cover the damage resulting from the loss of Mr. Patel’s services.
Our information technology systems may fail or be disrupted, which could adversely affect our business.
Our insurance business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. We rely
on these systems to perform underwriting and other modeling functions necessary for writing business, as well as to handle our policy administration process
(i.e., the printing and mailing of our policies, endorsements, renewal notices, etc.). The failure or disruption of these systems could interrupt our operations and
result in a material, adverse effect on our business.
The growth of our insurance business is dependent upon the successful development and implementation of advanced computer and data processing
systems as well as the development and deployment of new information technologies to streamline our operations, including policy underwriting, production and
administration and claim handling. The failure of these systems to function as planned could slow our growth and adversely affect our future business volume and
results of operations. Additionally, our computer and data processing systems could become obsolete or could cease to provide a competitive advantage in policy
underwriting, production and administration and claim handling which could negatively affect our future results of operations.
We conduct our business primarily from offices located in Tampa, Florida where tropical storms could damage our facilities or interrupt our power
supply. The loss or significant impairment of functionality in these facilities for any reason could have a material, adverse effect on our business although we
believe we have sufficient redundancies to replace our facilities if functionality is impaired. We contract with a third-party vendor to maintain complete daily
backups of our systems, which are stored at the vendor’s facility in Atlanta, Georgia. We additionally use industry leading Internet cloud infrastructure providers
to host some of our data processing systems. These cloud providers ensure redundancy across geographic regions with additional daily system backups.
Access to these databases and hosted environments is strictly controlled and limited to authorized personnel. In the event of a disaster causing a complete loss
of functionality at our Tampa location, we plan to temporarily use our secondary office in Ocala, Florida to continue our operations.
An unauthorized disclosure or loss of policyholder or employee information or other sensitive or confidential information, including by cyber-attack
or other security breach, could cause a loss of data, give rise to remediation or other expenses, expose us to liability under federal and state laws,
and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows, financial condition and results of
operations.
As part of our normal operations, we collect, process and retain certain sensitive and confidential information. We are subject to various federal and
state privacy laws and rules regarding the use and disclosure of certain sensitive or confidential information, including the Gramm-Leach-Bliley Act and its state-
law progeny. Despite the security measures we have implemented to help ensure data security and compliance with applicable laws and rules, which include
firewalls, regular penetration testing and other measures, our facilities and systems, and those of our third-party service providers and vendors, may be
vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, theft of data, misplaced or lost data, programming and human errors,
physical break-ins, or other disruptions. In addition, we cannot ensure that we will be able to identify, prevent or contain the effects of possible cyber-attacks or
other cybersecurity risks in the future that may bypass our security measures or disrupt our information technology systems or business.
Noncompliance with any privacy or security laws and regulations, or any security breach, cyber-attack or cybersecurity breach, and any incident
involving the misappropriation, loss or other unauthorized disclosure or use of, or access to, sensitive or confidential member information, could require us to
expend significant capital and other resources to continue to modify or enhance our protective measures and to remediate any damage caused by such
breaches. In addition, this could result in interruptions to our operations and damage to our reputation, and misappropriation of confidential information could also
result in regulatory enforcement actions, material fines and penalties, litigation or other liability or actions which could have a material adverse effect on our
business, cash flows, financial condition and results of operations. As the regulatory environment related to information security, data collection and use, and
privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could
also result in additional costs.
We rely on service providers and vendors to provide certain technology, systems and services that we use in connection with various functions of our
business, including PCI DSS (Payment Card Industry Data Security Standard) compliant credit card processing, and we may entrust them with confidential
information. The information systems of our third-party service providers and vendors are also vulnerable to an increasing threat of continually evolving
cybersecurity risks. Unauthorized parties may attempt to gain access to these systems or our information through fraud or other means of deceiving our
associates, third-party service providers or vendors. Hardware, software or applications we obtain from third parties may contain defects in design or
manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade
service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time. Ever-evolving threats
mean our third-party service providers and vendors must continually evaluate and adapt their own respective systems and processes, and there is no assurance
that they will be adequate to safeguard against all data security breaches or misuses of data. Any future significant compromise or breach of our data security via
a third-party service provider or vendor could result in additional significant costs, lost revenues, fines, lawsuits, and damage to our reputation.
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Increased competition, competitive pressures, industry developments, and market conditions could affect the growth of our business and adversely
impact our financial results.
The property and casualty insurance industry in Florida is cyclical and highly competitive. We compete not only with other stock companies but also
with mutual companies, the U.S. government, other underwriting organizations and alternative risk sharing mechanisms. Our principal lines of business are
written by numerous other insurance companies. Competition for any one account may come from very large, well-established national companies, smaller
regional companies, other specialty insurers in our field, and new entrants to the Florida market. Many of these competitors have greater financial resources,
larger agency networks and greater name recognition than our company. Additionally, our competitors may merge or acquire one another and further increase
their combined financial resources and agency networks. We compete for business not only on the basis of price, but also on the basis of financial strength,
types of coverage offered, availability of coverage desired by customers, commission structure, and quality of service. We may have difficulty continuing to
compete successfully on any of these bases in the future. Competitive pressures coupled with market conditions may affect our rate of premium growth and
financial results.
HCPCI and TypTap have each obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in the state
of Florida and many other states. Mortgage companies may require homeowners to obtain property insurance from an insurance company with an acceptable
A.M. Best rating, which we do not currently have. Such a requirement could prevent us from expanding our business unless we obtain such rating, which may in
turn limit our ability to compete with large, national insurance companies and certain regional insurance companies. A downgrade or loss of our Demotech rating
could result in a substantial loss of business in the event insureds move their business to insurers with a sufficient financial strength rating.
There are inherent limitations and risks related to our projections and our estimates of claims and loss reserves. If our actual losses exceed our loss
reserves, our financial results, our ability to expand our business, and our ability to compete in the property and casualty insurance industry may be negatively
affected. In addition, industry developments could further increase competition in our industry. These developments could include —
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an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies attempt to enter the
insurance business because of better pricing and/or terms;
new programs or changes to existing programs in which federally or state-sponsored entities provide property insurance in catastrophe-prone
areas or other alternative markets;
changes in Florida’s or any other states’ regulatory climate; and
the enactment of federal proposals for an optional federal charter that would allow some competing insurers to operate under regulations
different or less stringent than those applicable to our insurance subsidiaries.
These developments and others could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance
available.
If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely affected.
If our actual losses from claims exceed our loss reserves, our financial results would be adversely affected.
Our objective is to establish loss reserves that are adequate and represent management’s best estimate of the ultimate cost to investigate and settle a
specific claim. However, the process of establishing adequate reserves is complex and inherently uncertain, and the ultimate cost of a claim may vary materially
from the amounts reserved. We regularly monitor and evaluate loss and loss adjustment expense reserve development to determine reserve adequacy.
Due to these uncertainties, the ultimate losses may vary materially from current loss reserves which could have a material, adverse effect on our
future financial condition, results of operations and cash flows.
Our failure to pay claims accurately could adversely affect our insurance business, financial results and capital requirements.
We rely on our claims personnel to accurately evaluate and pay the claims made under our policies. Many factors could affect our ability to accurately
evaluate and pay claims, including the accuracy of our independent adjusters as they make their assessments and submit their estimates of damages; the
training, background, and experience of our claims representatives; the ability of our claims personnel to ensure consistent claims handling given the input by our
independent adjusters; the ability of our claims department to translate the information provided by our independent adjusters into acceptable claims settlements;
and the ability of our claims personnel to maintain and update our claims handling procedures and systems as they evolve over time based on claims and
geographical trends in claims reporting. Any failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace, impair
our corporate image and negatively affect our financial results.
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The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and
coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the
number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected
by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued and renewed, and
our financial position and results of operations may be adversely affected as a result of any such unforeseen changes.
If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our financial results may suffer.
Our future growth will depend on our ability to expand the number of insurance policies we write, to expand the kinds of insurance products we offer,
and to expand the geographic markets in which we do business, all balanced by the insurance risks we choose to write and cede. Our existing sources of funds
include operations, investment holdings, and possible sales of our investment securities. Unexpected catastrophic events in our market areas, such as
hurricanes, may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these
unanticipated claims unless we can raise additional capital.
HCI Group, Inc. depends on the ability of its subsidiaries to generate and transfer funds to meet its debt obligations.
HCI Group, Inc. does not have significant revenue generating operations of its own. Our ability to make scheduled payments on our debt obligations
depends on the financial condition and operating performance of our subsidiaries. If the funds we receive from our subsidiaries, some of which are subject to
regulatory restrictions on the payment of distributions, are insufficient to meet our debt obligations, we may be required to raise funds through the issuance of
additional debt or equity securities, reduce or suspend dividend payments, or sell assets.
We may require additional capital in the future which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and
reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements or to cover losses, we may
need to raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe current capital together with our
anticipated retained income will support our operations. However, we cannot provide any assurance in that regard, since many factors will affect our capital
needs and their amount and timing, including our growth and profitability, and the availability of reinsurance, as well as possible acquisition opportunities, market
disruptions and other unforeseeable developments. If we require additional capital, it is possible that equity or debt financing may not be available at all or may
be available only on terms unfavorable to us. Equity financings could result in dilution to our shareholders, and in any case such securities may have rights,
preferences and privileges that are senior to those of existing shareholders. If we cannot obtain adequate capital on favorable terms or at all, our business,
financial condition or results of operations could be materially affected.
There may be limited markets for and restrictions on certain holdings in our investment portfolio.
Certain holdings in our investment portfolio include limited partnership interests and commercial real estate. We may increase our holdings in these
types of investments as we pursue diversification. These investments may be illiquid in the near term as they are privately placed and are subject to certain
restrictions or conditions that may limit our ability to immediately dispose of the investments. If it becomes necessary to sell any of these investments at a time
when the fair market value is below our carrying value, we may incur significant losses which could have a material adverse effect on our net income and
financial position.
Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment of our available cash.
A portion of our income is, and likely will continue to be, generated by the investment of our available cash. The amount of income so generated is a
function of our investment policy, available investment opportunities, and the amount of available cash invested. Fluctuating interest rates and other economic
factors make it difficult to estimate accurately the amount of investment income that will be realized. In fact, we have realized and may in the future realize losses
on sales of our investments as well as other-than-temporary losses on our investment holdings. Any unfavorable change to the fair value of our equity securities
will also impact our financial results.
Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all and we risk non-collectability of reinsurance
amounts due us from reinsurers with which we have contracted.
Reinsurance is a method of transferring part of an insurance company’s liability under an insurance policy to another insurance company, or reinsurer.
We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting
capacity. The cost of such reinsurance is subject to prevailing market conditions beyond our control, such as the amount of capital in the reinsurance market and
the occurrence of natural and man-made catastrophes. We cannot be assured that reinsurance will remain continuously available to us in the amounts we
consider sufficient and at prices acceptable to us. As a result, we may determine to increase the amount of risk we retain or look for other alternatives to
reinsurance, which could in turn have a material, adverse effect on our financial position, results of operations and cash flows.
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With respect to the reinsurance contracts we currently have in effect, our ability to recover amounts due from reinsurers is subject to such reinsurers’
ability and willingness to pay and to meet their obligations to us. We attempt to select financially strong reinsurers with an A.M. Best rating of “A-” or better or we
require the reinsurer to fully collateralize its exposure. While we monitor from time to time the financial condition of our reinsurers, we rely principally on A.M.
Best, our reinsurance broker, and other rating agencies in determining their ability to meet their obligations to us. Any failure on the part of any one reinsurance
company to meet its obligations to us could have a material, adverse effect on our financial condition or results of operations.
We have exposure to unpredictable catastrophes, which can materially and adversely affect our financial results.
We write insurance policies that cover homeowners, condominium owners, and tenants for losses that result from, among other things, catastrophes.
We are therefore subject to losses, including claims under policies we have written, arising out of catastrophes that may have a significant effect on our business,
results of operations, and financial condition. A significant catastrophe could also have an adverse effect on our reinsurers. Catastrophes can be caused by
various events, including hurricanes, tropical storms, tornadoes, windstorms, earthquakes, hailstorms, explosions, power outages, fires and man-made events.
The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event. Our policyholders are currently concentrated in Florida, which is especially subject to
adverse weather conditions such as hurricanes and tropical storms. Therefore, although we attempt to manage our exposure to catastrophes through our
underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance
protection and may have a material, adverse impact on our results of operations and financial condition.
Industry trends, such as increased litigation against the insurance industry and individual insurers, the willingness of courts to expand covered
causes of loss, rising jury awards, and the escalation of loss severity may contribute to increased costs and to the deterioration of the reserves of
our insurance subsidiaries.
Loss severity in the property and casualty insurance industry may increase and may be driven by larger court judgments. In the event legal actions
and proceedings are brought on behalf of classes of complainants, this may increase the size of judgments. The propensity of policyholders and third party
claimants to litigate and the willingness of courts to expand causes of loss and the size of awards may render our loss reserves inadequate for current and future
losses.
The failure of the risk mitigation strategies we utilize could have a material, adverse effect on our financial condition or results of operations.
We utilize a number of strategies to mitigate risk exposure within our insurance business, which include:
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engaging in vigorous underwriting;
carefully evaluating terms and conditions of our policies;
focusing on our risk aggregations by geographic zones and other bases; and
ceding insurance risk to reinsurance companies.
However, there are inherent limitations in these tactics. We cannot provide assurance that an unanticipated event or series of events will not result in
loss levels which could have a material, adverse effect on our financial condition or results of operations.
The failure of any of the loss limitation methods we employ could have a material, adverse effect on our financial condition or our results of
operations.
Our insurance underwriting process is generally designed to limit our exposure to known and manageable risks. Various provisions of our policies,
such as limitations or exclusions from coverage, which have been negotiated to limit our risks, may not be enforceable in the manner we intend.
In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a
violation of that condition. While our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain
risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such
endorsements and limitations in a way that would adversely affect our loss experience, which changes could have a material, adverse effect on our financial
condition or results of operations.
Now and in the future, we may rely on independent agents to write our insurance policies, and if we are not able to contract with and retain
independent agents, our revenues would be negatively affected.
Although voluntary policies comprise a small percentage of our business, we expect to increase the number of voluntary policies (policies not
assumed or acquired from another company) we write as our business and product lines expand. An inability to sell our products through independent agents
would negatively affect our revenues.
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We must compete with other insurers for independent agents’ business. Our competitors may offer a greater variety of insurance products, lower
premiums for insurance coverage, or higher commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it
more difficult to attract business from independent agents to sell our products. A material reduction in the amount of our products that independent agents sell
could negatively affect our revenues.
Our success depends on our ability to accurately price the risks we underwrite.
The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks,
including risks associated with flood insurance and other new product offerings. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss
adjustment expenses, and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial
amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and
frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and thus, price our products accurately, is subject to several
risks and uncertainties, some of which are outside our control, including—
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the availability of sufficient reliable data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate rating and pricing techniques;
changes in legal standards, claim settlement practices, and restoration costs; and
legislatively imposed consumer initiatives.
In addition, we could underprice risks, which would negatively affect our profit margins. We could also overprice risks, which could reduce our
retention, sales volume and competitiveness. The foregoing factors could materially and adversely affect our profitability.
Use of current operating resources may be necessary to develop future new insurance products.
We may expand our product offerings by underwriting additional insurance products and programs. Expansion of our product offerings will result in
increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products will also
require regulatory approval, further increasing our costs and potentially affecting the speed with which we will be able to pursue new market opportunities.
Claddaugh may offer reinsurance products to unaffiliated insurance companies. We cannot assure you that we will be successful bringing new insurance
products to markets.
Use of current operating resources may be necessary to expand our insurance business geographically.
We are expanding our homeowners’ insurance business in other states. Geographic expansion of our insurance business will result in increases in
expenses due to additional costs incurred in actuarial rate justifications, software, personnel and regulatory compliance. Although we plan to enter other states
judiciously with attention to profitability, we cannot assure you that our entry into other states will be successful.
As an insurance holding company, we are currently subject to state regulation and in the future may become subject to federal regulation.
All states regulate insurance holding company systems. State statutes and administrative rules generally require each insurance company in the
holding company group to register with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies
within the holding company system that may materially affect the operations, management or financial condition of the insurers within the group. As part of its
registration, each insurance company must identify material agreements, relationships and transactions with affiliates, including without limitation, loans,
investments, asset transfers, transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance
transactions, dividends, and consolidated tax allocation agreements.
Insurance holding company regulations generally provide that transactions between an insurance company and its affiliates must be fair and equitable,
allocated between the parties in accordance with customary accounting practices, and fully disclosed in the records of the respective parties. Many types of
transactions between an insurance company and its affiliates, such as transfers of assets among such affiliated companies, certain dividend payments from
insurance subsidiaries and certain material transactions between companies within the system may be subject to prior approval by, or prior notice to, state
regulatory authorities. If we are unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action, which could
adversely affect our operations. In addition, state insurance regulations also frequently impose notice or approval requirements for the acquisition of specified
levels of ownership in the insurance company or insurance holding company.
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HCPCI is approved as an admitted carrier in the states of Arkansas, California, Florida, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania,
South Carolina and Texas. TypTap is approved as an admitted carrier in Florida only. In addition, HCPCI is approved as a non-admitted carrier in Virginia. We
may in the future seek authorization to transact business in other states as well. We will therefore become subject to the laws and regulatory requirements of
those states. These regulations may vary from state to state, and states occasionally may have conflicting regulations. Currently, the federal government’s role in
regulating or dictating the policies of insurance companies is limited. However, Congress, from time to time, considers proposals that would increase the role of
the federal government in insurance regulation, either in addition to or in lieu of state regulation. The impact of any future federal insurance regulation on our
insurance operations is unclear and may adversely impact our business or competitive position.
Our insurance subsidiaries are subject to extensive regulation, which may reduce our profitability or limit our growth. Moreover, if we fail to comply
with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and
results of operations.
The insurance industry is highly regulated and supervised. Our insurance subsidiaries are subject to the supervision and regulation of the states in
which they are domiciled and the states in which they transact insurance business. Such supervision and regulation is primarily designed to protect our
policyholders rather than our shareholders. These regulations are generally administered by a department of insurance in each state and relate to, among other
things —
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the content and timing of required notices and other policyholder information;
the amount of premiums the insurer may write in relation to its surplus;
the amount and nature of reinsurance a company is required to purchase;
participation in guaranty funds and other statutorily created markets or organizations;
business operations and claims practices;
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers and their products;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of insurance company subsidiaries to pay dividends to their holding companies;
restrictions on transactions between insurance companies and their affiliates;
restrictions on the size of risks insurable under a single policy;
requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
the form and content of records of financial condition required to be filed; and
the level of reserves.
The FLOIR and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic examinations of the
affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These
regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. These regulatory authorities also conduct
periodic examinations into insurers’ business practices. These reviews may reveal deficiencies in our insurance operations or non-compliance with regulatory
requirements.
In certain states including Florida, insurance companies are subject to assessments levied by the states where they conduct their business. While we
can recover these assessments from Florida policyholders through policy surcharges, our payment of the assessments and our recoveries may not offset each
other in the same reporting period in our financial statements and may cause a material, adverse effect on our cash flows and results of operations in a particular
reporting period.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations.
In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These
practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply
with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities
or otherwise penalize us. This could adversely affect our ability to operate our business.
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Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory
authorities could adversely affect our ability to operate our business, reduce our profitability and limit our growth.
Our revenue from real estate investments may be affected by the success and economic viability of our anchor retail tenants. Our reliance on a
single or significant tenant at certain properties may impact our ability to lease vacated space and adversely affect returns on the specific property.
At certain retail centers, we may have tenants, commonly referred to as anchor tenants, occupying all or a large portion of the gross leasable space. In
the event an anchor tenant becomes insolvent, suffers a downturn in business, ceases its operations at the retail center, or otherwise determines not to renew its
lease, any reduction or cessation of rental payments to us could adversely affect the returns on our real estate investments. A lease termination or cessation of
operations by an anchor tenant could also lead to the loss of other tenants at the specific retail location. We may then incur additional expenses to make
improvements and prepare the vacated space to be leased to one or more new tenants.
Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant
could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor
tenant could also allow other tenants to make reduced rental payments or to terminate their leases.
Our retail and other real estate properties may be subject to impairment charges which can adversely affect our financial results.
We periodically evaluate our long-lived assets and related intangible assets to determine if there has been any impairment in their carrying values. If
we determine an impairment has occurred, we are required to record an impairment charge equal to the excess of the asset’s carrying value over its estimated
fair value. As our real estate operations grow, there is an increased potential that the impairment of an asset could have a material adverse effect on our financial
results. In addition, our fair value estimates are based on several assumptions that are subject to economic and market uncertainties including, but not limited to,
demand for space, competition for tenants, changes in market rental rates and costs to operate each property. As these factors are difficult to predict and are
subject to future events that may alter our assumptions, the future cash flows estimated in our impairment analysis may not be achieved.
Our real estate operations are subject to regulation under various federal, state, and local laws concerning the environment.
Our real estate operations own various properties including a restaurant, marina facilities, and commercial buildings. As a result, we are subject to
regulation under various federal, state, and local laws concerning the environment, including laws addressing the discharge of pollutants into the air and water
and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including
remediation costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under
environmental laws relating to our real estate operations.
Our real estate operations include owning restaurant operations, which expose us to additional risks, which could negatively impact our operating
results and financial condition.
Our restaurant operations expose us to unique business risks. For example, restaurant operations are dependent in large part on food, beverage, and
supply costs that are not within our control. In addition, the restaurant industry is affected by changes in consumer preferences and discretionary spending
patterns that could adversely affect revenues from restaurant operations. Moreover, the restaurant industry is affected by litigation and publicity concerning food
quality, health, alcoholic beverages and other issues which can cause guests to avoid restaurants and that can result in liabilities. Any one of these risks, among
others, could negatively impact our operating results and financial condition.
Our operations in India expose us to additional risks, which could negatively impact our business, operating results, and financial condition.
Our India operations expose us to additional risks including income tax risks, currency exchange rate fluctuations and risks related to other challenges
caused by distance, language, and compliance with Indian labor laws and other complex foreign and U.S. laws and regulations that apply to our India
operations. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, such as the Foreign Corrupt Practices Act, and other
local laws prohibiting corrupt payments to governmental officials, among others. Violations of these laws and regulations could result in fines and penalties, or
criminal sanctions against us, our officers, or our employees. Although policies and procedures are designed to ensure compliance with these laws and
regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
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Our ongoing investments in real estate and information technology businesses have inherent risks, and could burden our financial and h uman
resources.
We have invested and expect to continue to invest in real estate and information technology. Despite our due diligence, these investments may still
involve significant risks and uncertainties, including distraction of management and employees from current operations, insufficient revenues to offset liabilities
assumed and incurred expenses, inadequate return of capital, and failure to realize the anticipated benefits. There can be no assurance that such investments
will be successful and will not adversely affect our financial condition and operating results.
Our credit agreement contains restrictions that can limit our flexibility in operating our business.
The agreement governing our revolving credit facility contains various covenants that limit our ability to engage in certain transactions. These
covenants limit our and our subsidiaries’ ability to, among other things:
•
•
•
•
•
incur additional indebtedness;
declare or make any restricted payments;
create liens on any of our assets now owned or hereafter acquired;
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets now owned or hereafter acquired; and
enter into certain transactions with our affiliates.
An increase in interest rates may negatively impact our operating results and financial condition.
Borrowings under our revolving credit facility have a variable rate of interest. An increase in interest rate would have a negative impact on our results
of operations attributable to increased interest expense.
ITEM 1B – Unresolved Staff Comments
Not applicable.
ITEM 2 – Properties
Real Estate Owned and Used in Operations
Tampa, Florida. The real estate consists of 3.5 acres of land, a three-story building with a gross area of 122,000 square feet, and a four-level parking
garage. This facility is 60% occupied by us and serves as our headquarters. The remaining space is leased to non-affiliates.
Ocala, Florida. The real estate consists of 1.6 acres of land and an office building with gross area of approximately 16,000 square feet. The facility is
100% designated for our insurance operations and will be used as an alternative location in the event a catastrophic event impacts our operations in Tampa,
Florida.
Investment Real Estate
Treasure Island, Florida. The real estate consists of approximately 10 acres of waterfront property and land improvements, a restaurant and a marina
facility. The marina facility and the restaurant are currently owned and operated by us. This property has been listed for sale since November 2018 and has yet to
receive an offer to purchase with acceptable terms. As a result, we reclassified this property from assets held for sale back to real estate investments in
December 2019.
Tierra Verde, Florida. The real estate consists of 7.1 acres of waterfront property, a dry rack storage building with gross area of 57,500 square feet,
and two buildings with retail space having an aggregate gross area of approximately 23,000 square feet. This marina facility is owned and operated by us.
Approximately 5% of the available retail space is occupied by us, 54% of the retail space is leased to non-affiliates, and the remaining space is available for
lease.
Riverview, Florida. The real estate consists of 2.57 acres of land, 1.27 acres of which is leased to Thorntons, LLC, a gas station and convenience store
chain. Our retail structure with 8,400 square feet of net rentable space is situated on the remaining land. Approximately 88% of the rentable space is leased to
non-affiliates and the remaining space is available for lease.
Sorrento, Florida. The real estate includes 5.42 acres of outparcel land intended for ground lease or resale and a retail shopping center with 61,400
square feet of net rentable area. Approximately 74% of the rentable space is currently leased to Publix supermarket. Approximately 94% of the rentable space is
leased to non-affiliates and the remaining space is available for lease.
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Melbourne, Florida. The real estate includes 2.26 acres of outparcel land intended for ground lease, resale or future development and a retail shopping
center with 49,995 square feet of rentable area. Approximately 42% of the rentable space is currently leased to Fresh Market supermarket. Approximately 95%
of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Tampa, Florida. We own investment properties in two different locations. One real estate consists of 6.69 acres of land and an office building with
gross area of 68,867 square feet. The building is 100% leased to Bank of America. Another is approximately 9 acres of undeveloped land that we acquired in
February 2019.
Clearwater, Florida. The real estate consists of 6.08 acres of land and a retail building with approximately 57,000 square feet of rentable space. It is
currently under redevelopment.
Leased Property
Noida, India. We lease 15,000 square feet of office space for our information technology operations. The lease commenced in 2013 and has an initial
term of nine years.
Miami Lakes, Florida. We lease approximately 5,600 square feet of office space for our claims related administration. The lease commenced March 1,
2018 and has an initial term of approximately three years.
Expense under all facility leases was $456,000, $407,000 and $336,000 during the years ended December 31, 2019, 2018 and 2017, respectively.
Expense for 2019 reflects lease expense under a new lease accounting standard adopted on January 1, 2019. See Adoption of New Accounting Standards in
Note 2 -- “Summary of Significant Accounting Policies” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K for additional
information.
ITEM 3 – Legal Proceedings
We are a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the
ultimate resolution of the claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material,
adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 4 – Mine Safety Disclosures
Not applicable.
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ITEM 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Markets for Common Stock
Our common stock trades on the New York Stock Exchange under the symbol “HCI.” The following table represents the high and low sales prices for
our common stock as reported by the New York Stock Exchange for the periods indicated:
PART II
Calendar Quarter—2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Calendar Quarter—2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
Price
High
Low
$
$
$
$
$
$
$
$
51.93
43.94
43.74
48.15
42.80
44.25
43.80
59.32
36.72
39.33
37.04
40.01
29.88
37.04
38.66
41.76
Holders
As of February 28, 2020, the market price for our common stock was $42.52 and there were 268 holders of record of our common stock.
Dividends
The declaration and payment of dividends is at the discretion of our board of directors. Our ability to pay dividends depends on many factors, including
the Company’s operating results, financial condition, capital requirements, the availability of cash from our subsidiaries and legal and regulatory constraints and
requirements on the payment of dividends and such other factors as our board of directors deems relevant. The following table represents the frequency and
amount of all cash dividends declared on our common stock for the two most recent fiscal years:
Declaration
Date
10/17/2019
7/2/2019
4/8/2019
1/14/2019
10/18/2018
7/6/2018
4/16/2018
1/15/2018
Payment
Date
12/20/2019
9/20/2019
6/21/2019
3/15/2019
12/21/2018
9/21/2018
6/15/2018
3/16/2018
Date of
Record
11/15/19
8/16/2019
5/17/2019
2/15/2019
11/16/2018
8/17/2018
5/18/2018
2/16/2018
Per Share
Amount
0.40
0.40
0.40
0.40
0.375
0.375
0.375
0.35
$
$
$
$
$
$
$
$
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders unless certain requirements,
which are discussed in Note 25 -- “Regulatory Requirements and Restrictions” to our consolidated financial statements under Item 8 of this Annual Report on
Form 10-K, are met. Hence Florida law may limit the availability of cash from our insurance subsidiaries for the payment of dividends to our shareholders.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our equity compensation plans as of December 31, 2019. We currently have no equity compensation plans not
approved by our stockholders.
Plan Category
(a)
Number of Securities
To be Issued Upon
Exercise of
Outstanding Options
(b)
Weighted-Average
Exercise Price of
Outstanding Options
(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Stockholders
340,000 $
43.21
1,761,804
Performance Graph
The following graph compares the 5-year cumulative total dollar return to shareholders on our common stock relative to the cumulative total returns of
the Russell 2000 Index and the NASDAQ Insurance Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our
common stock and in each index on December 31, 2014 and its relative performance is tracked through December 31, 2019. The returns shown are based on
historical results and are not intended to suggest future performance.
Recent Sales of Unregistered Securities
None
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Issuer Purchases of Equity Securities
The table below summarizes the number of shares of common stock repurchased during the three months ended December 31, 2019 under the
repurchase plan approved by our Board of Directors in December 2018 and also the number of shares of common stock surrendered by employees to satisfy
minimum federal income tax liabilities associated with the vesting of restricted shares in December 2019 (dollar amounts in thousands, except share and per
share amounts):
For the Month Ended
October 31, 2019
November 30, 2019
December 31, 2019
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under The Plans
or Programs
60,282 $
18,011 $
11,916 $
90,209 $
41.37
44.31
45.71
42.53
60,282 $
18,011 $
7,981 $
86,274
2,327
1,529
1,163
In December 2019, our Board of Directors approved an extension of the expiry date to March 15, 2020 for our common share repurchase plan which
was initially approved in 2018. See Note 20 -- “Stockholders’ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
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ITEM 6 – Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and the related notes appearing in Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2019, 2018, and 2017
and the consolidated balance sheet data at December 31, 2019 and 2018 are derived from our audited consolidated financial statements appearing in Item 8 of
this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2016 and 2015, and the consolidated balance
sheet data at December 31, 2017, 2016, and 2015, are derived from our audited consolidated financial statements that are not included in this Annual Report on
Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
Operating Revenue
Gross premiums earned
Premiums ceded
Net premiums earned
Net investment income
Net realized investment (losses) gains
Net unrealized investment gains (losses)
Net other-than-temporary impairment losses recognized in
income:
Total other-than-temporary impairment losses
Portion of loss recognized in other comprehensive
income, before taxes
Net other-than-temporary impairment losses
Policy fee income
Gain on repurchases of convertible senior notes
Gain on bargain purchase
Gain on remeasurement of previously held interest
Other income
Total operating revenue
Operating Expenses
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
General and administrative personnel expenses*
Interest expense
Loss on repurchases of senior notes
Impairment losses
Other operating expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
For the Years Ended December 31,
2019
2018
2017
2016
2015
(Dollar amounts in thousands, except per share amounts)
$
342,079 $
(125,765)
216,314
13,642
(254 )
7,950
343,065 $
(129,643)
213,422
16,581
6,183
(10,202 )
358,253 $
(133,635)
224,618
11,439
4,346
92
378,678 $
(135,051)
243,627
9,087
2,601
—
423,120
(140,614)
282,506
3,978
(608 )
—
(289 )
(80)
(1,116)
(2,252)
(5,275)
—
—
(351 )
(230 )
(289 )
3,229
—
—
—
1,882
242,474
107,514
42,497
31,112
13,055
—
—
12,203
206,381
36,093
9,517
26,576 $
(80)
3,389
—
—
—
1,999
231,292
109,328
38,943
25,908
18,096
—
—
12,115
204,390
26,902
9,177
17,725 $
(1,467)
3,622
—
—
—
1,756
244,406
165,629
39,663
25,127
16,767
743
38
12,063
260,030
(15,624 )
(8,731)
(6,893) $
(2,482)
3,914
153
2,071
4,005
1,470
264,446
124,667
42,642
26,200
11,079
—
388
12,614
217,590
46,856
17,835
29,021 $
594
(4,681)
3,496
—
—
—
1,261
285,952
87,224
41,984
28,276
10,754
—
—
11,522
179,760
106,192
40,331
65,861
$
*
For the years ended December 31, 2016 and 2015, we reclassified certain payroll-related costs such as share-based compensation expense, payroll taxes and employee
benefits previously reported in other operating expenses to general and administrative personnel expenses to conform with our 2019, 2018 and 2017 presentation.
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Per Share Data:
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Dividends per common share
Ratios to Net Premium Earned:
Loss Ratio
Expense Ratio
Combined Ratio
Ratios to Gross Premiums Earned:
Loss Ratio
Expense Ratio
Combined Ratio
Consolidated Balance Sheet Data:
Total investments
Total cash and cash equivalents
Total assets
Long-term debt
Total stockholders’ equity
As of or for the Years Ended December 31,
2019
2018
2017
2016
2015
(Dollar amounts in thousands, except per share amounts)
$
$
$
3.32
$
2.34
$
(0.75 )
$
2.95
$
6.51
3.31
$
2.34
$
(0.75 )
$
2.92
$
5.90
1.600
$
1.475
$
1.40
$
1.20
$
1.20
49.70 %
45.70 %
95.40 %
51.23 %
44.54 %
95.77 %
73.74 %
42.03 %
115.77 %
51.17 %
38.14 %
89.31 %
31.43 %
28.90 %
60.33 %
31.87 %
27.71 %
59.58 %
46.23 %
26.35 %
72.58 %
32.92 %
24.54 %
57.46 %
30.88 %
32.76 %
63.64 %
20.61 %
21.87 %
42.48 %
$
$
$
$
$
341,486
229,218
802,609
163,695
185,543
$
$
$
$
$
387,783
239,458
832,863
250,150
181,441
$
$
$
$
$
380,286
255,884
842,264
237,835
193,975
$
$
$
$
$
298,734
280,531
670,064
138,863
243,746
$
$
$
$
$
232,917
267,738
636,986
129,429
237,722
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ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual
report on Form 10-K.
Forward-Looking Statements
In addition to historical information, this annual report on Form 10-K contains forward-looking statements as defined under federal
securities laws. Such statements, including statements about our plans, objectives, expectations, assumptions or future events, involve risks and
uncertainties. 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; 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 and other factors listed under Item 1A—“Risk Factors” and elsewhere in this annual report on Form 10-
K and in our other Securities and Exchange Commission filings.
OVERVIEW
General
HCI Group, Inc. is a Florida-based company which through its subsidiaries is engaged in a variety of business activities, including property and
casualty insurance, reinsurance, real estate and information technology. Its principal business is property and casualty insurance.
We began insurance operations by participating in a “take-out program” which is a legislatively mandated program designed to encourage private
companies to assume policies from Citizens, a Florida state sponsored insurance carrier. Opportunities to acquire large numbers of policies from Citizens
meeting our strict underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens.
Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance
business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and
maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. For instance, HCPCI will accept the transfer of approximately
43,000 homeowners’ insurance policies from a troubled insurance company in April 2020 as described in the Recent Developments section below.
Recent Developments
On February 28, 2020, we entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of
$10,000,000. The agreement bears interest at a fixed rate of 3.90% and is secured by our property in Melbourne, Florida and the assignment of associated lease
agreements. Approximately $60,000 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of
$5,007,000 including principal and unpaid interest payable on March 1, 2032. The promissory note may be repaid in full as long as the Company provides at
least 60 days’ written notice and pays a prepayment premium plus a processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due
in February 2020.
On February 5, 2020, we, through HCPCI, entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company
(“Anchor”). Under the agreement, Anchor will cancel all its policies as of April 1, 2020 and HCPCI will offer short-term replacement policies to those
policyholders, who are under no obligation to accept them. The replacement policies will have substantially the same terms and rates as the cancelled polices
and will expire on the same dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI
will offer renewals to those policyholders at its own rates and terms. At April 1, 2020, HCPCI expects to offer up to approximately 43,000 replacement policies,
representing annualized premiums of up to $69,000,000. In addition, HCPCI will pay a cash bonus at the agreed rate ($50,000 per $1,000,000 of premium in
force), provided that Anchor is in compliance with the covenants specified in the agreement,
On January 16, 2020, we granted 40,000 shares of restricted stock and options to purchase 110,000 of our common shares at an exercise price of
$48 per share to our chief executive officer, Paresh Patel. The options will expire on January 16, 2030. These share-based awards were granted pursuant to our
2012 Omnibus Incentive Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by us. The grant date fair values
of the restricted stock and options were approximately $1,839,000 and $1,234,000, respectively.
On January 21, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are to be paid March 20, 2020
to stockholders of record on February 21, 2020.
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RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2019 with the Year Ended December 31, 2018
Our results of operations for the year ended December 31, 2019 reflect net income of $26,576,000, or $3.31 earnings per diluted common share,
compared with a net income of $17,725,000, or $2.34 earnings per diluted common share, for the year ended December 31, 2018. The year-over-year increase
was primarily attributable to an increase in net premiums earned of $2,892,000, a net increase in income from our investment portfolio (consisting of net
investment income and net realized and unrealized gains/losses) of $8,776,000, and a $5,041,000 decrease in interest expense, offset by a $5,204,000 increase
in payroll costs and other personnel expenses and an increase in policy acquisition expenses of $3,554,000.
Revenue
Gross Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $342,079,000 and $343,065,000, respectively. The
decrease in 2019 was primarily attributable to a net decrease in policies in force. Although the number of policies in force and gross premiums written from
TypTap business have increased steadily, these premiums have yet to be earned over the term of the policies.
Premiums Ceded for the years ended December 31, 2019 and 2018 were approximately $125,765,000 and $129,643,000, respectively, representing
36.8% and 37.8%, respectively, of gross premiums earned. Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed
the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses defined in a quota share
arrangement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. The $3,878,000 decrease was
primarily attributable to a $6,778,000 reduction related to retrospective provisions under one reinsurance contract as opposed to a net reduction of approximately
$485,000 in 2018 under the same contract. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies
and Estimates.” Premiums ceded in the prior year also included the recognition of additional premiums ceded of approximately $1,222,000 resulting from the
termination of one reinsurance contract during the second quarter of 2018 (See Note 26 -- “Related Party Transactions” to our audited consolidated financial
statements under Item 8 of this Annual Report on Form 10-K for additional information).
Net Premiums Written for the years ended December 31, 2019 and 2018 totaled approximately $239,190,000 and $206,813,000, respectively. Net
premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2019 resulted
primarily from an increase in gross premiums written from the growth in TypTap business combined with the decrease in premiums ceded as described above.
HCPCI’s and TypTap’s gross premiums written were approximately $304,683,000 and $60,272,000, respectively, for 2019 compared with approximately
$321,939,000 and $14,517,000, respectively, for 2018. We had approximately 131,000 policies in force at December 31, 2019 versus approximately 127,000
policies in force at December 31, 2018.
Net Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $216,314,000 and $213,422,000, respectively, and
reflect the gross premiums earned less reinsurance costs as described above.
The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2019 and 2018 (amounts in
thousands):
Net Premiums Written
(Increase) Decrease in Unearned Premiums
Net Premiums Earned
Years Ended December 31,
2019
2018
$
$
239,190 $
(22,876 )
216,314 $
206,813
6,609
213,422
Net Investment Income for the years ended December 31, 2019 and 2018 was approximately $13,642,000 and $16,581,000, respectively. The year-
over-year decrease was primarily attributable to a decrease in income from limited partnership investments of approximately $3,254,000. See Note 5 --
“Investments” under Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Net Realized Investment Losses for the year ended December 31, 2019 were approximately $254,000 versus $6,183,000 of net realized investment
gains for the year ended December 31, 2018. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the
impact from the rising interest rate trend and to decrease our holdings in municipal bonds as they become less attractive in a low tax rate environment.
Net Unrealized Investment Gains for the year ended December 31, 2019 were approximately $7,950,000 versus approximately $10,202,000 of net
unrealized investment losses for the year ended December 31, 2018. Net unrealized investment gains or losses represent the net change in the fair value of
equity securities. The increase in 2019 reflected an improvement in the fair value of equity securities compared with values prevalent during the general
downturn in the securities markets in December 2018.
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Expenses
Our Losses and Loss Adjustment Expenses amounted to approximately $107,514,000 and $109,328,000 for the years ended December 31, 2019 and
2018, respectively. Losses and loss adjustment expenses in 2019 included net losses related to a severe storm event in March 2019 of approximately
$7,400,000 as well as adverse development related to Hurricane Matthew in 2016 of approximately $1,923,000 and adverse development related to non-
catastrophe claims of approximately $9,100,000 primarily related to assignment of benefits litigation. During 2018, losses and loss adjustment expenses
included net losses of approximately $16,520,000 for Hurricane Michael as well as adverse development related to Hurricane Matthew of approximately
$2,100,000 and adverse development related to non-catastrophe claims of approximately $9,900,000 primarily related to assignment of benefits litigation See
“Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2019 and 2018 were approximately $42,497,000 and
$38,943,000, respectively. The increase from 2018 was primarily attributable to the organic growth of TypTap business resulting in increased agent
commissions and property inspection costs.
General and Administrative Personnel Expenses for the years ended December 31, 2019 and 2018 were approximately $31,112,000 and
$25,908,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and
employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this
expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the
payroll costs associated with the processing and settlement of Hurricane Irma claims which are recoverable from reinsurers under reinsurance contracts. The
year-over-year increase of $5,204,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-
executive employees effective in late March 2019, higher share-based compensation expense, and an increase in employee incentive bonus.
Interest Expense for the years ended December 31, 2019 and 2018 was approximately $13,055,0000 and $18,096,000, respectively. The decrease
resulted from the repayment of our 3.875% convertible senior notes in March 2019.
Income Tax Expense for the year ended December 31, 2019 was approximately $9,517,000 for state, federal, and foreign income taxes compared
with income tax expense of approximately $9,177,000 for the year ended December 31, 2018, resulting in an effective tax rate of 26.4% for 2019 and 34.1% for
2018. The decrease was primarily attributable to the negative effect of the derecognition of deferred tax assets of approximately $1,825,000 and the
nondeductible expense of approximately $1,887,000, both of which occurred in 2018 and related to restricted stock awards with market conditions that were not
met. (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” to our consolidated financial statements under Item 8 of this Annual Report on
Form 10-K).
Ratios:
The loss ratio applicable to the year ended December 31, 2019 (losses and loss adjustment expenses incurred related to net premiums earned) was
49.7% compared with 51.2% for the year ended December 31, 2018. The decrease was primarily due to the increase in net premiums earned combined with
the decrease in losses and loss adjustment expenses.
The expense ratio applicable to the year ended December 31, 2019 (defined as underwriting expenses, general and administrative personnel
expenses, interest and other operating expenses related to net premiums earned) was 45.7% compared with 44.6% for the year ended December 31, 2018. The
increase in our expense ratio was primarily attributable to the increases in policy acquisition expenses and general and administrative personnel expenses,
offset by the increase in net premiums earned as described earlier.
The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the year ended December 31, 2019
was 95.4% compared with 95.8% for the year ended December 31, 2018. The decrease was primarily to the increase in net premiums earned as described
earlier.
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 year ended December 31,
2019 was 60.3% compared with 59.6% for the year ended December 31, 2018. The increase in 2019 was primarily attributable to the net increase in total
expenses.
Comparison of the Year Ended December 31, 2018 with the Year Ended December 31, 2017
Our results of operations for the year ended December 31, 2018 reflect net income of $17,725,000, or $2.34 earnings per diluted common share,
compared with a net loss of $6,893,000, or $0.75 loss per common share, for the year ended December 31, 2017. Losses and loss adjustment expenses were
approximately $56,301,000 lower in 2018, attributable to lower catastrophe losses and decreased adverse development. Catastrophe losses in 2018 primarily
included net losses of approximately $16,520,000 from Hurricane Michael versus net losses of approximately $54,000,000 from Hurricane Irma in 2017. The
year-over-year improvement in losses and loss adjustment expenses was offset by a net $11,196,000 decrease in net premiums earned, a net $3,315,000
decrease in income from investment activities and a $1,329,000 increase in interest expense. Income tax expense in 2018 was negatively impacted by the
derecognition of deferred tax assets of approximately $1,825,000 related to unvested restricted stock with market conditions and the nondeductible expense of
approximately $1,887,000 associated with the reclassified dividends on such restricted stock awards, offset by a lower federal corporate income tax rate
effective January 1, 2018.
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Revenue
Gross Premiums Earned for the years ended December 31, 2018 and 2017 were approximately $343,065,000 and $358,253,000, respectively. The
decrease in 2018 was primarily attributable to a net decrease in policies in force offset by an increase in the average premium per policy.
Premiums Ceded for the years ended December 31, 2018 and 2017 were approximately $129,643,000 and $133,635,000, respectively, representing
37.8% and 37.3%, respectively, of gross premiums earned. The $3,992,000 decrease was primarily attributable to an unfavorable adjustment of $12,465,000 to
premiums ceded in connection with retrospective provisions under certain reinsurance contracts due to losses incurred by Hurricane Irma during the third quarter
of 2017, offset by the recognition of additional premiums ceded of approximately $1,222,000 resulting from the termination of one reinsurance contract during the
second quarter of 2018 (See Note 26 -- “Related Party Transactions” to our audited consolidated financial statements under Item 8 of this Annual Report on Form
10-K for additional information) and an increase in premiums ceded attributable to a lower retention level for the reinsurance contract year 2019/20.
For the year ended December 31, 2018, premiums ceded included a net decrease of approximately $485,000 versus a net increase of approximately
$5,740,000 for the year ended December 31, 2017 related to retrospective provisions.
Net Premiums Written for the years ended December 31, 2018 and 2017 totaled approximately $206,813,000 and $213,711,000, respectively. Net
premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The decrease in 2018
resulted primarily from a decrease in gross premiums written during the period due to policy attrition, offset by the decrease in premiums ceded as described
above. We had approximately 127,000 policies in force at December 31, 2018 versus approximately 139,000 policies in force at December 31, 2017.
Net Premiums Earned for the years ended December 31, 2018 and 2017 were approximately $213,422,000 and $224,618,000, respectively, and
reflect the gross premiums earned less reinsurance costs as described above.
The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2018 and 2017 (amounts in
thousands):
Net Premiums Written
Decrease in Unearned Premiums*
Net Premiums Earned
Years Ended December 31,
2018
2017
$
$
206,813 $
6,609
213,422 $
213,711
10,907
224,618
*
Unearned premiums are impacted by the timing and size of any takeout completed during the year net of attrition.
Net Investment Income for the years ended December 31, 2018 and 2017 was approximately $16,581,000 and $11,439,000, respectively. The year-
over-year increase was attributable to an increase in income from limited partnership investments of approximately $2,096,000, an increase of approximately
$1,358,000 in income from real estate investments, and an increase in interest income from cash and short-term investments. See Note 5 -- “Investments” under
Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Net Realized Investment Gains for the years ended December 31, 2018 and 2017 were approximately $6,183,000 and $4,346,000, respectively. The
gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the impact from the rising interest rate trend and to
decrease our holdings in municipal bonds as they become less attractive in a low tax rate environment.
Net Unrealized Investment Losses for the year ended December 31, 2018 were approximately $10,202,000 versus approximately $92,000 of net
unrealized investment gains for the year ended December 31, 2017. Net unrealized investment gains or losses represent the net change in the fair value of
equity securities. The decrease in 2018 primarily resulted from the adoption of the new accounting standard with regard to equity securities, combined with a
general downturn in the U.S. securities markets in December 2018.
Net Other-Than-Temporary Impairment Losses for the years ended December 31, 2018 and 2017 were approximately $80,000 and $1,467,000,
respectively. During 2018, we recognized impairment loss on one fixed-maturity security versus impairment losses specific to four fixed-maturity securities and
six equity securities during 2017.
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Expenses
Our Losses and Loss Adjustment Expenses amounted to approximately $109,328,000 and $165,629,000 for the years ended December 31, 2018
and 2017, respectively. During 2018, losses and loss adjustment expenses included net losses of approximately $16,520,000 for Hurricane Michael as well as
adverse development related to Hurricane Matthew of approximately $2,100,000 and adverse development related to non-catastrophe claims of approximately
$9,900,000 primarily related to assignment of benefits litigation. Losses and loss adjustment expenses in 2017 included net losses related to Hurricane Irma of
approximately $54,000,000 as well as adverse development related to Hurricane Matthew of approximately $2,500,000 and adverse development related to non-
catastrophe claims of approximately $16,200,000 primarily related to assignment of benefits litigation.
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2018 and 2017 were approximately $38,943,000 and
$39,663,000, respectively. The decrease from 2017 was primarily attributable to decreased commissions and premium taxes resulting from the net decrease in
policies in force.
General and Administrative Personnel Expenses for the years ended December 31, 2018 and 2017 were approximately $25,908,000 and
$25,127,000, respectively. The year-over-year increase of $781,000 was primarily attributable to the recognition of approximately $1,505,000 of cumulative
dividends paid on unvested restricted stock awards of which market conditions will not be met and an increase of approximately $606,000 in employee incentive
bonus, offset by an increase in recoverable Hurricane Irma payroll costs of $1,231,000 and lower share-based compensation expense during 2018.
Interest Expense for the years ended December 31, 2018 and 2017 was approximately $18,096,0000 and $16,767,000, respectively. The increase
primarily resulted from the 4.25% convertible debt offering completed in March 2017.
Loss on repurchases of Senior Notes for the year ended December 31, 2017 was approximately $743,000, resulting from the early extinguishment of
our 8% Senior Notes.
Income Tax Expense for the year ended December 31, 2018 was approximately $9,177,000 for state, federal, and foreign income taxes compared
with income tax benefit of approximately $8,731,000 for the year ended December 31, 2017, resulting in an effective tax rate of 34.1% for 2018 and 55.9% for
2017. The decrease was primarily attributable to the positive impact from a lower federal corporate income tax rate effective January 1, 2018, offset by the
negative effect of the derecognition of deferred tax assets of approximately $1,825,000 and the nondeductible expense of approximately $1,887,000, both of
which related to restricted stock awards with market conditions that will not be met. (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” to
our consolidated financial statements under Item 8 of this Annual Report on Form 10-K).
Ratios:
The loss ratio applicable to the year ended December 31, 2018 was 51.2% compared with 73.8% for the year ended December 31, 2017. The
decrease was primarily due to the decrease in losses and loss adjustment expenses as described previously.
The expense ratio applicable to the year ended December 31, 2018 was 44.6% compared with 42.0% for the year ended December 31, 2017. The
increase in our expense ratio was primarily attributable to the decrease in net premiums earned.
The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the year ended December 31, 2018
was 95.8% compared with 115.8% for the year ended December 31, 2017. The decrease was primarily to the decrease in losses and loss adjustment expenses
as described earlier.
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 year ended December 31,
2018 was 59.6% compared with 72.6% for the year ended December 31, 2017. The decrease in 2018 was primarily attributable to the decrease in losses and
loss adjustment expenses.
Seasonality of Our Business
Our insurance business is seasonal as hurricanes and tropical storms affecting Florida typically occur during the period from June 1 through
November 30 each year. Also, with our reinsurance treaty year typically effective on 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.
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LIQUIDITY AND CAPITAL RESOURCES
Throughout our history, our liquidity requirements have been met through issuances 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/or equity offerings to support our growth and future
investment opportunities.
Our insurance subsidiaries require 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 losses
and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. Substantially all of
our losses and loss adjustment expenses, excluding litigated claims, are fully settled and paid within approximately 100 days of the claim receipt date. Additional
cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.
We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such
as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management
considers adequate to diversify risk and safeguard our financial position.
In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating
expenses and real estate acquisitions.
Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases
The following table summarizes the principal and interest payment obligations for our indebtedness at December 31, 2019:
4.25% Convertible Senior Notes*
Maturity Date
March 2037
4% Promissory Note
Through February 2031
3.75% Callable Promissory Note
Through September 2036
3.95% Promissory Note
4.55% Promissory Note
Finance Leases
Revolving credit facility
Through February 2020
Through August 2036
Through August 2023
Payment Due Date
March 1 and September 1
1st day of each month
1st day of each month
17th of each month
1st day of each month
Various
Through December 2021
January 1, April 1, July 1, October 1
*
At the option of the note holder, we may be required to repurchase for cash all or any portion of the note on March 1, 2022, March 1, 2027 or March 1,
2032.
See Note 13 -- “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Share Repurchase Plan
In December 2019, our Board of Directors extended the expiry date of our share repurchase plan approved in 2018 to March 15, 2020. See Note 20 --
“Stockholders’ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Limited Partnership Investments
Our limited partnership investments consist of five private equity funds managed by their general partners. Three of these funds have unexpired
capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Although capital
commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances. At December 31, 2019,
there was an aggregate unfunded capital balance of $15,130,000. See Limited Partnership Investments under Note 5 -- “Investment” to our consolidated
financial statements under Item 8 of this Annual Report on Form 10-K.
Real Estate Investment
Real estate has long been a significant component of our overall investment portfolio. It helps offset the volatility of other high-risk assets. Thus, we
may consider increasing our real estate investment portfolio should an opportunity arise.
We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. FMKT
Mel JV’s real estate portfolio consists of outparcels for ground lease or sale. We have the option to take full ownership of these outparcels by acquiring the
remaining 10% interest. Alternatively, we may sell these outparcels and allocate the profits from the sale before liquidating FMKT Mel JV.
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Sources and Uses of Cash
Our cash flows from operating, investing and financing activities for the years ended December 31, 2019, 2018 and 2017 are summarized below.
Cash Flows for the Year ended December 31, 2019
Net cash provided by operating activities for the year ended December 31, 2019 was approximately $54,047,000, which consisted primarily of cash
received from net premiums written and reinsurance recoveries of approximately $105,676,000 less cash disbursed for operating expenses, losses and loss
adjustment expenses and interest payments. Net cash provided by investing activities of $50,459,000 was primarily due to the proceeds from sales of fixed-
maturity and equity securities of $45,616,000, the proceeds from redemptions and maturities of fixed-maturity securities of $59,343,000, the proceeds from sales
and maturities of short-term and other investments of $67,398,000, and the distributions of $2,121,000 from limited partnership investments, offset by the
purchases of fixed-maturity and equity securities of $107,299,000, the purchases of real estate investments of $11,481,000, the purchases of property and
equipment of $2,887,000, the purchases of short-term and other investments of $1,178,000, and the limited partnership investments of $1,174,000. Net cash
used in financing activities totaled $114,724,000, which was primarily due to the repayment of long-term debt of $91,318,000, $20,054,000 used in our share
repurchases, and $12,706,000 of net cash dividend payments, offset by $9,750,000 of borrowings from our revolving credit facility.
Cash Flows for the Year ended December 31, 2018
Net cash provided by operating activities for the year ended December 31, 2018 was approximately $28,595,000, which consisted primarily of cash
received from net premiums written and reinsurance recoveries of approximately $128,300,000 less cash disbursed for operating expenses, losses and loss
adjustment expenses and interest payments. Net cash used in investing activities of $17,678,000 was primarily due to the purchases of fixed-maturity and equity
securities of $165,424,000, the purchases of short-term and other investments of $201,538,000, the purchases of real estate investments of $7,472,000, and the
limited partnership investments of $7,182,000, offset by the proceeds from sales of fixed-maturity and equity securities of $148,248,000, the proceeds from
redemptions and maturities of fixed-maturity securities of $82,177,000, and the proceeds from sales and maturities of short-term and other investments of
$135,256,000. Net cash used in financing activities totaled $27,288,000, which was primarily due to $21,166,000 used in our share repurchases, $10,351,000 of
net cash dividend payments and the repayment of long-term debt of $1,127,000, offset by the proceeds from the issuance of 4.55% promissory note of
$6,000,000.
Cash Flows for the Year ended December 31, 2017
Net cash provided by operating activities for the year ended December 31, 2017 was approximately $16,635,000, which consisted primarily of cash
received from net premiums written and reinsurance recoveries less cash disbursed for operating expenses, losses and loss adjustment expenses and interest
payments. Net cash used in investing activities of $80,164,000 was primarily due to the purchases of fixed-maturity and equity securities of $165,196,000, the
limited partnership investments of $4,226,000, and the real estate investments of $11,878,000, offset by the proceeds from sales of fixed-maturity and equity
securities of $77,041,000, the distributions of $11,758,000 from limited partnership investments and the redemptions and repayments of fixed-maturity securities
of $14,897,000. Net cash provided by financing activities totaled $39,030,000, which was primarily due to the proceeds from issuance of 4.25% Convertible
Senior Notes of $143,750,000, offset by $40,250,000 used in the repurchases of our 8% senior notes, $4,975,000 of related underwriting and issuance costs,
$45,872,000 used in our share repurchases and $12,833,000 of net cash dividend payments.
Investments
The main objective of our investment policy is to maximize our after-tax investment income with a reasonable level of risk given the current financial
market. Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities.
At December 31, 2019, we had $238,124,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest
rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new
investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces
the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for
realized investment gains on disposition.
In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities
and real estate mortgages, as permitted by applicable law, including insurance regulations.
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OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2019, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not
recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 23 -- “Commitments and Contingencies”
to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K and Contractual Obligations and Commitments below for additional
information.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes our material contractual obligations and commitments as of December 31, 2019 (amounts in thousands):
Operating lease (1)
Service agreement (1)
Reinsurance contracts (2)
Unfunded capital commitment (3)
Revolving credit facility
Long-term debt obligations (4)
Total
Total
552
51
2,024
15,130
9,750
196,021
223,528
$
$
Payment Due by Period
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
327
25
2,024
15,130
9,750
17,015
44,271
225
26
—
—
—
156,842
157,093
—
—
—
—
—
3,901
3,901
—
—
—
—
—
18,263
18,263
(1)
(2)
(3)
(4)
Represents a lease for office space in Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment
and storage space. Liabilities related to our India operations were converted from India Rupees to U.S. dollars using the December 31, 2019 exchange rate.
Represents the minimum payment of reinsurance premiums under one multi-year reinsurance contract. Reinsurance premiums payable after March 31, 2020 are estimated
and subject to subsequent revision as the premiums are determined on a quarterly basis based on the premiums associated with the applicable flood total insured value on
the last day of the preceding quarter.
Represents the unfunded balance of capital commitments under the subscription agreements related to limited partnerships in which we hold interests.
Amounts represent principal and interest payments over the lives of various long-term debt obligations. See Note 13 -- “Long-Term Debt” to our consolidated financial
statements under Item 8 of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments to develop amounts reflected and
disclosed in our financial statements. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss
adjustment expenses, which include amounts estimated for claims incurred but not yet reported. We base our estimates on various assumptions and actuarial
data we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates.
We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective
provisions, deferred income taxes, and stock-based compensation expense involve our most significant judgments and estimates material to our consolidated
financial statements.
Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss
adjustment expenses (LAE). Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in
full, and (ii) claims that have been incurred but not yet reported to us (“IBNR”). Reserves established by us represent an estimate of the outcome of future events
and, as such, cannot be considered an exact calculation of our liability. Rather, loss reserves represent management’s best estimate of our company’s liability
based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the
balance sheet date. The process of establishing loss reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future
uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss reserves, we
give careful consideration to all available data and actuarial analyses.
Reserves represent estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported. The
amount of loss reserves for reported claims consist of case reserves established by our claims department (based on a case-by-case evaluation of the kind of
risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss) and bulk reserves for
additional growth on carried case reserves on known claims. The amounts of reserves for unreported claims and LAE (incurred but not reported claims, or IBNR)
are determined using our historical information for each line of business adjusted to reflect current conditions. Inflation is ordinarily implicitly provided for in the
reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.
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Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial
techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case reserves, new claims, changes to existing case
reserves, and paid losses with respect to the current and prior years. As we continue to expand historical data regarding paid and incurred losses, we use this
data to develop expected ultimate loss and loss adjustment expense ratios. We then apply these expected loss and loss adjustment expense ratios to earned
premium to derive a reserve level for each line of business. In connection with the determination of these reserves, we will also consider other specific factors
such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability. Therefore, we use the
loss ratio method, among other methods, to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss
expectations updated, with the possibility of variability from the initial estimate of ultimate losses.
When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate amount payable to settle the
claim. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the claims
adjuster. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, location, and the policy
provisions relating to the type of loss. Case reserves are adjusted by us as more information becomes available. It is our policy to settle each claim as
expeditiously as possible.
We maintain IBNR reserves to provide for claims that have been incurred but have not been reported and subsequent development on reported
claims. The IBNR reserve is determined by estimating our insurance company’s ultimate net liability for both reported and unreported claims and then subtracting
the case reserves and payments made to date for reported claims.
Loss Reserve Estimation Methods. We apply the following general methods in projecting reserves for losses and LAE:
•
•
•
•
•
•
•
•
Reported loss development;
Paid loss development;
Paid Bornhuetter-Ferguson method;
Reported Experience-Modified Bornhuetter-Ferguson method;
Paid Experience-Modified Bornhuetter-Ferguson method;
Loss ratio method;
Several variations of the Frequency-Severity method, depending on exposure; and
A factor load to loss and allocated loss adjustment expenses reserves for the unallocated LAE.
Selected reserves are based on a review of the indications from these methods as well as other considerations such as emergence since the most
recent evaluation and number of open claims for a given accident period.
Description of Ultimate Loss Estimation Methods. The reported loss development method relies on the assumption that, at any given state of
maturity, ultimate losses can be reasonably predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development
factor derived from development patterns observed in the historical reported data. The validity of the results of this method depends on the stability of claim
reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be
effective; they only need to have a fairly consistent level of adequacy for the historical experience that is considered. In order to derive loss development patterns
that are predictive for our business, we compile and review loss development triangles of our experience on an accident quarter basis, and select loss
development factors based on indications from this analysis of our data.
The paid loss development method is mechanically identical to the reported loss development method described above, but applied to loss payments
only. The paid method does not rely on case reserves or claim reporting patterns in making projections.
The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing
changes, a shift between single and multiple claim payments, legal changes, or variations in our mix of business from year to year. Also, since the percentage of
losses paid for immature accident quarters is often low, development factors for these maturities can be volatile. A small variation in the number of claims paid
can have a leveraging effect that can lead to significant distortions in estimated ultimate losses for these highly leveraged accident quarters. Therefore, ultimate
values for immature accident quarters are often based on alternative estimation techniques than more mature accident quarters.
The loss ratio method used by us relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a
function of currently reported losses. The expected loss ratio is multiplied by earned premium to produce ultimate losses. Reported losses are then subtracted
from this estimate to produce expected unreported losses.
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The loss ratio method is more useful than other models for immature loss years. For these immature years, the amounts reported or paid may not be
fully predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or
by emerging trends. This method is also useful when variations in reporting or payment patterns distort the historical development of losses.
The paid and reported Bornhuetter-Ferguson methods are a weighting of the loss ratio method and the corresponding development method.
Outstanding reserves or IBNR reserves are derived by applying the loss ratio estimate to the estimated unpaid or unreported percent of losses based on the
development patterns from the development methods.
The paid and reported experience-modified Bornhuetter-Ferguson methods are similar to the traditional paid and reported Bornhuetter-Ferguson
methods described above, with the distinction being that the initial (unadjusted Bornhuetter-Ferguson) estimates are compared to actual paid or reported losses.
A modification factor is selected based on the difference in the actual losses and the estimate based on the expected loss ratio and development pattern. The
modification factor is applied to the initial expected ultimate loss to produce modified expected ultimates, which are then utilized as the basis for the traditional
paid and reported Bornhuetter-Ferguson methods.
Finally, we employ several variations of the frequency/severity method for exposures that do not tend to follow historical payment and reported
patterns, such as catastrophes as well as for the separate analysis of litigated claims, discussed below. For such exposures, we estimate future development of
reported claims and average severities on IBNR claims. We combine this estimate with our open claims in order to derive an estimate of expected unreported
losses. Paid losses are added to this estimate in order to derive an estimate of ultimate losses. This method is based on the assumption that future unreported
claims and the average severity of open claims and unreported claims can be reasonably estimated from the experience available.
While the property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental
remediation, product and mold, and other uncertain or environmental exposures, we have not experienced significant losses from these types of claims. We
have experienced material losses associated with sinkholes in past years, but the materiality of this hazard has decreased significantly since the passing of
Florida Senate Bill 408. We continue to segregate this data in our derivation of estimated required reserves. While the losses we have experienced from
exposures to catastrophes have not historically been material, we have experienced significant losses related to recent catastrophes. These losses have
followed materially different development patterns than the balance of our experience. To address this situation, we separate this exposure from the remainder
of the business and derive reserves specific to each catastrophe event. We have seen a significant difference in development patterns between litigated and non-
litigated claims. For instance, claims associated with Assignment of Benefits (“AOB”) lawsuits have driven up our legal and claim settlement costs in past years.
It is still too early for us to gauge the impact of the AOB reform passed by the Florida Legislature during 2019 in curbing inflated claims and volumes of lawsuits.
Therefore, we have performed the reserving methods separately on these two groups of claims as well. Total reserves are determined by adding the reserves
related to each line of business.
Currently, our estimated ultimate liability is calculated using the principles and procedures described above, which are applied to the lines of business
written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the
established loss reserves and have a material, adverse effect on our results of operations and financial condition. Changes in estimates, or differences between
estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine our net loss reserves.
Management does not believe that any reasonably likely changes in the frequency of claims would affect our loss reserves. However, management believes that
a reasonably likely increase or decrease in the severity of claims could impact our net loss reserves. The table below summarizes the effect on net loss
reserves and equity in the event of reasonably likely changes in the severity of claims considered in establishing loss and loss adjustment expense reserves.
The range of reasonably likely changes in the severity of our claims was established based on a review of changes in loss year development and applied to loss
reserves as a whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios:
Change in Reserves
Reserves
Percentage
change in
equity, net
of tax
Year Ended December 31, 2019
-20.0%
-15.0%
-10.0%
-5.0%
Base
5.0%
10.0%
15.0%
20.0%
171,758
182,492
193,227
203,962
214,697
225,432
236,167
246,902
257,636
15.10 %
11.32 %
7.55%
3.77%
—
(3.77 )%
(7.55 )%
(11.32)%
(15.10)%
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Reinsurance Recoverable. Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss
adjustment expenses that is recoverable from reinsurers. This estimate is determined in a manner consistent with the terms of the applicable reinsurance
contracts and based on the ultimate losses and loss adjustment expenses we expect to incur. Given the uncertainty of the ultimate amounts of losses and loss
adjustment expenses, the estimate may vary significantly from the eventual outcome.
Economic Impact of Reinsurance Contract with Retrospective Provisions. One of our reinsurance contracts includes retrospective provisions
that adjust premiums in the event losses are minimal or zero. In accordance with U.S. GAAP, we will recognize an asset in the period in which the absence of
loss experience obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in
the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a
catastrophic loss event occurs during the contract term.
For the year ended December 31, 2019, we accrued benefits of $6,344,000 and recognized a reduction in ceded premiums of $434,000. For the year
ended December 31, 2018, we recognized a net increase in accrued benefits of $743,000 and a net increase in ceded premiums of $258,000. In contrast, for
the year ended December 31, 2017, we derecognized $3,413,000 of net accrued benefits. We also recognized ceded premiums of $2,327,000, including the
reversal of the majority of previously deferred reinsurance costs. The adjustments made in 2017 were attributable to the impact of Hurricane Irma. In
combination, for the year ended December 31, 2019, we recognized a decrease in ceded premiums of $6,778,000. For the year ended December 31, 2018, we
recognized a net reduction in ceded premiums of $485,000 as opposed to a net increase in ceded premiums of $5,740,000 for the year ended December 31,
2017.
As of December 31, 2019, we had $9,480,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a
catastrophic loss that exceeds the coverage limits. As of December 31, 2018, accrued benefits totaled $3,136,000.
We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the individual
reinsurer’s financial position.
Income Taxes. We account for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable
income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax
rates and laws are recognized in the period in which they occur. Valuation allowances are provided against assets that are not likely to be realized, if any. We
have elected to classify the related interest and penalties, if any, as income tax expense as permitted by current accounting standards.
Stock-Based Compensation. We account for stock-based compensation awards under our shareholder approved incentive plans in accordance with
the fair value recognition provisions of U.S. GAAP, which require the measurement, and recognition of compensation for all stock-based awards made to
employees and non-employee directors including stock options and restricted stock issuances based on estimated fair values. We recognize stock-based
compensation in the consolidated statements of income on a straight-line basis over the vesting period. We use the Black-Scholes option-pricing model, which
requires the following variables for input to calculate the fair value of each stock award on the option grant date: 1) expected volatility of our stock price, 2) the
risk-free interest rate, 3) expected term of each award, 4) expected dividends, and 5) an expected forfeiture rate.
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolios at December 31, 2019 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main
objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential
economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory
requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are
managed primarily by outside investment advisors and are overseen by the investment committee appointed by our board of directors. From time to time, our
investment committee may decide to invest in low risk assets such as U.S. government bonds.
Our investment portfolios are exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any
government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios.
We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component
of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying
value of our stockholders’ equity. In addition, we recognize any unrealized gains and losses related to our equity securities in our statement of income. As a
result, our results of operations can be materially affected by the volatility in the equity market.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Interest Rate Risk
Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing
anticipated movement in interest rates and considering our future capital needs.
The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31,
2019 (amounts in thousands):
Hypothetical Change in Interest Rates
300 basis point increase
200 basis point increase
100 basis point increase
100 basis point decrease
200 basis point decrease
300 basis point decrease
Credit Risk
Estimated
Fair Value
Change in
Estimated
Fair Value
$
194,537 $
197,304
200,071
205,602
208,052
208,658
(8,302)
(5,535)
(2,768)
2,764
5,213
5,819
Percentage
Increase
(Decrease) in
Estimated
Fair Value
-4.09%
-2.73%
-1.36%
1.36%
2.57%
2.87%
Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity
securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid
concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize
credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.
The following table presents the composition of our fixed-maturity securities, by rating, at December 31, 2019 (amounts in thousands):
Comparable Rating
AA+, AA, AA-
A+, A, A-
BBB+, BBB, BBB-
BB+, BB, BB-
CCC+, CC and Not rated
Total
Equity Price Risk
Cost or
Amortized
Cost
% of
Total
Amortized
Cost
46,238
114,607
27,079
2,985
9,045
Estimated
Fair Value
23
57
14
1
5
46,577
115,760
28,167
3,114
9,221
% of
Total
Estimated
Fair Value
23
57
14
2
4
$
199,954
100 $
202,839
100
Our equity investment portfolio at December 31, 2019 included common stocks, perpetual preferred stocks, mutual funds and exchange traded funds.
We may incur potential losses due to adverse changes in equity security prices. We manage the risk primarily through industry and issuer diversification and
asset mix.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table illustrates the composition of our equity securities at December 31 , 2019 (amounts in thousands):
Stocks by sector:
Financial
Industrial
Consumer
Utility
Energy
Other (1)
Mutual funds and Exchange traded funds by type:
Debt
Equity
Total
Estimated
Fair Value
% of
Total
Estimated
Fair Value
$
$
18,759
2,030
1,419
865
1,057
2,922
27,052
5,004
3,229
8,233
35,285
53
6
4
3
3
8
77
14
9
23
100
(1)
Represents an aggregate of less than 5% sectors.
Foreign Currency Exchange Risk
At December 31, 2019, we did not have any material exposure to foreign currency related risk.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 8 – Financial Statements and Supplementary Data
Index to Financial Statements
Reports of Dixon Hughes Goodman LLP, Independent Registered Public Accounting firm
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements for the Years Ended December 31, 2019, 2018 and 2017
36
Page
37-38
39-40
41
42
43-45
46-48
49-93
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
HCI Group, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HCI Group, Inc. and Subsidiaries (the Company) as of December 31, 2019 and
2018, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2020 expressed an unqualified
opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2013.
Tampa, Florida
March 6, 2020
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm on Internal Control
To the Board of Directors and Stockholders of
HCI Group, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited HCI Group, Inc. and Subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements of the Company as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019,
and our report dated March 6, 2020, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Dixon Hughes Goodman LLP
Tampa, Florida
March 6, 2020
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands)
December 31,
2019
2018
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost:
$199,954 and $184,670, respectively)
Equity securities, at fair value (cost: $31,863 and $45,671, respectively)
Short-term investments, at fair value
Limited partnership investments, at equity
Investment in unconsolidated joint venture, at equity
Assets held for sale
Real estate investments
Total investments
Cash and cash equivalents
Restricted cash
Accrued interest and dividends receivable
Income taxes receivable
Premiums receivable
Prepaid reinsurance premiums
Reinsurance recoverable:
Paid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses
Deferred policy acquisition costs
Property and equipment, net
Intangible assets, net
Other assets
Total assets
$
202,839 $
35,285
491
28,346
762
—
73,763
341,486
229,218
700
1,616
1,040
20,255
17,983
16,155
116,523
21,663
14,698
4,192
17,080
$
802,609 $
39
182,723
41,143
66,479
32,293
845
9,810
54,490
387,783
239,458
700
1,792
971
16,667
17,932
11,151
112,760
16,507
13,338
4,800
9,004
832,863
(continued)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - continued
(Dollar amounts in thousands)
Liabilities and Stockholders’ Equity
December 31,
2019
2018
Losses and loss adjustment expenses
Unearned premiums
Advance premiums
Assumed reinsurance balances payable
Accrued expenses
Deferred income taxes, net
Revolving credit facility
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies (Note 23)
Stockholders’ equity:
7% Series A cumulative convertible preferred stock (no par value, 1,500,000
shares authorized, no shares issued and outstanding)
Series B junior participating preferred stock (no par value, 400,000 shares
authorized, no shares issued or outstanding)
Preferred stock (no par value, 18,100,000 shares authorized, no shares
issued or outstanding)
Common stock (no par value, 40,000,000 shares authorized, 7,764,564 and
8,356,730 shares issued and outstanding in 2019 and 2018, respectively)
Additional paid-in capital
Retained income
Accumulated other comprehensive income (loss) , net of taxes
Total stockholders’ equity
$
214,697 $
181,163
5,589
76
10,059
4,008
9,750
163,695
28,029
617,066
—
—
—
—
—
183,365
2,178
185,543
Total liabilities and stockholders’ equity
$
802,609 $
See accompanying Notes to Consolidated Financial Statements.
40
207,586
157,729
6,192
14
6,483
1,068
—
250,150
22,200
651,422
—
—
—
—
—
182,894
(1,453)
181,441
832,863
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar amounts in thousands, except per share amounts)
Years Ended December 31,
2019
2018
2017
Revenue
Gross premiums earned
Premiums ceded
Net premiums earned
Net investment income
Net realized investment (losses) gains
Net unrealized investment gains (losses)
Net other-than-temporary impairment losses recognized in income:
Total other-than-temporary impairment losses
Portion of loss recognized in other comprehensive income, before taxes
Net other-than-temporary impairment losses
Policy fee income
Other
Total revenue
Expenses
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
General and administrative personnel expenses
Interest expense
Loss on repurchases of senior notes
Impairment loss
Other operating expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
342,079 $
(125,765)
216,314
13,642
(254 )
7,950
343,065 $
(129,643)
213,422
16,581
6,183
(10,202 )
(289 )
—
(289 )
3,229
1,882
242,474
107,514
42,497
31,112
13,055
—
—
12,203
206,381
36,093
9,517
(80)
—
(80)
3,389
1,999
231,292
109,328
38,943
25,908
18,096
—
—
12,115
204,390
26,902
9,177
26,576 $
17,725 $
358,253
(133,635)
224,618
11,439
4,346
92
(1,116)
(351 )
(1,467)
3,622
1,756
244,406
165,629
39,663
25,127
16,767
743
38
12,063
260,030
(15,624 )
(8,731)
(6,893)
$
$
$
3.32 $
2.34 $
(0.75 )
3.31 $
2.34 $
(0.75 )
See accompanying Notes to Consolidated Financial Statements.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
Net income (loss)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments:
Net unrealized gains (losses) arising during the period
Other-than-temporary impairment loss charged to investment income
Call and repayment (gains) losses charged to investment income
Reclassification adjustment for net realized gains
Net change in unrealized gains (losses)
Deferred income taxes on above change
Total other comprehensive income (loss), net of income taxes
Comprehensive income (loss)
Years Ended December 31,
2019
2018
2017
$
26,576 $
17,725 $
(6,893)
4,902
289
(141 )
(218 )
4,832
(1,201)
(3,137)
80
(18)
(723 )
(3,798)
963
$
3,631
30,207 $
(2,835)
14,890 $
5,996
1,467
14
(4,346)
3,131
(1,208)
1,923
(4,970)
See accompanying Notes to Consolidated Financial Statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2019
(Dollar amounts in thousands)
Additional
Paid-In
Capital
Retained
Income
Accumulated
Other
Comprehensive
(Loss) Income,
Total
Stockholders’
Net of Tax
Equity
— $
—
182,894 $
26,576
(1,453) $
—
181,441
26,576
—
63
—
—
(1,203)
—
—
—
—
—
3,631
—
—
—
—
3,631
63
—
—
(1,203)
(18,851 )
—
6,460
132
—
(12,706 )
—
—
—
—
—
—
(18,851 )
(12,706 )
6,460
132
13,399
(13,399 )
—
—
— $
183,365 $
2,178 $
185,543
— $
—
—
—
—
—
—
—
—
—
—
—
— $
Common Stock
Shares
Amount
8,356,730 $
—
—
10,000
180,404
(299,776)
(28,784 )
(454,010)
—
—
—
—
7,764,564 $
43
Balance at December 31, 2018
Net income
Total other comprehensive income, net of income
taxes
Exercise of common stock options
Issuance of restricted stock
Forfeiture of restricted stock
Repurchase and retirement of common stock
Repurchase and retirement of common stock under
share repurchase plan
Common stock dividends ($1.60 per share)
Stock-based compensation
Tax basis adjustment on equity method investment
Additional paid-in capital shortfall allocated to
retained income
Balance at December 31, 2019
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity – (Continued)
For the Year Ended December 31, 2018
(Dollar amounts in thousands)
Balance at December 31, 2017
Net income
Total other comprehensive loss, net of income taxes
Cumulative effect adjustments for adoption of new
accounting standards:
Reclassification of after-tax net unrealized
holding gains related to equity securities
Reclassification of stranded tax effects related to
available-for-sale fixed-maturity and equity
securities
Issuance of restricted stock
Forfeiture of restricted stock
Repurchase and retirement of common stock
Repurchase and retirement of common stock under
share repurchase plan
Purchase of noncontrolling interest
Common stock dividends ($1.475 per share)
Stock-based compensation
Additional paid-in capital shortfall allocated to
retained income
Balance at December 31, 2018
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Income
Accumulated
Other
Comprehensive
Income (Loss),
Total
Stockholders’
Net of Tax
Equity
8,762,416 $
—
—
— $
—
—
— $
—
—
189,409 $
17,725
—
4,566 $
—
(2,835)
193,975
17,725
(2,835)
—
—
—
4,168
(4,168)
—
—
189,860
(56,637 )
(27,281 )
(511,628)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,151)
(984 )
—
—
—
(20,015 )
(539 )
—
4,632
—
—
(10,351 )
—
984
—
—
—
—
—
—
—
—
—
—
(1,151)
(20,015 )
(539 )
(10,351 )
4,632
—
8,356,730 $
—
— $
17,073
— $
(17,073 )
182,894 $
—
(1,453) $
—
181,441
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity – (Continued)
For the Year Ended December 31, 2017
(Dollar amounts in thousands)
Balance at December 31, 2016
Net loss
Total other comprehensive income, net of income
taxes
Issuance of restricted stock
Exercise of common stock options
Forfeiture of restricted stock
Repurchase and retirement of common stock
Repurchase and retirement of common stock under
share repurchase plan
Repurchase of common stock under prepaid forward
contract
Equity component on 4.25% convertible senior notes
(net of offering costs of $543)
Deferred taxes on debt discount
Common stock dividends ($1.40 per share)
Stock-based compensation
Additional paid-in capital shortfall allocated to
retained income
Balance at December 31, 2017
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Income
Accumulated
Other
Comprehensive
Income,
Total
Stockholders’
Net of Tax
Equity
9,662,761 $
—
— $
—
8,139 $
—
232,964 $
(6,893)
2,643 $
—
243,746
(6,893)
—
154,936
30,000
(23,766 )
(437,240)
—
—
—
—
—
—
—
75
—
(21,318 )
—
—
—
—
—
1,923
—
—
—
—
1,923
—
75
—
(21,318 )
(433,175)
—
(15,154 )
—
—
(15,154 )
(191,100)
—
(9,400)
—
—
(9,400)
—
—
—
—
—
—
—
—
15,151
(5,845)
—
4,523
—
—
(12,833 )
—
—
—
—
—
15,151
(5,845)
(12,833 )
4,523
—
8,762,416 $
—
— $
23,829
— $
(23,829 )
189,409 $
—
4,566 $
—
193,975
See accompanying Notes to Consolidated Financial Statements.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Stock-based compensation
Net amortization of premiums on investments in fixed-maturity
securities
Depreciation and amortization
Deferred income tax expense (benefit)
Net realized investment losses (gains)
Net unrealized investment (gains) losses
Other-than-temporary impairment losses
Loss (income) from unconsolidated joint venture
Distribution received from unconsolidated joint venture
Loss on repurchases of senior notes
Impairment loss
Net income from limited partnership interests
Distributions received from limited partnership interests
Foreign currency remeasurement loss (gain)
Other non-cash items
Changes in operating assets and liabilities:
Accrued interest and dividends receivable
Income taxes
Premiums receivable
Prepaid reinsurance premiums
Reinsurance recoverable
Deferred policy acquisition costs
Other assets
Losses and loss adjustment expenses
Unearned premiums
Advance premiums
Assumed reinsurance balances payable
Reinsurance recovered in advance on unpaid losses
Accrued expenses and other liabilities
Net cash provided by operating activities
Years Ended December 31,
2019
2018
2017
$
26,576 $
17,725 $
(6,893)
6,460
4,632
50
8,942
1,871
254
(7,950)
289
83
—
—
—
(1,176)
4,176
57
290
176
(69)
(3,588)
(51)
(8,767)
(5,156)
(7,837)
7,111
23,434
(603 )
62
—
9,413
54,047
761
10,996
141
(6,183)
10,202
80
(304 )
68
—
—
(4,430)
2,345
135
72
191
15,221
1,140
4,354
(20,807 )
205
408
9,008
(7,167)
1,244
(1 )
(13,885 )
2,444
28,595
4,523
1,252
9,591
(4,913)
(4,346)
(92)
1,467
234
147
743
38
(2,334)
881
(60)
134
(329 )
(13,381 )
(531 )
2,268
(103,104)
(73)
783
128,086
(10,907 )
297
(3,279)
13,885
2,548
16,635
(continued)
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows – (Continued)
(Amounts in thousands)
Years Ended December 31,
2019
2018
2017
Cash flows from investing activities:
Investments in limited partnership interests
Distributions received from limited partnership interests
Distribution from unconsolidated joint venture
Purchase of property and equipment
Purchase of intangible assets
Purchase of real estate investments
Purchase of fixed-maturity securities
Purchase of equity securities
Purchase of short-term and other investments
Proceeds from sales of fixed-maturity securities
Proceeds from calls, repayments and maturities of fixed-maturity
securities
Proceeds from sales of equity securities
Proceeds from sales, redemptions and maturities of short-term and other
investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Cash dividends paid
Cash dividends received under share repurchase forward contract
Proceeds from revolving credit facility
Proceeds from exercise of common stock options
Proceeds from the issuance of long-term debt
Repurchases of senior notes
Repayment of long-term debt
Repurchases of common stock
Repurchases of common stock under share repurchase plan
Purchase of non-controlling interest
Debt issuance costs
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
(1,174)
2,121
—
(2,887)
—
(11,481 )
(82,662 )
(24,637 )
(1,178)
7,947
59,343
37,669
67,398
50,459
(13,012 )
306
9,750
63
—
—
(91,318 )
(1,203)
(18,851 )
—
(459 )
(114,724)
(7,182)
158
695
(2,187)
(409 )
(7,472)
(113,174)
(52,250 )
(201,538)
81,809
82,177
66,439
135,256
(17,678 )
(11,318 )
967
—
—
6,000
—
(1,127)
(1,151)
(20,015 )
(539 )
(105 )
(27,288 )
(22)
(10,240 )
240,158
229,918 $
(164 )
(16,535 )
256,693
240,158 $
$
47
(4,226)
11,758
417
(2,340)
(637 )
(11,878 )
(114,743)
(50,453 )
—
31,759
14,897
45,282
—
(80,164 )
(13,906 )
1,073
—
75
143,859
(40,250 )
(974 )
(30,718 )
(15,154 )
—
(4,975)
39,030
61
(24,438 )
281,131
256,693
(continued)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows – (Continued)
(Amounts in thousands)
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Non-cash investing and financing activities:
Unrealized gain (loss) on investments in available-for-sale securities,
net of tax
Conversion of revolving credit facility to long-term debt
Receivable from sales of available-for-sale securities
Payable on purchases of available-for-sale securities
Addition to property and equipment under finance lease
Years Ended December 31,
2019
2018
2017
7,713 $
3,655 $
11,506
9,386 $
10,720 $
8,906
3,631 $
(2,835) $
1,923
— $
— $
9,441
— $
— $
255
— $
— $
18 $
61 $
4
—
$
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 1 -- Nature of Operations
HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through
two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company
(“TypTap”). HCPCI is authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida.
HCPCI also offers flood-endorsed and wind-only policies to Florida customers and has regulatory approval to underwrite residential property and casualty
insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. However, Florida is still
HCPCI’s primary market. TypTap offers standalone flood and homeowners multi-peril policies to Florida homeowners. The operations of both insurance
subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. In particular, the Company is developing technologies to collect and analyze claims
and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries.
In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the businesses of owning and leasing real estate
and operating marina facilities and one restaurant. See Note 16 -- “Segment Information.”
Note 2 -- Summary of Significant Accounting Policies
Basis of Presentation. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“U.S. GAAP”).
Adoption of New Accounting Standards.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases
(Topic 842). The guidance establishes new principles that lessees and lessors will apply to report useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 is effective for the Company January 1, 2019 and supersedes accounting for
leases prescribed in Topic 840, Leases. ASU 2016-02 leaves lessor accounting substantially unchanged. The key change affecting the Company is the
requirement that operating leases be recorded on the balance sheet. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No.
2018-20, Narrow-Scope Improvements for Lessors; and ASU No. 2019-01, Codification Improvements to Topic 842. The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases
will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company
was initially required to use a modified retrospective method and apply this standard at the beginning of the earliest comparative period presented in the financial
statements. Subsequently, the FASB permitted the application of this standard at the beginning of the adoption period as an alternative.
Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. As a result, financial
information is not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. The Company
elected a package of practical expedients, which permits the Company to not reassess under the new standard its prior conclusions about lease identification,
lease classification, and initial direct costs. Upon adoption, the Company, as a lessee, recognized ROU assets of approximately $771 and lease liabilities of
approximately $812 for all operating leases except for those that have a lease term of 12 months or less.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of HCI Group, Inc. and its majority-owned
and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its
relationships or investments for consolidation pursuant to authoritative accounting guidance related to the consolidation of variable interest entities under the
Variable Interest Model prescribed by the FASB. A variable interest entity is consolidated when the Company has the power to direct activities that most
significantly impact the economic performance of the variable interest entity and has the obligation to absorb losses or the right to receive benefits from the
variable interest entity that could potentially be significant to the variable interest entity. When a variable interest entity is not consolidated, the Company uses
the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset value of the
unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from
these estimates. Material estimates that are particularly susceptible to significant change in the near term are primarily related to losses and loss adjustment
expenses, reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, and stock-based compensation expense.
Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less than three months to be
cash and cash equivalents. At December 31, 2019 and 2018, cash and cash equivalents consisted of cash on deposit with financial institutions and securities
brokerage firms, commercial paper, and certificates of deposit.
Available-for-Sale Fixed-Maturity Securities . Fixed-maturity securities include debt securities and redeemable preferred stock. The Company’s
available-for-sale securities are carried at fair value. Temporary changes in the fair value of available-for-sale securities are excluded from net investment
income and reported in stockholders’ equity as a component of accumulated other comprehensive income, net of deferred income taxes. Realized investment
gains and losses from sales are recorded on the trade date and are determined using the first-in first-out (FIFO) method. Investment income is recognized as
earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the
estimated remaining term of the security. Gains and losses from call redemptions and repayments are charged to investment income.
The Company reviews fixed-maturity securities for other-than-temporary impairment on a monthly basis. When the fair value of any investment is
lower than its cost, an assessment is made to determine whether the decline is temporary or other-than-temporary. If the decline is determined to be other-than-
temporary, the investment is written down to fair value and an impairment loss is recognized in income in the period in which the Company makes such
determination.
When reviewing impaired securities, the Company considers its ability and intent to hold these securities and whether it is probable that the Company
will be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intends to sell or it is
probable that the Company will have to sell before recovery or maturity, the unrealized losses are recognized as other-than-temporary losses in income. In
instances where there are credit related losses associated with the impaired fixed-maturity securities for which the Company asserts that it does not have the
intent to sell, and it is probable that the Company will not be required to sell until a market price recovery or maturity, the amount of the other-than-temporary
impairment loss related to credit losses is recognized in income, and the amount of the other-than-temporary impairment loss related to other non-credit factors
such as changes in interest rates or market conditions is recorded as a component of accumulated other comprehensive income.
When determining impairment due to a credit related loss, the Company carefully considers factors such as the issuer’s financial ratios and condition,
the security’s current ratings and maturity date, and overall market conditions in estimating the cash flows expected to be collected. The expected cash flows
discounted at the effective interest rate of the security implicit at the date of acquisition is then compared with the security’s amortized cost at the measurement
date. A credit loss is incurred when the present value of the expected cash flows is less than the security’s amortized cost. The Company considers various
factors in determining whether an individual security is other-than-temporarily impaired (see Available-for-Sale Fixed-Maturity Securities in Note 5 --
“Investments”).
Equity Securities. Equity securities represent ownership interests held by the Company in entities for investment purposes. Unrealized holding gains
and losses related to equity securities are reported in the consolidated statement of income as net unrealized investment gains and losses. Realized investment
gains and losses from sales are recorded on the trade date and are determined using the first-in first-out method (see Equity Securities in Note 5 --
“Investments”). Prior to January 1, 2018, these equity securities were classified as either available-for-sale or trading and were carried at fair value on the
Company’s consolidated balance sheet. Unrealized holding gains and losses from the changes in the fair values of available-for-sale equity securities were
reported in accumulated other comprehensive income.
Short-Term Investments. Short-term investments include certificates of deposit issued by financial institutions and commercial paper with original
maturities of more than three months but less than one year at date of acquisition. These short-term investments are carried at cost or amortized cost, which
approximates fair value.
Limited Partnership Investments. The Company has interests in limited partnerships that are not registered under the United Stated Securities Act
of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public
market and any withdrawal is subject to the terms and conditions of the partnership agreement. The Company has no influence over partnership operating and
financial policies. The Company did not elect the fair value option and, therefore, uses the equity method to account for these investments (see Limited
Partnership Investments in Note 5 -- “Investments”). The Company generally recognizes its share of the limited partnership’s earnings or losses on a three-
month lag.
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to U.S. GAAP, these limited partnerships which are private equity funds must measure their investments at fair value and reflect the
unrealized gains and losses in the fair value of their investments on their statement of income. As a result, the carrying value of limited partnership investments
at each reporting date approximates their estimated fair value.
Investment in Unconsolidated Joint Venture. The Company has a 90% equity interest in a limited liability company (treated as a joint venture under
U.S. GAAP) that owns land for lease or for sale. The joint venture was determined to be a variable interest entity as it lacks sufficient equity to finance its
activities without additional subordinated financial support. Despite having a majority equity interest, the Company does not have the power to direct the activities
that most significantly impact the economic performance of the joint venture and, accordingly, is not required to consolidate the joint venture as its primary
beneficiary. As a result, the Company uses the equity method to account for this investment.
When evidence indicates an impairment may occur, the Company evaluates whether a decline in value is other than temporary. Evidence may include
continuing operating losses of the joint venture, a declining occupancy rate, a decrease in real estate value, and an oversupply of rental property in close vicinity
to the investment property. Should available evidence indicate the recovery of the initial investment is less likely, the Company would compare the carrying
value of the investment with its expected residual value and recognize an impairment loss in earnings.
Assets Held for Sale. Assets held for sale are valued at the lower of the carrying value or fair value less costs to sell. Assets are classified as held
for sale when the following criteria are met: (i) management has the authority and commits to a plan to sell the asset; (ii) the asset is available for immediate sale
in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the asset has been initiated; (iv) the sale of the asset is probable
within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will
be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less costs to sell, the Company primarily relies on the value determined by an independent appraiser. If the
estimated fair value less costs to sell is less than the carrying value of the asset, the asset is written down to its estimated fair value less costs to sell and an
impairment loss is recognized in the consolidated statement of income. Depreciation is not recorded while assets are classified as held for sale.
Real Estate Investments. Real estate investments include real estate and the related assets purchased for investment purposes (see Note 5 --
“Investments”). Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is included in net investment income
and allocated over the estimated useful life of the asset using the straight-line method of depreciation. Land is not depreciated. Real estate is evaluated for
impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable.
Deferred policy acquisition costs. Deferred policy acquisition costs (“DAC”) represent direct costs to acquire insurance contracts and consist of
premium taxes and commissions paid to outside agents at the time of collection of the policy premium. DAC is amortized over the life of the related policy in
relation to the amount of gross premiums earned.
The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross
premium earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is
earned.
DAC is reviewed to determine if it is recoverable from future premium income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates
of total revenues discussed above are reduced or permanently impaired as a result of the disposition of a line of business. The amount of amortization of DAC
could be revised in the near term if any of the estimates discussed above are revised.
Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization, which is included in other
operating expenses. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building, 39 years; computer hardware and
software, 3 years; and office and furniture equipment, 3 to 7 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s
useful life. Land is not depreciated. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do
not improve or extend the life of the respective assets are expensed as incurred. The Company capitalizes both internal and external costs for internally
developed software during the application development stage. During the preliminary project and post-implementation stage, internal-use software development
costs are expensed as incurred. Capitalized software costs are depreciated on a straight-line basis over the estimated useful life of 7 years.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived
assets by determining whether the assets can be recovered from undiscounted future cash flows. Recoverability of long-lived assets is dependent upon, among
other things, the Company’s ability to maintain profitability, so as to be able to meet its obligations when they become due. In the opinion of management, based
upon current information and projections, long-lived assets will be recovered over the period of benefit.
Intangible Assets. Intangibles consist of the value attributable to the acquired in-place leases and the primary, or anchor, tenant relationships. The
value attributable to the anchor tenant relationship represents the economic benefits of having a nationally recognized retailer as the lead tenant, which draws
consumer traffic and other tenants to the retail center. These intangibles are amortized to expense over the related lease term. Amortization of the intangibles
related to real estate investments is reflected in net investment income in the consolidated statement of income. The Company reviews these intangible assets
for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable. In the event the Company determines
the carrying value is not recoverable, an impairment loss is recorded in the Company’s consolidated statement of income.
Leases. The Company leases office equipment, storage units, and office space from non-affiliates under terms ranging from one month up to ten
years. In assessing whether a contract is or contains a lease, the Company first determines whether there is an identified asset in the contract. The Company
then determines whether the contract conveys the right to obtain substantially all of the economic benefits from use of the identified asset or the right to direct
the use of the identified asset. The Company elects not to record any lease with a term of 12 months or less on the consolidated balance sheet. For such short-
term leases, the Company recognizes the lease payments in expense on a straight-line basis over the lease term.
If the contract is or contains a lease and the Company has the right to control the use of the identified asset, the ROU asset and the lease liability is
measured from the lease component of the contract and recognized on the consolidated balance sheet. In measuring the lease liability, the Company uses its
incremental borrowing rate for a loan secured by a similar asset that has a term similar to the lease term to discount the lease payments. The contract is further
evaluated to determine the classification of the lease as to whether it is finance or operating. If the lease is a finance lease, the ROU asset is depreciated to
depreciation expense over the shorter of the useful life of the asset or the lease term. Interest expense is recorded in connection with the lease liability using
the effective interest method. If the lease is an operating lease, the ROU asset is amortized to lease expense on a straight-line basis over the lease term. For
the presentation of finance leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with property and
equipment, net, and long-term debt, respectively. For the presentation of operating leases on the Company’s consolidated balance sheet, ROU assets and
corresponding lease liabilities are included with other assets and other liabilities, respectively.
The Company as a lessor leases its commercial and retail properties, boat slips, and docks to non-affiliates at various terms. If the contract gives the
Company’s customer the right to control the use of the identified asset, revenue is recognized on a straight-line basis over the lease term. Initial direct costs
incurred by the Company are deferred and amortized on a straight-line basis over the lease term. The Company also records an unbilled receivable, which is the
amount by which straight-line revenue exceeds the amount billed in accordance with the lease.
Lease Acquisition Costs. Lease acquisition costs represent capitalized costs of finding and acquiring tenants such as leasing commissions, legal,
and marketing expenses. The costs are included in other assets in the consolidated balance sheet. The Company amortizes these costs in other operating
expenses on a straight-line basis over the term of a lease.
Long-Term Debt. Long-term debt includes debt instruments and finance lease obligations. A debt instrument is generally classified as a liability and
carried at amortized cost, net of any discount and issuance costs. At issuance, a debt instrument with embedded features such as conversion and redemption
options is evaluated to determine whether bifurcation and derivative accounting is applicable. If such instrument is not subject to derivative accounting, it is further
evaluated to determine if the Company is required to separately account for the liability and equity components.
To determine the carrying values of the liability and equity components at issuance, the Company measures the fair value of a similar liability,
including any embedded features other than the conversion option, and assigns such value to the liability component. The liability component’s fair value is then
subtracted from the initial proceeds to determine the carrying value of the debt instrument’s equity component, which is included in additional paid-in capital.
Any embedded feature other than the conversion option is evaluated at issuance to determine if it is probable that such embedded feature will be
exercised. If the Company concludes that the exercisability of that embedded feature is not probable, the embedded feature is considered to be non-substantive
and would not impact the initial measurement and expected life of the debt instrument’s liability component.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Transaction costs related to issuing a debt instrument that embodies both l iability and equity components are allocated to the liability and equity
components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance
costs are capitalized and presented as a deduction from the carrying value of the debt. Both debt discount and deferred debt issuance costs are amortized to
interest expense over the expected life of the debt instrument using the effective interest method. Equity issuance costs are a reduction to the proceeds
allocated to the equity component.
Prepaid Share Repurchase Forward Contract. A prepaid share repurchase forward contract is generally a contract that allows the Company to buy
from the counterparty a specified number of common shares at a specific time at a given forward price. The Company entered into such a contract and evaluated
the characteristics of the forward contract to determine whether it met the definition of a derivative financial instrument pursuant to U.S. GAAP. The Company
determined the forward contract is an equity contract on the Company’s common shares requiring physical settlement in common shares of the Company. As
such, the transaction is recognized as a component of stockholders’ equity with a charge to additional paid-in capital equal to the prepayment amount, which
represents the cash paid to the counterparty. There will be no recognition in earnings for changes in fair value in subsequent periods.
Losses and Loss Adjustment Expenses. Reserves for losses and loss adjustment expenses (“LAE”) are determined by establishing liabilities in
amounts estimated to cover incurred losses and LAE. Such reserves are determined based on the assessment of claims reported and the development of
pending claims. These reserves are based on individual case estimates for the reported losses and LAE and estimates of such amounts that are incurred but not
reported. Changes in the estimated liability are charged or credited to income as the losses and LAE are settled.
The estimates of unpaid losses and LAE are subject to trends in claim severity and frequency and are continually reviewed. As part of the process, the
Company reviews historical data and considers various factors, including known and anticipated regulatory and legal developments, changes in social attitudes,
inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or
decreases to the existing unpaid losses and LAE. Adjustments are reflected in the results of operations in the period in which they are made and the liabilities
may deviate substantially from prior estimates. Losses and LAE ceded to or recovered from reinsurers are recorded as a reduction to losses and LAE on the
consolidated statement of income.
Advance Premiums. Premium payments received prior to the policy effective date are recorded as advance premiums. Once the policy is in force,
the premiums are recorded as described under “Premium Revenue” below.
Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events by
reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of reinsurers
to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into
consideration probable maximum losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the
applicable reinsurance contract or contracts. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with
those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as
a reduction of gross premiums earned. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.
One of the Company’s current reinsurance contracts contains retrospective provisions including terms and conditions that adjust premiums based on
the loss experience under the contracts. In such cases, a with-and-without method is used to estimate the asset or liability amount to be recognized at each
reporting date. The amount of the estimate is the difference between the net contract costs before and after the loss experience under the contract. Estimates
related to premium adjustments are recognized in ceded premiums earned. These estimates are reviewed monthly based on the loss experience to date and as
adjustments become necessary. Such adjustments are reflected in the Company’s current operations and recorded in other assets until received upon the
expiration of the contracts.
The Company receives ceding commissions from ceding gross written premiums to a third-party reinsurer under one flood quota share reinsurance
contract. The ceding commissions represent the reimbursement of the Company’s policy acquisition, underwriting and other operating expenses. Ceding
commissions received cover a portion of premium taxes and agent commissions capitalized by the Company and a portion of non-capitalized acquisition costs
and other underwriting expenses. Ceding commissions are recognized to income on a pro-rata basis over the terms of the policies reinsured, the amount of
which is included in policy acquisition and other underwriting expenses in the consolidated statement of income. The unearned portion of ceding commissions
that represents recovery of capitalized acquisition costs is classified as a reduction of deferred policy acquisition costs whereas the remaining unearned balance
is classified as deferred revenue in other liabilities.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies and is included in gross premiums earned.
Unearned premiums represent the portion of the premiums attributable to the unexpired policy term. The Company reviews its policy detail and establishes an
allowance for any amount outstanding for more than 90 days. At December 31, 2019 and 201 8, allowances for uncollectible premiums were $528 and $558,
respectively.
Policy Fees. Policy fees represent nonrefundable fees for insurance coverage, which are intended to reimburse a portion of the costs incurred to
underwrite the policy. Policy fees are recognized ratably over the policy coverage period.
Florida Insurance Guaranty Association Assessments. The Company’s Florida insurance subsidiaries may be assessed by the state guaranty
association. The assessments are intended to be used for the payment of covered claims of insolvent insurance entities. The assessments are generally based
on a percentage of premiums written during or following the year of insolvency. Liabilities are recognized when the assessments are probable to be imposed on
the premiums on which they are expected to be based and the amounts can be reasonably estimated. The insurer is permitted by Florida statutes to recover the
entire amount of assessments from in-force and future policyholders through policy surcharges. U.S. GAAP provides that the Company should record an asset
based on the amount of written or obligated-to-write premiums and limited to the amounts recoverable over the life of the in-force policies.
Foreign Currency. The functional currency of the Company’s Indian subsidiary is the U.S. dollar. As such, the monetary assets and liabilities of this
subsidiary are remeasured into U.S. dollars at the exchange rate in effect on the balance sheet date. Non-monetary assets and liabilities are remeasured using
historical rates. Expenses recorded in the local currency are remeasured at the prevailing exchange rate. Exchange gains and losses resulting from these
remeasurements are included in other operating expenses.
Income Taxes. The Company files consolidated federal and state income tax returns and allocates taxes among its wholly owned subsidiaries in
accordance with a written tax-allocation agreement.
The Company accounts for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense: current and deferred.
Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income
or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in
tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is
more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a
likelihood of more than fifty percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A
tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a
greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination
of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the
reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available,
it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2019, management is not aware of any uncertain
tax positions that would have a material effect on the Company’s consolidated financial statements.
Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at
December 31, 2019 and 2018. Fair values for securities or financial instruments are based on the framework for measuring fair value established by U.S. GAAP
(see Note 7 -- “Fair Value Measurements”).
Stock-Based Compensation. The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which
requires the measurement and recognition of compensation for all stock-based awards made to employees and directors based on estimated fair values. In
accordance with U.S. GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is
defined as the period during which a recipient is required to provide service in exchange for an award. Forfeitures of the Company’s stock-based awards are
accounted for as they occur. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company’s outstanding
stock-based awards include stock options and restricted stock awards with service conditions. Compensation expense related to all awards is included in general
and administrative personnel expenses. The Company receives a windfall tax benefit for certain stock option exercises and for restricted stock awards if these
awards vest at a higher value than the value used to recognize compensation expense. In the event the restricted stock awards vest at a lower value than the
value used to recognize compensation expense, the Company experiences a tax shortfall. The Company recognizes tax windfalls and shortfalls in the
consolidated statement of income.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Basic and diluted earnings (loss) per common share. Basic earnings (loss) per common share is computed by dividing net income (loss)
attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP requires the inclusion of
restricted stock as participating securities since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common
stockholders. In addition, the intrinsic value of restricted stock declines when the Company experiences operating losses. As a result, holders of the Company’s
restricted stock are allocated a proportional share of net income and loss determined by dividing total weighted-average shares of restricted stock by the sum of
total weighted-average common shares and shares of restricted stock (the “two-class method”). Diluted earnings (loss) per common share reflect the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as participating equities. During loss periods,
common stock equivalents such as stock options and convertible debt are excluded from the calculation of diluted loss per share, as the inclusion would have an
anti-dilutive effect. See Note 19 -- “Earnings Per Share” for potentially dilutive securities at December 31, 201 9, 2018 and 201 7.
Statutory Accounting Practices. The Company’s U.S. insurance subsidiaries comply with statutory accounting practices prescribed by the National
Association of Insurance Commissioners. There are no state prescribed or permitted practices that have been adopted by the Company’s U.S. subsidiaries. In
addition, the Company’s Bermuda insurance subsidiary prepares and files financial statements in accordance with the prescribed regulatory accounting
practices of the Bermuda Monetary Authority.
Note 3 -- Recent Accounting Pronouncements
Accounting Standards Update No. 2019-12. In December 2019, the FASB issued Accounting Standards Update No. 2019-12 (“ASU 2019-12”),
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. It eliminates certain exceptions to the guidance in ASC 740 related to the approach for
intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis
differences. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill, along with other clarifications. ASU 2019-12 is effective for the Company beginning with the first quarter of
2021. Early adoption is permitted. This guidance will not have a material impact on the Company’s consolidated financial statements. However, it will impact the
Company’s future income tax disclosures in its notes to the consolidated financial statements.
Accounting Standard to be Adopted in Fiscal Year 2020
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326),
effective January 1, 2020. This update amends guidance on the recognition and measurement of credit losses for assets held at amortized cost and available-
for-sale debt securities. For assets held at amortized cost, ASU 2016-13 eliminates the probable initial recognition threshold and, instead, requires credit losses
to be measured using the Current Expected Credit Loss (“CECL”) model. The CECL model requires the measurement of all expected credit losses based on
historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. For available-for-sale debt
securities, credit losses will continue to be measured in a manner similar to the current standard. ASU 2016-13 requires a valuation allowance, rather than a
write-down, to be recognized for the Company’s expected credit losses. The valuation allowance account is a deduction from the amortized cost basis of the
financial assets to reflect the net amount expected to be collected. Any subsequent changes to the expected credit losses of the financial assets will be recorded
in earnings. The Company is required to use the modified-retrospective method by recognizing a cumulative-effect adjustment to the beginning retained income
of fiscal year 2020. As for debt securities in which an other-than-temporary impairment had been recognized before the effective date, the prospective transition
method will be used. On January 1, 2020, a cumulative-effect adjustment of $453 related to reinsurance recoverable was recognized to beginning retained
income with a corresponding entry to an allowance for credit losses account.
Note 4 -- Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance
sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.
Cash and cash equivalents
Restricted cash
Total
December 31,
2019
2018
$
$
229,218 $
700
229,918 $
239,458
700
240,158
Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory
requirements.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 5 -- Investments
a) Available-for-Sale Fixed-Maturity Securities
The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At December 31, 2019 and 2018, the cost or
amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:
As of December 31, 2019
U.S. Treasury and U.S. government agencies
Corporate bonds
State, municipalities, and political subdivisions
Exchange-traded debt
Redeemable preferred stock
Total
As of December 31, 2018
U.S. Treasury and U.S. government agencies
Corporate bonds
State, municipalities, and political subdivisions
Exchange-traded debt
Redeemable preferred stock
Total
Cost or
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
$
26,220 $
157,155
7,763
8,698
118
78 $
2,212
149
462
5
$
199,954 $
2,906 $
(3 ) $
(3 )
—
(15)
—
(21) $
$
$
61,979 $
103,580
10,567
8,426
118
184,670 $
24 $
134
98
82
—
338 $
(206 ) $
(1,809)
(3 )
(261 )
(6 )
(2,285) $
26,295
159,364
7,912
9,145
123
202,839
61,797
101,905
10,662
8,247
112
182,723
Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The
scheduled contractual maturities of fixed-maturity securities at December 31, 2019 and 2018 are as follows:
Available-for-sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
December 31,
2019
2018
Cost or
Amortized
Cost
Estimated
Fair
Value
Cost or
Amortized
Cost
Estimated
Fair
Value
$
$
63,135 $
125,833
6,896
4,090
199,954 $
63,429 $
127,660
7,350
4,400
202,839 $
50,659 $
117,826
11,602
4,583
184,670 $
50,574
116,498
11,253
4,398
182,723
Sales of Available-for-Sale Fixed-Maturity Securities
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the years ended
December 31, 2019, 2018 and 2017 were as follows:
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Proceeds
Gross
Realized
Gains
Gross
Realized
Losses
7,947 $
221 $
(3 )
81,809 $
1,293 $
(570 )
31,759 $
2,176 $
(181 )
$
$
$
56
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Other-than-temporary Impairment
The Company regularly reviews its individual investment securities for other-than-temporary impairment. The Company considers various factors in
determining whether each individual security is other-than-temporarily impaired, including-
•
•
•
•
•
the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings;
the length of time and the extent to which the market value of the security has been below its cost or amortized cost;
general market conditions and industry or sector specific factors and other qualitative factors;
nonpayment by the issuer of its contractually obligated interest and principal payments; and
the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
The Company recognized $289 of credit-related impairment loss on one fixed-maturity security for the year ended December 31, 2019 in the
consolidated statement of income compared with $80 of non-credit related impairment loss pertaining to one fixed-maturity security for the year ended December
31, 2018. For the year ended December 31, 2017, the Company recognized impairment losses of $428 related to the sale of four intent-to-sell fixed-maturity
securities.
The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in income for available-for-
sale fixed-maturity securities:
Balance at January 1
Credit impairments on impaired securities
Credit impaired security fully disposed of for which
there was no prior intent or requirement to sell
Balance at December 31
2019
2018
2017
$
$
— $
289
—
289 $
— $
—
—
— $
475
—
(475 )
—
There was no activity related to cumulative credit losses during 2018. During 2017, the Company sold two fixed-maturity securities with cumulative
credit losses totaling $475.
Securities with gross unrealized loss positions at December 31, 2019 and 2018, aggregated by investment category and length of time the individual
securities have been in a continuous loss position, are as follows:
As of December 31, 2019
U.S. Treasury and U.S. government agencies
Corporate bonds
Exchange-traded debt
Total available-for-sale securities
Less Than Twelve Months
Twelve Months or Longer
Total
Gross
Unrealized
Loss
Estimated
Fair
Value
Gross
Unrealized
Loss
Estimated
Fair
Value
Gross
Unrealized
Loss
Estimated
Fair
Value
$
$
(3 ) $
(3 )
(15)
(21) $
2,292 $
4,597
345
7,234 $
— $
—
—
— $
— $
—
—
— $
(3 ) $
(3 )
(15)
(21) $
2,292
4,597
345
7,234
At December 31, 2019, there were eight securities in an unrealized loss position. Of these securities, none had been in an unrealized loss position for
12 months or longer.
As of December 31, 2018
U.S. Treasury and U.S. government agencies
Corporate bonds
State, municipalities, and political subdivisions
Exchange-traded debt
Redeemable preferred stock
Total available-for-sale securities
Less Than Twelve Months
Twelve Months or Longer
Total
Gross
Unrealized
Loss
Estimated
Fair
Value
Gross
Unrealized
Loss
Estimated
Fair
Value
Gross
Unrealized
Loss
Estimated
Fair
Value
$
$
(59) $
(542 )
(3 )
(261 )
(6 )
(871 ) $
21,031 $
19,932
715
5,275
112
47,065 $
(147 ) $
(1,267)
—
—
—
(1,414) $
35,393 $
36,682
—
—
—
72,075 $
(206 ) $
(1,809)
(3 )
(261 )
(6 )
(2,285) $
56,424
56,614
715
5,275
112
119,140
At December 31, 2018, there were 82 securities in an unrealized loss position. Of these securities, 35 securities had been in an unrealized loss
position for 12 months or longer.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
b) Equity Securities
The Company holds investments in equity securities measured at fair values which are readily determinable. At December 31, 2019 and 2018, the
cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:
December 31, 2019
December 31, 2018
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
Cost
$
$
31,863 $
45,671 $
3,652 $
1,059 $
(230 ) $
(5,587) $
35,285
41,143
The table below presents the portion of unrealized gains and losses in the Company’s consolidated statement of income for the periods related to
equity securities still held.
Net gains (losses) recognized
Exclude: Net realized (losses) gains recognized for
securities sold
Net unrealized gains (losses) recognized*
Years Ended December 31,
2019
2018
7,424 $
(4,811)
(526 )
7,950 $
5,391
(10,202 )
$
$
*
Unrealized holding gains and losses for the comparative year in 2017 were reported in accumulated other comprehensive income.
Sales of Equity Securities
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the years ended December 31, 2019, 2018 and 2017
were as follows:
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Other-than-temporary Impairment before 2018
Proceeds
Gross
Realized
Gains
Gross
Realized
Losses
37,669 $
2,448 $
(2,974)
66,439 $
7,324 $
(1,933)
45,282 $
3,993 $
(1,642)
$
$
$
Prior to 2018, equity securities classified as available-for-sale were evaluated for other-than-temporary impairment. When the impairment existed, an
impairment loss was recognized in the consolidated statement of income. For the year ended December 31, 2017, the Company recognized impairment losses
of $1,039 related to available-for-sale equity securities.
58
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
c) Limited Partnership Investments
The Company has interests in limited partnerships that are not registered or readily tradeable on a securities exchange. These partnerships are
private equity funds managed by general partners who make decisions with regard to financial policies and operations. As such, the Company is not the primary
beneficiary and does not consolidate these partnerships. The following table provides information related to the Company’s investments in limited partnerships:
Investment Strategy
Primarily in senior secured loans and, to a
limited extent, in other debt and equity
securities of private U.S. lower-middle-
market companies. (b)(c)(e)
Value creation through active distressed
debt investing primarily in bank loans,
public and private corporate bonds, asset-
backed securities, and equity securities
received in connection with debt
restructuring. (b)(d)(e)
High returns and long-term capital
appreciation through investments
in the power, utility and energy
industries, and in the infrastructure
sector. (b)(f)(g)
Value-oriented investments in less
liquid and mispriced senior and junior
debts of private equity-backed
companies. (b)(h)(i)
Value-oriented investments in mature
real estate private equity funds and
portfolios globally. (b)(j)
Total
December 31, 2019
December 31, 2018
Carrying
Value
Unfunded
Balance
(%) (a)
Carrying
Value
Unfunded
Balance
(%) (a)
$
9,659 $
2,085
15.37 $
10,169 $
2,577
15.37
5,985
—
1.76
9,219
—
1.76
9,188
1,391
0.18
9,023
2,329
0.18
1,602
3,106
0.47
1,156
3,706
0.47
1,912
28,346 $
8,548
15,130
$
2.24
$
2,726
32,293 $
7,692
16,304
3.28
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Represents the Company’s percentage investment in the fund at each balance sheet date.
Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited
partner, will be received when underlying investments of the funds are liquidated.
Expected to have a ten-year term. Although the capital commitment has expired, follow-on investments and pending commitments may require additional fundings.
Expected to have a three-year term from June 30, 2018. Although the capital commitment period has ended, the general partner could still request an additional funding of
approximately $843 under certain circumstances.
At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.
Expected to have a ten-year term and the capital commitment is expected to expire on June 30, 2020.
With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods.
Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory
committee or a majority of limited partners.
The capital commitment was extended and is now expected to expire on December 1, 2020.
Expected to have an eight-year term from November 27, 2019.
The following is the aggregated summarized unaudited financial information of limited partnerships included in the investment strategy table above,
which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. In applying
the equity method of accounting, the Company uses the most recently available financial information provided by the general partner of each of these
partnerships. The financial statements of these limited partnerships are audited annually.
Operating results:
Total income
Total expenses
Net (loss) income
Years Ended December 31,
2019
2018
2017
$
$
27,171 $
139,252
(112,081) $
1,821,935 $
146,079
1,675,856 $
409,169
105,281
303,888
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Balance Sheet:
Total assets
Total liabilities
December 31,
2019
2018
$
$
6,850,913 $
549,562 $
6,689,792
394,029
For the years ended December 31, 2019, 2018 and 2017, the Company recognized net investment income of $1,176, $4,430 and $2,334,
respectively, for these investments. At December 31, 2019 and 2018, the Company’s cumulative contributed capital to the partnerships existing at each
respective balance sheet date totaled $29,528 and $28,354, respectively, and the Company’s maximum exposure to loss aggregated $28,346 and $32,293,
respectively.
During the year ended December 31, 2019, the Company received in cash a return on investment of $4,176 and a return of capital of $2,121
compared with a return on investment of $2,345 and a return of capital of $158 during the year ended December 31, 2018. During the year ended December 31,
2017, the Company received total cash distributions of $12,639, representing $11,758 of returned capital and $881 of return on investment. Included in the
return of capital was $11,626 from one limited partnership the Company withdrew from in February 2017.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized its share of earnings or losses based on the respective
partnership’s statement of income. The carrying value of these investments approximates the amount the Company expected to recover at December 31, 2019
and 2018.
d) Investment in Unconsolidated Joint Venture
Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a
joint venture under U.S. GAAP. At December 31, 2019 and 2018, the Company’s maximum exposure to loss relating to this variable interest entity was $762 and
$845, respectively, representing the carrying value of the investment. At December 31, 2019, 2018 and 2017, there was no undistributed income from this equity
method investment.
For the year ended December 31, 2019, the Company did not receive any cash distributions. For the year ended December 31, 2018, the Company
received a cash distribution of $763, representing a combined distribution of $68 in earnings and $695 in capital. For the year ended December 31, 2017, the
Company received a cash distribution of $564, representing a combined distribution of $147 in earnings and $417 in capital. The following tables provide FMJV’s
summarized unaudited financial results and the unaudited financial positions:
Operating results:
Total revenues
Total expenses
Net income (loss)
The Company’s share of net income (loss) *
*
Included in net investment income in the Company’s consolidated statements of income.
Years Ended December 31,
2019
2018
2017
$
$
$
2 $
93
(91) $
438 $
100
338 $
331
483
(152 )
(83) $
304 $
(234 )
Balance Sheet:
Property and equipment, net
Cash
Other
Total assets
Other liabilities
Members’ capital
Total liabilities and members’ capital
Investment in unconsolidated joint venture, at equity**
**
Includes the 90% share of FMKT Mel JV’s operating results.
60
December 31,
2019
2018
741
102
4
847 $
— $
847
847 $
762 $
787
149
5
941
3
938
941
845
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
e) Assets Held for Sale
In November 2018, Greenleaf Capital, LLC, the Company’s wholly owned subsidiary, listed for sale its 10-acre waterfront property, consisting of land,
commercial and marina buildings in Treasure Island, Florida. With the expectation of a sale within a year, the property was reclassified in the Company’s
consolidated balance sheet from real estate investments to assets held for sale, and depreciation ceased. Although this property has drawn interest from several
potential buyers since the listing, the Company has yet to receive an offer with acceptable terms. The Company will continue to market the property but can no
longer reasonably assume a sale will occur within a year. Accordingly, in December 2019 the property was reclassified back to real estate investments at its
carrying value before it was classified as held for sale. The carrying value of $10,031, including additional improvement costs of $221, was then adjusted for
catch-up depreciation expense of $261, which is included in net investment income in the Company’s consolidated statement of income.
f) Real Estate Investments
Real estate investments include land, buildings with office and retail space for lease, outparcels, and marinas. Real estate investments consist of the
following as of December 31, 2019 and 2018:
Land
Land improvements
Building
Tenant and leasehold improvements
Other
Total, at cost
Less: accumulated depreciation and amortization
Real estate investments
December 31,
2019
2018
$
$
39,511 $
11,907
24,086
1,487
3,489
80,480
(6,717)
73,763 $
23,884
8,717
19,201
1,261
5,266
58,329
(3,839)
54,490
On February 27, 2019, the Company acquired approximately nine acres of undeveloped land located near its current headquarters in Tampa, Florida
for a purchase price of $8,500, which was primarily financed by the Company’s revolving credit facility. The transaction was accounted for as an asset
acquisition. As such, all acquisition-related costs were capitalized.
Depreciation and amortization expense related to real estate investments was $1,782, $1,536 and $1,447, respectively, for the years ended
December 31, 2019, 2018 and 2017.
g) Net Investment Income
Net investment income (loss), by source, is summarized as follows:
Available-for-sale fixed-maturity securities
Equity securities
Investment expense
Limited partnership investments
Real estate investments
(Loss) income from unconsolidated joint venture
Cash and cash equivalents
Short-term investments
Other
Net investment income
$
Years Ended December 31,
2019
2018
2017
6,506 $
1,333
(465 )
1,176
(211 )
(83)
4,970
416
—
5,097 $
2,131
(581 )
4,430
340
304
3,485
1,375
—
5,689
3,318
(726 )
2,334
(1,018)
(234 )
2,069
—
7
$
13,642 $
16,581 $
11,439
At December 31, 2019, $126,347 or 55.1% of the Company’s cash and cash equivalents were deposited at three national banks and included $12,188
in two custodial accounts. At December 31, 2018, $180,508 or 75.4% of the Company’s cash and cash equivalents were deposited at three national banks and
included $73,511 in two custodial accounts. At December 31, 2019 and 2018, the Company’s cash deposits at any one bank generally exceed the Federal
Deposit Insurance Corporation’s $250 coverage limit for insured deposit accounts.
h) Other Investments
From time to time, the Company may invest in financial assets other than stocks, mutual funds and bonds. For the years ended December 31, 2019,
2018, and 2017, net realized gains related to other investments were $54, $69, and $0, respectively.
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 6 -- Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other comprehensive income or loss, which for the Company includes changes in
unrealized gains or losses of investments carried at fair value and changes in the other-than-temporary impairment losses related to these investments.
Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The
components of other comprehensive income or loss and the related tax effects allocated to each component were as follows:
Unrealized gain arising during the period
Other-than-temporary impairment loss
Call and repayment gains charged to investment income
Reclassification adjustment for realized gains
Total other comprehensive gain
Unrealized loss arising during the period
Other-than-temporary impairment loss
Call and repayment gains charged to investment income
Reclassification adjustment for realized gains
Total other comprehensive loss
Unrealized gain arising during the period
Other-than-temporary impairment loss
Call and repayment losses charged to investment income
Reclassification adjustment for realized gains
Total other comprehensive income
Year Ended December 31, 2019
Before Tax
Income Tax
Expense
(Benefit)
Net of Tax
4,902 $
289
(141 )
(218 )
4,832 $
1,219 $
71
(35)
(54)
1,201 $
3,683
218
(106 )
(164 )
3,631
Year Ended December 31, 2018
Before Tax
Income Tax
Expense
(Benefit)
Net of Tax
(3,137) $
80
(18)
(723 )
(3,798) $
(795 ) $
20
(5 )
(183 )
(963 ) $
(2,342)
60
(13)
(540 )
(2,835)
Year Ended December 31, 2017
Before Tax
Income Tax
Expense
(Benefit)
Net of Tax
5,996 $
1,467
14
(4,346)
3,131 $
2,313 $
566
5
(1,676)
1,208 $
3,683
901
9
(2,670)
1,923
$
$
$
$
$
$
Note 7 -- Fair Value Measurements
The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels as follows:
Level 1 Unadjusted quoted prices in active markets for identical assets.
Level 2 Other inputs that are observable for the assets, either directly or indirectly such as quoted prices for identical assets that are not observable throughout
the full term of the asset.
Level 3 Inputs that are unobservable.
Valuation Methodology
Cash and cash equivalents
Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value
approximates fair value due to the short maturity and high liquidity of these funds.
Short-term investments
Short-term investments consist of certificates of deposit and zero-coupon commercial paper with maturities of 91 to 365 days. Due to their short
maturity, the carrying value approximates fair value.
62
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fixed-maturity and equity securities
Estimated fair values are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are
observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not available, fair values are
measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in
pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are
significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value
estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current
market exchange.
The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an
independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the
pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and
consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through ongoing monitoring
of the reported fair values.
Limited Partnership Investments
As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company has interests in limited partnerships which are private
equity funds. Pursuant to U.S. GAAP, these funds are required to use fair value accounting; therefore, the estimated fair value approximates the carrying value
of these funds.
Long-term debt
The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:
3.875% Convertible Senior Notes
4.25% Convertible Senior Notes
3.95% Promissory Note
4% Promissory Note
3.75% Callable Promissory Note
4.55% Promissory Note
Maturity
Date
Valuation Methodology
2019 Quoted price
2037 Quoted price
2020 Discounted cash flow method/Level 3 inputs
2031 Discounted cash flow method/Level 3 inputs
2036 Discounted cash flow method/Level 3 inputs
2036 Discounted cash flow method/Level 3 inputs
Assets Measured at Estimated Fair Value on a Recurring Basis:
The following tables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of December 31, 2019 and 2018:
As of December 31, 2019
Financial Assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies
Corporate bonds
State, municipalities, and political subdivisions
Exchange-traded debt
Redeemable preferred stock
Total available-for-sale securities
Equity securities
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Total
229,218 $
700 $
491 $
25,294 $
159,364
—
9,145
123
193,926 $
35,285 $
— $
— $
— $
1,001 $
—
7,912
—
—
8,913 $
— $
— $
— $
— $
— $
—
—
—
—
— $
— $
229,218
700
491
26,295
159,364
7,912
9,145
123
202,839
35,285
$
$
$
$
$
$
63
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of December 31, 2018
Financial Assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies
Corporate bonds
State, municipalities, and political subdivisions
Exchange-traded debt
Redeemable preferred stock
Total available-for-sale securities
Equity securities
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Total
$
$
$
$
$
$
239,458 $
700 $
66,479 $
60,297 $
101,905
—
8,247
112
170,561 $
41,143 $
— $
— $
— $
1,500 $
—
10,662
—
—
12,162 $
— $
— $
— $
— $
— $
—
—
—
—
— $
— $
239,458
700
66,479
61,797
101,905
10,662
8,247
112
182,723
41,143
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2019 and 2018.
Assets and Liabilities Carried at Other Than Fair Value
The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of
$
$
$
Carrying
Value
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Estimated
Fair Value
28,346 $
— $
— $
28,346 $
28,346
9,750 $
— $
9,750 $
— $
9,750
134,075 $
8,875
7,237
7,837
5,611
$
163,635 $
Carrying
Value
— $
—
—
—
—
— $
147,375 $
—
—
—
—
— $
8,887
7,409
7,861
5,802
147,375
8,887
7,409
7,861
5,802
147,375 $
29,959 $
177,334
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Estimated
Fair Value
$
32,293 $
— $
— $
32,293 $
32,293
$
$
89,181 $
130,120
9,077
7,732
8,159
5,826
250,095 $
64
— $
—
—
—
—
—
— $
89,824 $
145,617
—
—
—
—
235,441 $
— $
—
9,128
7,788
8,001
6,025
30,942 $
89,824
145,617
9,128
7,788
8,001
6,025
266,383
December 31, 2019 and 2018:
As of December 31, 2019
Financial Assets:
Limited partnership investments
Financial Liabilities:
Revolving credit facility
Long-term debt:
4.25% Convertible senior notes
3.95% Promissory note
4% Promissory note
3.75% Promissory note
4.55% Promissory note
Total long-term debt
As of December 31, 2018
Financial Assets:
Limited partnership investments
Financial Liabilities:
Long-term debt:
3.875% Convertible senior notes
4.25% Convertible senior notes
3.95% Promissory note
4% Promissory note
3.75% Promissory note
4.55% Promissory note
Total long-term debt
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 8 -- Deferred Policy Acquisition Costs
The following table summarizes the activity with respect to deferred policy acquisition costs:
Beginning balance
Policy acquisition costs deferred
Amortization
Ending balance
December 31,
2019
2018
$
$
16,507 $
42,302
(37,146 )
21,663 $
16,712
34,999
(35,204 )
16,507
The amount of policy acquisition costs amortized and included in policy acquisition and other underwriting expenses for the years ended
December 31, 2019, 2018 and 2017 was $37,146, $35,204 and $35,663, respectively.
Note 9 -- Property and Equipment, net
Property and equipment, net consists of the following:
Land
Building
Computer hardware and software
Office furniture and equipment
Tenant and leasehold improvements
Other
Total, at cost
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2019
2018
$
$
1,642 $
8,101
6,770
2,154
3,388
3,377
25,432
(10,734 )
14,698 $
1,642
7,959
6,480
2,061
3,345
1,035
22,522
(9,184)
13,338
Depreciation and amortization expense under property and equipment was $1,550, $1,370 and $1,237, respectively, for the years ended
December 31, 2019, 2018 and 2017.
Note 10 -- Intangible Assets, net
The Company’s intangible assets, net consist of the following:
Anchor tenant relationships
In-place leases
Total, at cost
Less: accumulated amortization
Intangible assets, net
December 31,
2019
2018
$
$
1,761 $
4,215
5,976
(1,784)
4,192 $
1,761
4,215
5,976
(1,176)
4,800
For the years ended December 31, 2019, 2018 and 2017, amortization expense associated with intangible assets was $608, $604 and $503,
respectively. The remaining weighted-average amortization period as of December 31, 2019 was 14.2 years and 10.0 years for anchor tenant relationships and
in-place leases, respectively, or a combined weighted average of 11.4 years.
Amortization expense for intangible assets after December 31, 2019 is as follows:
Year
2020
2021
2022
2023
2024
Thereafter
Total
Amount
624
519
445
337
333
1,934
4,192
$
$
65
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 11 -- Other Assets
The following table summarizes the Company’s other assets:
Benefits receivable related to retrospective reinsurance contracts
Prepaid expenses
Deposits
Lease acquisition costs, net
Other
Total other assets
December 31,
2019
2018
$
$
9,480 $
2,107
1,678
566
3,249
17,080 $
3,136
2,069
1,413
620
1,766
9,004
Note 12 -- Revolving Credit Facility
The Company has a three-year secured revolving credit agreement (“Credit Agreement”) with Fifth Third Bank that expires on December 5, 2021. The
Credit Agreement provides the Company with borrowing capacity of up to $65,000 and bears interest at an annual rate equal to monthly-determined LIBOR plus
a margin based on the type of collateral used to secure each borrowing. The interest payment is due quarterly in arrears on January 1, April 1, July 1, and
October 1. The Credit Agreement contains affirmative and negative covenants as well as customary events of defaults. Under the terms of the Credit Agreement,
the Company must comply with certain financial and non-financial covenants and agree to pay a fee equal to the product of the unused line fee rate and the
average of the daily unused available credit balances. The unused line fee rate is determined monthly based on the average daily deposit balances.
In February 2019, the Company borrowed $8,000 to fund the purchase of the undeveloped land as described in Note 5 -- “Investments” under Real
Estate Investments. The Company incurred and capitalized $459 of issuance costs in other assets. Thereafter, the Company borrowed an additional amount of
$1,750 for real estate investment purposes. For the year ended December 31, 2019, interest expense totaled $452, which included $157 of amortized issuance
costs. At December 31, 2019, the Company was in compliance with all required covenants, and there were $9,750 of borrowings outstanding.
Note 13 -- Long-Term Debt
The following table summarizes the Company’s long-term debt:
3.875% Convertible Senior Notes, due March 15, 2019
4.25% Convertible Senior Notes, due March 1, 2037
3.95% Promissory note, due through February 17, 2020
4% Promissory note, due through February 1, 2031
3.75% Promissory note, due through September 1, 2036
4.55% Promissory note, due through August 1, 2036
Finance lease liabilities, due through August 15, 2023
Total principal amount
Less: unamortized discount and issuance costs
Total long-term debt
December 31,
2019
2018
— $
143,750
8,881
7,345
7,955
5,704
60
173,695
(10,000 )
163,695 $
89,990
143,750
9,125
7,857
8,290
5,928
55
264,995
(14,845 )
250,150
$
$
The following table summarizes future maturities of long-term debt as of December 31, 2019, which takes into consideration the assumption that the
4.25% Convertible Senior Notes are repurchased at the earliest call date.
Year
2020
2021
2022
2023
2024
Thereafter
Total
$
$
10,013
1,178
144,974
1,267
1,310
14,953
173,695
66
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Information with respect to interest expense related to long-term debt is as follows:
Interest Expense:
Contractual interest
Non-cash expense (a)
Capitalized interest (b)
Total
(a)
(b)
Represents amortization of debt discount and issuance costs.
Interest was capitalized for construction projects.
Convertible Senior Notes
3.875% Convertible Senior Notes
Years Ended December 31,
2019
2018
2017
$
$
8,061 $
4,845
(303 )
12,603 $
10,740 $
7,487
(131 )
18,096 $
10,424
6,404
(61)
16,767
On March 15, 2019, the Company repaid the outstanding principal balance of its notes totaling $89,990 plus accrued interest of $1,744. Prior to the
repayment, the conversion rate was 16.4074 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.95 per
share.
4.25% Convertible Senior Notes
On March 3, 2017, the Company issued 4.25% Convertible Senior Notes in a private offering for an aggregate principal amount of $143,750. The net
proceeds were $138,775 after $4,975 in related issuance and transaction costs. The notes mature March 1, 2037 and the cash interest is payable semiannually
in arrears on March 1 and September 1 of each year.
The Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. These
Convertible Senior Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the
issuance or repurchase of securities by the Company or any of its subsidiaries. The Convertible Senior Notes provide no protection to the note holders in the
event of a fundamental change or other corporate transaction involving the Company except those described in the indenture. These Convertible Senior Notes
do not require a sinking fund to be established for the purpose of redemption.
Embedded Conversion Feature
The conversion feature of these Convertible Senior Notes is subject to conversion rate adjustments upon the occurrence of specified events (including
payment of dividends above a specified amount) but will not be adjusted for any accrued and unpaid interest.
Since May 2018, the Company’s cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of
the 4.25% Convertible Notes. Accordingly, as of December 31, 2019, the conversion rate of the Company’s 4.25% Convertible Notes was 16.3667 shares of
common stock for each $1 in principal amount, which was the equivalent of approximately $61.10 per share.
The holders of the Convertible Senior Notes may convert all or a portion of their Convertible Senior Notes during specified periods as follows:
(1) during any calendar quarter commencing after the calendar quarter ending on the dates specified in the indenture, if the last reported sale price of the
Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten
consecutive trading-day period in which the trading price per $1 principal amount of the Convertible Senior Notes is less than 98% of the product of the last
reported sale price and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; or (4) at any time on
or after the dates specified in the indenture.
The note holders who elect to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures will be
entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion
obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of December 31, 2019, none of
the conditions allowing the holders of the Convertible Senior Notes to convert had been met.
The Company determined that the Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument but rather is
required to be separately accounted for in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance, the
Company accounted for the equity component of the embedded conversion feature as a reduction in the carrying amount of the debt and an increase in
additional paid-in capital.
67
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Embedded Redemption Feature – Fundamental Change
The note holders have the right to require the Company to repurchase for cash all or any portion of the Convertible Senior Notes at par prior to the
maturity date should any of the fundamental change events described in the indenture occur. The Company concluded that this embedded redemption feature is
not a derivative financial instrument and that it is not probable at issuance that any of the specified fundamental change events will occur. Therefore, this
embedded redemption feature is not substantive and will not affect the expected life of the liability component.
Embedded Redemption Feature – Put Option of the Note Holder
At the option of the holders of the Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the Convertible
Senior Notes at par on March 1, 2022, March 1, 2027 or March 1, 2032. The Company concluded that this embedded feature is not a derivative financial
instrument. In addition, based on economic factors at the time when the Convertible Senior Notes were issued, the Company determined it is probable that the
note holders will exercise this option. Thus, the Company amortizes the liability component and related issuance costs associated with the Convertible Senior
Notes over the period from March 3, 2017 to March 1, 2022.
The effective interest rate for the Convertible Senior Notes, taking into account both cash and non-cash components, approximates 7.6%. Had a 20-
year term been used for the amortization of the liability component and issuance costs, the annual effective interest rate charged to earnings would have
decreased to approximately 5.4%. As of December 31, 2019, the remaining amortization period of the debt discount was expected to be 2.2 years.
The following table summarizes information regarding the equity and liability components of the Convertible Senior Notes:
Principal amount
Unamortized discount
Liability component – net carrying value before issuance costs
Equity component – conversion, net of offering costs
December 31,
2019
2018
$
$
$
143,750 $
(7,545)
136,205 $
233,740
(11,316 )
222,424
15,151 $
31,051
Promissory Notes
3.95% Promissory Note
On February 27, 2017, the Company converted its outstanding revolving credit facility of $9,441 into a three-year mortgage loan primarily
collateralized by a retail shopping center in Melbourne, Florida. Shortly after the loan conversion, the Company withdrew an additional amount of $109, thereby
increasing the loan amount to $9,550. The loan bore a fixed annual interest rate of 3.95%. Approximately $50 of principal and interest was payable in 35 monthly
installments beginning March 17, 2017 plus a final balloon payment of $8,891 including principal and unpaid interest payable on February 17, 2020.
3.75% Callable Promissory Note
The loan bears interest at a fixed annual rate of 3.75% and is collateralized by a retail shopping center in Sorrento, Florida and the lease agreements
associated with this property. Approximately $53 of principal and interest is payable in 240 monthly installments. The promissory note may be repaid in full as
long as the Company provides at least 60 days’ written notice and pays a prepayment premium as specified in the loan agreement. In addition, the lender may
require full payment of the outstanding principal and unpaid interest on September 1, 2031 provided a written notice of its intention to call the note is given at
least six months in advance.
4% Promissory Note
The loan is collateralized by the Company’s Tampa, Florida headquarters, which is owned by HCPCI Holdings, LLC, and the lease agreements
associated with this property. The loan bears interest at a fixed annual rate of 4%. Approximately $68 of principal and interest is payable in 180 monthly
installments. The promissory note may be repaid in full as long as the Company provides at least 60 days’ written notice and pays a prepayment premium as
specified in the loan agreement.
4.55% Promissory Note
On July 6, 2018, Century Park Holdings, LLC, a subsidiary of the Company, entered into a 18-year loan agreement for $6,000 secured by commercial
real estate in Tampa, Florida and an associated lease agreement. The loan bears interest at a fixed annual rate of 4.55%. Approximately $41 of principal and
interest is payable in 216 monthly installments. The promissory note may be repaid in full or in part after September 1, 2020 as long as the Company provides
at least 30 days’ written notice and pays a prepayment consideration as specified in the loan agreement.
68
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Note 14 -- Reinsurance
The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and
one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from
subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30% ceding
commission on ceded premiums written. The reinsurance premiums under one multi-year flood catastrophe excess of loss reinsurance contract are generally
determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter.
The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements.
Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally
becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance
market conditions.
The impact of the reinsurance treaties on premiums written and earned is as follows:
Premiums Written:
Direct
Assumed
Gross written
Ceded
Net premiums written
Premiums Earned:
Direct
Assumed
Gross earned
Ceded
Years Ended December 31,
2019
2018
2017
$
$
$
360,525 $
4,430
364,955
(125,765)
239,190 $
340,656 $
1,423
342,079
(125,765)
336,565 $
(109 )
336,456
(129,643)
206,813 $
340,966 $
2,099
343,065
(129,643)
346,188
1,158
347,346
(133,635)
213,711
347,235
11,018
358,253
(133,635)
Net premiums earned
$
216,314 $
213,422 $
224,618
During the years ended December 31, 2019, 2018, and 2017, ceded losses of $114,443, $149,120, and $214,082, respectively, were recognized as
reductions in losses and LAE. Ceded losses related to Hurricane Irma, Hurricane Michael, other non-catastrophe claims were $103,613, $10,750, and $80,
respectively, for 2019 and $143,890 and $5,230, respectively, for 2018. For 2017, the reduction in losses and LAE entirely related to Hurricane Irma. Ceded
losses recognized in 2018 included $7,400 attributable to Oxbridge Reinsurance Limited, a related party. At December 31, 2019 and 2018, there were 31 and 38
reinsurers, respectively, participating in the Company’s reinsurance program. Amounts receivable with respect to reinsurers at December 31, 2019 and 2018
were $132,678 and $123,911, respectively. Approximately 61.4% of the reinsurance recoverable balance at December 31, 2019 was receivable from the Florida
Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on the insurance ratings, the payment history and the financial strength of the reinsurers,
management believes there was no significant credit risk associated with its reinsurers’ obligation to perform on any prepaid reinsurance contract and to fund any
reinsurance recoverable balance as of December 31, 2019. The ratio of assumed premiums earned to net premiums earned for the years ended December 31,
2019, 2018 and 2017 was 0.66%, 0.98%, and 4.9%, respectively.
One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the year ended
December 31, 2019, the Company recognized a reduction in ceded premiums of $6,778. For the year ended December 31, 2018, the Company recognized a
net reduction in ceded premiums of $485 in contrast with a net increase in ceded premiums of $5,740 for the year ended December 31, 2017. Included in these
adjustments attributable to the Company’s contract with Oxbridge for the years ended December 31, 2018 and 2017 were $448 and $933, respectively, of net
increase in ceded premiums.
In addition, adjustments related to retrospective provisions are reflected in other assets. At December 31, 2019 and 2018, other assets included
$9,480 and $3,136, respectively. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount
receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the
reinsurer’s financial condition.
69
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Note 15 -- Losses and Loss Adjustment Expenses
The liability for losses and LAE is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated
expenses, anticipated future claim development and losses incurred, but not reported. See Loss and Loss Adjustment Expenses in Note 2 -- “Summary of
Significant Accounting Policies.”
The Company writes insurance primarily in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. The occurrence
of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the
Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.
Activity in the liability for losses and LAE is summarized as follows:
Net balance, beginning of year*
Incurred, net of reinsurance, related to:
Current year
Prior years
Total incurred, net of reinsurance
Paid, net of reinsurance, related to:
Current year
Prior years
Total paid, net of reinsurance
Net balance, end of year
Add: reinsurance recoverable
Gross balance, end of year
Years Ended December 31,
2019
2018
2017
$
94,826 $
97,818 $
70,492
96,955
10,559
107,514
96,860
12,468
109,328
(48,456 )
(55,710 )
(104,166)
98,174
116,523
(54,698 )
(57,622 )
(112,320)
94,826
112,760
146,922
18,707
165,629
(87,770 )
(50,533 )
(138,303)
97,818
100,760
$
214,697 $
207,586 $
198,578
*
Net balance represents beginning-of-period liability for unpaid losses and LAE less beginning-of-period reinsurance recoverable for unpaid losses and LAE.
The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as these estimates are
subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating
results of the period during which such adjustments are adjusted. During the year ended December 31, 2019, the Company recognized losses related to prior
years of $10,559, which were primarily attributable to unfavorable development resulting from litigation. Included in adverse development for 2019 were losses
related to Hurricane Matthew of $1,923. Losses for the 2019 loss year included estimated losses of $7,400 pertaining to one severe storm event during the first
quarter. During 2019, the Company increased its estimated gross losses for Hurricane Irma from $411,000 to $514,000 and for Hurricane Michael from $22,250
to $33,000 due to an increase in the number of claims and lawsuits. These increases had no impact on the Company’s results of operations as these additional
losses were entirely ceded.
The following is information about incurred and paid claims development as of December 31, 2019, net of reinsurance, as well as cumulative claim
frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts.
The information about incurred and paid claims development for the years ended December 31, 2015 to 2012 is presented as supplementary information and is
unaudited.
70
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Homeowners Multi-peril and Dwelling Fire Insurance (a)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2019
Total of
IBNR Plus
Expected
Development
Reported
Cumulative
Number of
Reported
Claims
(Not in Dollar
2012
2013
2014
2015
2016
2017
2018
2019
Claims
Amounts)(b)
$ 66,425 $ 62,742
$ 64,083
$ 67,220 $ 67,469 $
$ 67,058
— 67,579 69,932 69,906 72,015 71,604 73,763 74,043
— 75,810 81,773 84,917 88,053 90,084 92,454
—
$ 66,465
$ 66,505
—
—
—
—
—
—
—
—
—
—
— 78,017 90,902 96,173 101,272 102,149
— 81,446 90,879 92,684 92,986
—
— 91,443 88,937 89,652
—
—
— 79,436 83,976
—
—
—
— 95,467
—
—
—
—
$ 698,196
137
306
805
1,489
2,795
8,567
16,499
37,702
6,620
7,008
7,659
7,660
6,922
5,748
4,657
4,393
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
$ 36,914 $ 53,225
$ 64,667
$ 65,903
$ 67,059
$ 62,836
$ 59,041
— 40,240 57,374 64,257
— 47,650 68,897
—
— 50,939
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
68,106
77,712
76,042
51,663
—
—
—
70,224
82,463
87,784
73,037
43,039
—
—
$ 67,203
73,420
90,707
99,200
89,144
72,492
87,125
95,179
83,311
66,996
41,014
—
78,808
63,958
47,471
$ 609,911
298
$ 88,583
Total
All outstanding liabilities before 2012, net of
reinsurance
Liabilities for LAE, net of reinsurance
Year
2012
2013
2014
2015
2016
2017
2018
2019
Total
Year
2012
2013
2014
2015
2016
2017
2018
2019
(a)
(b)
Excludes losses from Wind-only insurance (2012 through 2019) and any hurricane event prior to 2019.
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or
expense to the Company.
71
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Homeowners Wind-only Insurance (a) *
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2019
Total of
IBNR Plus
Expected
Development
Reported
Cumulative
Number of
Reported
Claims
(Not in Dollar
2012
2013
2014
2015
2016
2017
2018
2019
Claims
Amounts)(b)
$
— $
—
—
—
—
— $
—
—
—
—
— $
—
—
—
—
308 $
—
401 $
1,005
569 $
1,314
692 $
1,814
605 $
1,853
—
—
—
—
—
—
1,529
—
—
1,119
798
—
815
708
1,132
24
77
26
28
46
100
228
155
130
134
$
5,113
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
$
— $
— $
— $
156 $
332 $
465 $
582 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
689
—
—
—
1,155
484
—
—
1,405
786
216
—
582
1,772
789
607
828
Year
2015
2016
2017
2018
2019
Total
Year
2015
2016
2017
2018
2019
Total
All outstanding liabilities before 2012, net of
reinsurance
Liabilities for LAE, net of reinsurance
$
4,578
$
—
535
*
(a)
(b)
The Company began writing Homeowners Wind-only insurance in 2015.
Excludes losses from multi-peril and dwelling fire insurance (2012 through 2019) and any hurricane event prior to 2019.
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or
expense to the Company.
72
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Losses Specific to Any Hurricane Event prior to 201 9
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2019
Total of
IBNR Plus
Expected
Development
Reported
Cumulative
Number of
Reported
Claims
(Not in Dollar
2012
2013
2014
2015
2016
2017
2018
2019
Claims
Amounts)(b)
$
— $
—
—
—
— $
—
—
—
— $
—
—
—
— $ 21,414 $ 24,126 $ 26,211 $ 28,133 $
— 53,602 54,080 53,557
—
— 16,543 16,532
—
—
—
—
—
—
—
1,824
5,992
432
35
2,418
20,867
1,699
136
$ 98,222
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
$
— $
—
—
—
— $
—
—
—
— $
—
—
—
— $ 12,227 $ 20,025 $ 23,316 $ 25,849
47,524
43,905
—
15,992
—
—
—
—
—
47,514
13,391
—
—
—
—
Year
2016
2017
2018
2019
Total
Year
2016
2017
2018
2019
Total
All outstanding liabilities before 2012, net of
reinsurance
Liabilities for LAE, net of reinsurance
$ 89,365
—
$
8,857
(b)
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or
expense to the Company.
73
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The reconciliation of the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses is as follows:
Net outstanding liabilities
Homeowners multi-peril and dwelling fire insurance
Homeowners Wind-only insurance
Losses specific to any hurricane event prior to 2019
Other short-duration insurance lines
$
Liabilities for unpaid losses and loss adjustment expenses, net of
reinsurance
Reinsurance recoverables
Total gross liability for unpaid losses and loss adjustment expenses
$
December 31,
2019
2018
88,583 $
535
8,857
199
98,174
116,523
214,697 $
80,767
1,434
12,612
13
94,826
112,760
207,586
The following is supplementary and unaudited information about average historical claims duration as of December 31, 2019:
Average Annual Percentage Payout of Incurred
Losses by Age,
Net of Reinsurance
Years
Homeowners multi-peril and dwelling fire
insurance
Homeowners Wind-only insurance
Losses specific to any hurricane prior to 2019
1
2
3
4
5
6
7
8
51.4%
46.4%
70.6%
21.2%
26.1%
14.4%
7.9 %
7.5 %
3.4 %
0.7 %
1.9 %
2.6 %
1.8 %
0.0 %
—
1.0 %
*
—
0.3 %
*
—
0.0 %
*
—
*
The Company began writing Homeowners Wind-only insurance in 2015.
74
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 16 -- Segment Information
The Company identifies its operating divisions based on organizational structure and revenue source. Currently, the Company has three reportable
segments: insurance operations, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty
insurance division and reinsurance division are grouped together into one reportable segment under insurance operations. The real estate operations segment
includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and
other segment represents the activities of the holding companies, the information technology division, and other companies that do not meet the quantitative
thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of
operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and
operating performance based on revenue and operating income.
For the years ended December 31, 2019, 2018 and 2017, revenues from the Company’s insurance operations before intracompany elimination
represented 95.0%, 95.0% and 96.2%, respectively, of total revenues of all operating segments. At December 31, 2019 and 2018, insurance operations’ total
assets represented 85.5% and 85.9%, respectively, of the combined assets of all operating segments. See Note 1 -- “Nature of Operations” for a description of
the Company’s insurance operations. The following tables present segment information reconciled to the Company’s consolidated statements of income.
Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.
For the Year Ended December 31, 2019
Revenue:
Net premiums earned
Net investment income
Net realized investment gains (losses)
Net unrealized investment gains
Net other-than-temporary impairment losses
Policy fee income
Other
Total revenue
Expenses:
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Interest expense
Depreciation and amortization
Other
Total expenses
Income (loss) before income taxes
Total revenue from non-affiliates(c)
Insurance
Operations
Real
Estate(a)
Corporate/
Other(b)
Reclassification/
Elimination
Consolidated
$
$
$
216,314 $
12,230
286
6,565
(289 )
3,229
762
239,097
107,514
37,146
2
113
30,590
175,365
— $
1
—
—
—
—
9,366
9,367
—
—
1,653
2,542
5,168
9,363
— $
2,348
(540 )
1,385
—
—
5,738
8,931
—
—
12,043
1,285
23,246
36,574
— $
(937 )
—
—
—
—
(13,984 )
(14,921 )
—
—
(643 )
(2,390)
(11,888 )
(14,921 )
216,314
13,642
(254 )
7,950
(289 )
3,229
1,882
242,474
107,514
37,146
13,055
1,550
47,116
206,381
63,732 $
4 $
(27,643 ) $
— $
36,093
239,097 $
7,738 $
7,176
(a)
(b)
(c)
Other revenue under real estate primarily consisted of rental income from investment properties.
Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
75
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
For the Year Ended December 31, 2018
Revenue:
Net premiums earned
Net investment income
Net realized investment gains
Net unrealized investment gains
Net other-than-temporary impairment losses
Policy fee income
Other
Total revenue
Expenses:
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Interest expense
Depreciation and amortization
Other
Total expenses
Income (loss) before income taxes
Total revenue from non-affiliates(c)
Insurance
Operations
Real
Estate(a)
Corporate/
Other(b)
Reclassification/
Elimination
Consolidated
$
$
$
213,422 $
10,862
4,639
(8,688)
—
3,389
583
224,207
109,328
35,204
1
125
25,797
170,455
— $
1
—
—
—
—
9,324
9,325
—
—
1,568
2,373
4,254
8,195
— $
5,554
1,544
(1,514)
(80)
—
4,999
10,503
—
—
17,008
1,011
20,464
38,483
— $
164
—
—
—
—
(12,907 )
(12,743 )
—
—
(481 )
(2,140)
(10,122 )
(12,743 )
213,422
16,581
6,183
(10,202 )
(80)
3,389
1,999
231,292
109,328
35,204
18,096
1,369
40,393
204,390
53,752 $
1,130 $
(27,980 ) $
— $
26,902
224,207 $
7,718 $
9,331
(a)
(b)
(c)
Other revenue under real estate primarily consisted of rental income from investment properties.
Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
For the Year Ended December 31, 2017
Revenue:
Net premiums earned
Net investment income
Net realized investment gains
Net unrealized investment gains
Net other-than-temporary impairment losses
Policy fee income
Other
Total revenue
Expenses:
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Interest expense
Loss on repurchase of senior notes
Depreciation and amortization
Other
Total expenses
Income (loss) before income taxes
Total revenue from non-affiliates(c)
Insurance
Operations
Real
Estate(a)
Corporate/
Other(b)
Reclassification/
Elimination
Consolidated
$
$
$
224,618 $
9,898
3,978
—
(1,258)
3,622
693
241,551
165,629
35,663
—
—
128
27,547
228,967
— $
6
—
—
—
—
7,046
7,052
—
—
1,250
—
2,121
4,022
7,393
— $
2,974
368
92
(209 )
—
4,417
7,642
—
—
15,704
743
939
18,123
35,509
— $
(1,439)
—
—
—
—
(10,400 )
(11,839 )
—
—
(187 )
—
(1,950)
(9,702)
(11,839 )
224,618
11,439
4,346
92
(1,467)
3,622
1,756
244,406
165,629
35,663
16,767
743
1,238
39,990
260,030
12,584 $
(341 ) $
(27,867 ) $
— $
(15,624 )
241,551 $
5,525 $
6,958
(a)
(b)
(c)
Other revenue under real estate primarily consisted of rental income from investment properties.
Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
76
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table presents segment assets reconciled to the Company’s total assets in the consolidated balance sheets.
Segment:
Insurance Operations
Real Estate Operations
Corporate and Other
Consolidation and Elimination
Total assets
Note 17 -- Leases
December 31,
2019
2018
$
$
663,280 $
93,727
60,662
(15,060 )
802,609 $
615,983
83,828
146,651
(13,599 )
832,863
At December 31, 2019, the Company had operating leases’ ROU assets and corresponding liabilities of $484 and $513, respectively. In addition, the
Company had finance leases with ROU assets of $79 and corresponding lease liabilities of $60 at December 31, 2019. The following table summarizes the
Company’s operating and finance leases in which the Company is a lessee:
Class of Assets
Operating lease:
Office equipment
Storage units
Office space
Finance lease:
Office equipment
Initial Term
1 to 63 months
2 years
3 to 10 years
Renewal
Option
Yes
Yes
Yes
3 to 5 years
Not applicable
Other Terms and
Conditions
(a), (b)
(b)
(b), (c)
(d)
(a)
(b)
(c)
(d)
At the end of the lease term, the Company can purchase the equipment at fair market value.
There are no variable lease payments.
Rent escalation provisions exist.
There is a bargain purchase option.
As of December 31, 2019, maturities of lease liabilities were as follows:
Due in Year
2020
2021
2022
2023
Total lease payments
Less: interest and foreign taxes
Total lease obligations
Leases
Operating
Finance
$
$
327 $
208
17
—
552
39
513 $
19
19
17
9
64
4
60
77
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table provides quantitative information with regard to the Company’s operating and finance leases.
Lease costs:
Finance lease costs:
Amortization – ROU assets*
Interest expense
Operating lease costs*
Short-term lease costs*
Total lease costs
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases
Operating cash flows – operating leases
Financing cash flows – finance leases
Weighted-average remaining lease term:
Finance leases (in years)
Operating leases (in years)
Weighted-average discount rate:
Finance leases
Operating leases
Year Ended
December 31, 2019
December 31, 2019
$
$
$
$
$
15
2
314
198
529
2
318
14
3.7
1.7
3.7 %
4.0 %
*
Included in other operating expenses of the consolidated statement of income.
The following table summarizes the Company’s operating leases in which the Company is a lessor:
Class of Assets
Operating lease:
Office space
Retail space
Boat docks/wet slips
(e)
There are no purchase options.
Note 18 -- Income Taxes
A summary of income tax expense is as follows:
Current:
Federal
State
Foreign
Total current taxes
Deferred:
Federal
State
Foreign
Total deferred taxes
Income tax expense (benefit)
Initial Term
1 to 3 years
3 to 20 years
1 to 12 months
Renewal
Option
Other Terms and
Conditions
Yes
Yes
Yes
(e)
(e)
(e)
Years Ended December 31,
2019
2018
2017
6,177 $
1,362
107
7,646
1,586
287
(2 )
1,871
9,517 $
7,443 $
1,490
104
9,037
(245 )
392
(7 )
140
9,177 $
(3,933)
34
81
(3,818)
(4,144)
(757 )
(12)
(4,913)
(8,731)
$
$
78
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows:
Income taxes at statutory rate
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal
tax benefits
Effects of tax rate changes
Share-based compensation
Non-deductible executive compensation
Other
Income tax (benefit) expense
$
2019
2018
Amount
%
Amount
%
2017
Amount
%
$
7,579
21.0 $
5,649
21.0 $
(5,468)
35.0
Years Ended December 31,
1,362
(37)
(159 )
685
87
9,517
3.8
—
(0.4)
1.9
0.1
26.4 $
1,303
—
2,156
306
(237 )
9,177
4.8
—
8.0
1.1
(0.8)
34.1 $
(657 )
(1,400)
(705 )
244
(745 )
(8,731)
4.2
9.0
4.5
(1.6)
4.8
55.9
The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. The tax
returns filed for the years ending December 31, 2018, 2017, and 2016 remain subject to examination by the Company’s major taxing jurisdictions. The Company
elected to classify interest and penalties, if any, arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There
have been no material amounts of interest or penalties for the years ended December 31, 2019, 2018 and 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Key components of the 2017 Tax Act are: a
permanent reduction to the federal corporate income tax rate from a bracket system with a top tax rate of 35% to a flat rate of 21% beginning on January 1,
2018; implementation of a territorial tax system; an amendment to Internal Revenue Code Section 965 that requires U.S. shareholders (10% or greater) of
controlled foreign corporations and other specified foreign corporations to include in income, for the last taxable year of such foreign corporation beginning before
January 1, 2018, such U.S. shareholder’s pro rata share of a deemed repatriation amount; and changes to carryback and carryforward rules for net operating
losses arising after December 31, 2017. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is
enacted.
For the years ended December 31, 2019 and 2018, the Company recorded income taxes of $9,517 and $9,177, respectively, resulting in effective tax
rates of 26.4% and 34.1%, respectively. For the year ended December 31, 2017, the Company recorded approximately $8,731 of income tax benefits, which
resulted in an effective tax rate of 55.9%. The decrease in the effective tax rate in 2019 as compared with 2018 was primarily attributable to the unfavorable
factors in 2018 consisting of the negative effect of the derecognition of deferred tax assets of $1,825 for restricted stock awards of which market conditions would
not be met prior to their expiry date, the disallowance of the deductibility of the $1,887 expense representing dividends cumulatively paid on such restricted stock
awards which were reclassified from retained income (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation”), offset by an increase in
nondeductible performance-based compensation expenses for 2019. The decrease in the effective tax rate in 2018 as compared with 2017 was primarily
attributable to the reduction of the federal corporate income tax rate from 35% to 21%, offset by the opposing factors in 2018 as described earlier.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
79
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Significant components of the Company’s net deferred income tax assets are as follows:
$
Deferred tax assets:
Unearned premiums
Losses and loss adjustment expenses
Stock-based compensation
Net unrealized investment losses
Other-than-temporary impairment losses
Organizational costs
Accrued expenses
Unearned revenue
Bad debt reserve
Other
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible assets
Deferred policy acquisition costs
Net unrealized investment gains
Basis difference related to partnership investments
Basis difference related to convertible senior notes
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax liabilities
$
December 31,
2019
2018
6,272 $
2,838
878
—
77
63
86
120
9
—
10,343
(1,661)
(2,214)
(5,469)
(1,547)
(1,188)
(1,256)
(392 )
(624 )
(14,351 )
(4,008) $
5,455
3,001
716
1,641
6
76
78
231
20
26
11,250
(1,430)
(1,841)
(4,347)
—
(1,193)
(2,429)
(394 )
(684 )
(12,318 )
(1,068)
State net operating loss carryforwards were fully utilized in 2018 and as such, there are no state net operating loss carryforwards as of December 31,
2018.
A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred tax assets
will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will
be realized. Thus, the Company did not have a valuation allowance established as of December 31, 2019 or 2018.
The 2017 Tax Act implemented a mandatory one-time tax of eight percent on illiquid assets and 15.5% percent on cash and cash equivalents
attributable to the accumulated earnings of controlled foreign companies and other specified foreign corporations on U.S. shareholders owning ten percent or
greater of the foreign company. The Company included this one-time federal income tax and the corresponding state taxes attributable to this deemed
repatriation amount in the net income tax benefit for the year ended December 31, 2017. In addition to this mandatory one-time deemed repatriation, the 2017
Tax Act also implemented a territorial system which exempts U.S. corporations from U.S. taxes on most future foreign profits. Since all accumulated earnings of
the Company’s foreign subsidiary at December 31, 2017 were subjected to federal and state income taxes as a result of the one-time mandatory deemed
repatriation and all earnings of its foreign subsidiaries after December 31, 2017 will not be subject to U.S. income taxes, the Company will no longer be required
to consider the establishment of a deferred tax liability related to the undistributed earnings of its foreign subsidiary.
Note 19 -- Earnings Per Share
U.S. GAAP requires the Company to use the two-class method in computing basic earnings (loss) per share since holders of the Company’s
restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both
basic and diluted earnings (loss) per share during periods of net income (loss).
80
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
A summary of the numerator and denominator of the basic and fully diluted earnings (loss) per common share is presented below:
Year Ended December 31, 2019
Net income
Less: Income attributable to participating securities
Basic Earnings Per Share:
Income allocated to common stockholders
Effect of Dilutive Securities:
Stock options
Convertible senior notes
Diluted Earnings Per Share:
Income available to common stockholders and assumed
conversions
(a)
Shares in thousands.
Year Ended December 31, 2018
Net income
Less: Loss attributable to participating securities*
Basic Earnings Per Share:
Income allocated to common stockholders
Effect of Dilutive Securities:**
Stock options
Diluted Earnings Per Share:
Income available to common stockholders and assumed
conversions
Income
(Numerator)
Shares (a)
(Denominator)
Per Share
Amount
$
26,576
(1,448)
25,128
7,580 $
3.32
—
8,748
12
2,646
$
33,876
10,238 $
3.31
Loss
(Numerator)
Shares (a)
(Denominator)
Per Share
Amount
$
17,725
717
18,442
7,878 $
2.34
—
17
$
18,442
7,895 $
2.34
(a)
*
**
Shares in thousands.
Loss attributable to participating securities included the reclassification of cumulative dividends paid on certain restricted stock with market based vesting conditions from
retained income to expense. See Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” for additional information.
Convertible senior notes were excluded due to antidilutive effect.
Year Ended December 31, 2017
Net loss
Less: Loss attributable to participating securities
Basic and Diluted Loss Per Share:
Loss available to common stockholders***
Income (Loss)
(Numerator)
Shares (a)
(Denominator)
Per Share
Amount
$
(6,893)
481
$
(6,412)
8,558 $
(0.75 )
(a)
***
Shares in thousands.
Stock options and convertible senior notes were excluded due to antidilutive effect.
81
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 20 -- Stockholders’ Equity
Common Stock
For each of the last two years, the Company’s Board of Directors authorized a one-year plan to repurchase up to $20,000 of the Company’s common
shares before commissions and fees. The shares may be purchased for cash in open market purchases, block transactions and privately negotiated transactions
in accordance with applicable federal securities laws. The share repurchase plan may be modified, suspended, terminated or extended by the Company any
time without prior notice.
During the years ended December 31, 2019 and 2018, the Company repurchased and retired 454,010 and 511,628 shares, respectively, at weighted
average prices per share of $41.49 and $39.09, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended
December 31, 2019 and 2018 were $18,851 and $20,015, respectively, or $41.52 and $39.12 per share, respectively. On December 19, 2019, the Board
decided to extend the repurchase plan to March 15, 2020.
Series B Junior Participating Preferred Share Purchase Right
On April 18, 2017, the Company’s Board of Directors terminated the Company’s shareholder rights plan by amending the share purchase right’s
expiration date to April 18, 2017. Prior to the amended expiration date, one preferred share purchase right entitled a common shareholder to purchase from the
Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, no par value, at a price of $125.00 per one one-hundredth of such
preferred share.
Share Repurchase Agreements
In conjunction with the issuance of the 4.25% Convertible Notes in March 2017 as described in Note 13 -- “Long-Term Debt” under Convertible Senior
Notes , the Company used $20,345 of the net proceeds to repurchase and retire an aggregate of 413,600 shares of its common stock at a price of $49.19 per
share from institutional investors.
Prepaid Share Repurchase Forward Contracts
The Company has one outstanding prepaid share repurchase forward contract entered into with Societe Generale, a forward counterparty. The
Company entered into this forward contract in conjunction with the March 2017 issuance of the 4.25% Convertible Notes as described in Note 13 -- “Long-Term
Debt” under Convertible Senior Notes. Under the forward contract, the Company made an initial upfront payment of $9,400 in exchange for the future delivery of
191,000 shares of the Company’s common stock over a settlement period in 2022.
The forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of the forward
counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company
pays any cash dividends on its common shares, the forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the
forward contract will be treated as retired for financial statement purposes as of the effective date of the forward contract, but will remain outstanding for
corporate law purposes, including for purposes of any future stockholder votes.
The Company determined that the forward contract does not meet the characteristics of a derivative instrument and, as such, the transaction resulted
in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted earnings
(loss) per share.
In November 2018, the Company’s share repurchase forward contract with Deutsche Bank AG, London Branch, entered into in conjunction with the
2013 issuance of the 3.875% Convertible Notes, was settled with the delivery of 622,751 shares of the Company’s common stock.
Preferred Stock
Series A Cumulative Convertible Preferred Stock
At December 31, 2019 and 2018, there were no Series A Cumulative Convertible Preferred Stock issued or outstanding.
Series B Junior Participating Preferred Stock (“Series B Preferred”)
At December 31, 2019 and 2018, there were no Series B Preferred issued or outstanding.
Undesignated Preferred Stock
The Company is authorized to issue up to an additional 18,100,000 shares of preferred stock, no par value. The authorized but unissued and
undesignated preferred stock may be issued in one or more series and the shares of each series shall have such rights as determined by the Company’s Board
of Directors subject to the rights of the holders of the Series A Cumulative Convertible Preferred Stock and Series B Preferred.
82
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 21 -- Stock-Based Compensation
Incentive Plan
The Company currently has outstanding stock-based awards granted under its 2007 Stock Option and Incentive Plan and 2012 Omnibus Incentive
Plan. Only the 2012 Plan is active and available for future grants. With respect to the 2012 Plan, the Company may grant stock-based awards to employees,
directors, consultants, and advisors of the Company. At December 31, 2019, there were 1,761,804 shares available for grant.
Stock Options
Stock options granted and outstanding under the incentive plans vest over periods ranging from immediately vested to five years and are exercisable
over the contractual term of ten years.
A summary of the stock option activity for the years ended December 31, 2019, 2018 and 2017 is as follows (option amounts not in thousands):
Outstanding at January 1, 2017
50,000 $
4.02
2.3 years $
1,773
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Granted
Exercised
Outstanding at December 31, 2017
Granted
Outstanding at December 31, 2018
Granted
Exercised
Outstanding at December 31, 2019
110,000 $
(30,000 ) $
130,000 $
110,000 $
240,000 $
110,000 $
(10,000 ) $
340,000 $
40.00
2.50
34.82
40.00
37.19
53.00
6.30
43.21
8.2 years $
472
8.8 years $
3,278
7.9 years $
1,657
Exercisable at December 31, 2019
92,500 $
36.36
6.8 years $
868
The following table summarizes information about options exercised for the years ended December 31, 2019, 2018 and 2017 (option amounts not in
thousands):
Options exercised
Total intrinsic value of exercised options
Tax benefits realized
2019
2018
2017
$
$
10,000
347 $
85 $
—
— $
— $
30,000
1,319
509
For the years ended December 31, 2019, 2018 and 2017, the Company recognized $870, $521 and $306, respectively, of compensation expense
which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $22, $79 and $78 for the years ended
December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, there was $1,835 and $1,359, respectively, of unrecognized compensation
expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.4
years.
83
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during
the years ended December 31, 2019, 2018 and 2017 :
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Restricted Stock Awards
2019
2018
2017
3.34%
40.17 %
2.53%
5
4.00%
42.22 %
2.57%
5
3.53%
42.86 %
1.92%
5
From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees and nonemployee
directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants include only service conditions. The
determination of fair value with respect to the awards with only service-based conditions is based on the market value of the Company’s stock on the grant date.
Information with respect to the activity of unvested restricted stock awards during the years ended December 31, 2019, 2018 and 2017 is as follows:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Number of
Restricted
Stock
Awards
Weighted
Average
Grant Date
Fair Value
542,503 $
154,936 $
(75,983 ) $
(23,766 ) $
597,690 $
189,860 $
(98,617 ) $
(56,637 ) $
632,296 $
180,404 $
(116,164) $
(299,776) $
396,760 $
30.81
42.92
37.95
36.32
32.82
41.81
40.82
36.46
33.33
42.79
40.10
25.31
41.71
The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of
$5,590, $4,111 and $4,217 for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, there was approximately
$12,661 and $11,199, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to
recognize the remaining compensation expense over a weighted-average period of 2.6 years. The following table summarizes information about deferred tax
benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the years
ended December 31, 2019, 2018 and 2017.
Deferred tax benefits recognized
Tax benefits realized for restricted stock and paid dividends
Fair value of vested restricted stock
2019
2018
2017
$
$
$
1,075 $
1,129 $
4,658 $
862 $
1,086 $
4,025 $
970
1,396
2,884
During 2019, 284,000 shares of the Company’s restricted stock awards granted to employee and nonemployee directors were forfeited for not
meeting their market-based vesting conditions. Any dividend payment associated with these awards during 2019 was expensed when declared. As a result, for
the year ended December 31, 2019, the Company recognized dividends of $237 in general and administrative personnel expenses for $170 and in other
operating expenses for $67.
84
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
During 2018, the Company reclassified from retained income dividends of $1,887 cumulatively paid on unvested restricted stock awards with market
based vesting conditions to general and administrative personnel expenses for $1,346 and to other operating expenses for $541. These awards, of which the
market conditions would not have been met, were granted to the Company’s employee and nonemployee directors during 2013. As a result, for the year ended
December 31, 2018, the Company recognized dividends of $195 related to these awards in general and administrative personnel expenses for $159 and in
other operating expenses for $36.
During the years ended December 31, 2019, 2018 and 2017, no awards were issued with other than service-based vesting conditions.
Note 22 -- Employee Benefit Plan
The Company has a 401(k) Safe Harbor Profit Sharing Plan (“401(k) Plan”) that qualifies as a defined contribution plan under Section 401(k) of the
Internal Revenue Code. Under the 401(k) Plan, participating employees are eligible for company matching and discretionary profit sharing contributions. Plan
participants may elect to defer up to one hundred percent of their pre-tax gross wages, subject to annual limitations. The Company matching contribution is
limited to a maximum of four percent of the employee’s annual salary or wage and is fully vested when contributed. Eligibility and vesting of the Company’s
discretionary profit sharing contribution is subject to the plan participant’s years of service. During the years ended December 31, 2019, 2018 and 2017, the
Company contributed approximately $638, $536 and $560, respectively, in matching contributions, which are included in general and administrative personnel
expenses. There has been no discretionary profit sharing contribution since the plan’s inception.
The Company also maintains benefit plans for its employees in India including a statutory post-employment benefit plan, or gratuity plan, providing
defined, lump-sum benefits. The Company’s liability for the gratuity plan reflects the undiscounted benefit obligation payable as of the balance sheet date, which
was based upon the employees’ salary and years of service. At December 31, 2019 and 2018, the amounts accrued under the gratuity plan were $89 and $72,
respectively. In addition, the Company provides matching contributions with respect to two defined contribution plans: the Provident Fund and the Employees
State Insurance Fund, both of which are available to qualifying employees in India. Expense recognized by the Company for all benefit plans in India was $17,
$14 and $17, respectively, for the years ended December 31, 2019, 2018 and 2017.
Note 23 -- Commitments and Contingencies
Obligations under Multi-Year Reinsurance Contract
As of December 31, 2019, the Company has a contractual obligation related to one multi-year reinsurance contract. This contract may be cancelled
only with the other party’s consent. The future minimum aggregate premium amounts payable to the reinsurer is $2,024 due in 12 months following December
31, 2019. Reinsurance premiums payable after March 31, 2020 are estimated and subject to subsequent revision as the premiums are determined on a
quarterly basis based on the premiums associated with the applicable flood total insured value on the last day of the preceding quarter.
Rental Income
The Company leases available space at the Company’s headquarters and at its various investment properties to non-affiliates at various terms. In
addition, the Company leases boat slips and docks on a long-term basis. Expected annual rental income due under non-cancellable operating leases for all
properties owned at December 31, 2019 is as follows:
Year
2020
2021
2022
2023
2024
Thereafter
Total
Amount
4,164
3,699
3,188
2,709
2,683
11,720
28,163
$
$
Capital Commitment
As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for
limited partnership interests. At December 31, 2019, there was an aggregate unfunded balance of $15,130.
85
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 24 -- Quarterly Results of Operations (Unaudited)
The tables below summarize unaudited quarterly results of operations for 2019, 2018 and 2017.
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Interest expense
Total expenses
Income (loss) before income taxes
Net income (loss)
Comprehensive income (loss)
Earnings per share:
Basic
Diluted*
03/31/19
06/30/19
09/30/19
12/31/19
Three Months Ended
$
51,184 $
60,634
26,996
9,673
4,337
51,351
9,283
6,738
8,732
51,998 $
58,630
24,293
10,077
2,884
48,315
10,315
7,553
8,767
54,434 $
59,979
27,327
10,988
2,907
52,260
7,719
5,853
6,189
$
$
0.82 $
0.82 $
0.93 $
0.90 $
0.73 $
0.73 $
58,698
63,231
28,898
11,759
2,927
54,455
8,776
6,432
6,519
0.84
0.82
*
During the quarters ended March 31, 2019 and September 30, 2019, the convertible senior notes were antidilutive.
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Interest expense
Total expenses
Income (loss) before income taxes
Net income (loss)
Comprehensive income (loss)
Earnings (loss) per share:
Basic
Diluted**
$
03/31/18
06/30/18
09/30/18
12/31/18
Three Months Ended
53,522 $
57,739
19,655
9,360
4,470
42,935
14,804
10,791
8,340
52,965 $
58,813
21,803
9,959
4,505
47,293
11,520
6,403
6,413
54,177 $
61,743
25,769
9,829
4,552
49,820
11,923
8,997
8,955
52,758
52,997
42,101
9,795
4,569
64,342
(11,345 )
(8,466)
(8,818)
$
$
1.25 $
1.11 $
0.96 $
0.92 $
1.08 $
1.00 $
(0.95 )
(0.95 )
**
During the quarter ended December 31, 2018, the convertible senior notes and stock options were antidilutive.
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Interest expense
Total expenses
Income (loss) before income taxes
Net income (loss)
Comprehensive income (loss)
Earnings (loss) per share:
Basic
Diluted***
03/31/17
06/30/17
09/30/17
12/31/17
Three Months Ended
$
63,036 $
67,713
25,529
9,649
3,542
48,571
19,142
12,020
12,949
61,847 $
67,580
27,665
10,070
4,378
53,275
14,305
9,542
8,959
43,964 $
47,490
89,231
9,926
4,408
113,508
(66,018 )
(40,546 )
(38,792 )
$
$
1.27 $
1.15 $
1.05 $
0.93 $
(4.44 ) $
(4.44 ) $
55,771
61,623
23,204
10,018
4,439
44,676
16,947
12,091
11,914
1.37
1.14
***
During the quarter ended September 30, 2017, the convertible senior notes and stock options were antidilutive.
86
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 25 -- Regulatory Requirements and Restrictions
The Company has no restrictions on the payment of dividends to its shareholders except those restrictions imposed by the Florida Business
Corporation Act and those restrictions imposed by insurance statutes and regulations applicable to the Company’s insurance subsidiaries. As of December 2019,
without prior regulatory approval, $88,780 of the Company’s consolidated retained earnings was free from restriction under the insurance statutes and
regulations and available for the payment of dividends in 2020. The following briefly describes certain related and other requirements and restrictions imposed by
the states or jurisdiction in which the Company’s insurance subsidiaries are incorporated.
Florida
HCPCI and TypTap, which are domiciled in Florida, prepare their statutory financial statements in accordance with accounting principles and practices
prescribed or permitted by the Florida Department of Financial Services, Office of Insurance Regulation, which Florida utilizes for determining solvency under the
Florida Insurance Code (the “Code”). The commissioner of the FLOIR has the right to permit other practices that may deviate from prescribed practices.
Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative
rules applicable to all insurance enterprises domiciled in Florida. Permitted statutory accounting practices encompass all accounting practices that are not
prescribed; such practices differ from state to state, may differ from entity to entity within a state, and may change in the future.
The Code requires HCPCI and TypTap to maintain capital and surplus equal to the greater of 10% of their respective liabilities or a statutory minimum
as defined in the Code. TypTap, the Company’s insurance subsidiary organized in 2015, was subject to a consent order that required TypTap to maintain
minimum capital and surplus of $20,000 during the year ending December 31, 2018. At December 31, 2019, HCPCI and TypTap were required to maintain
minimum capital and surplus of $21,700 and $10,000, respectively. At December 31, 2018, HCPCI was required to maintain minimum capital and surplus of
$21,700. HCPCI and TypTap were in compliance with these requirements at December 31, 2019 and 2018.
U.S. GAAP differs in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory-basis).
These entities’ statutory-basis financial statements are presented on the basis of accounting practices prescribed or permitted by the FLOIR. The FLOIR has
adopted the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual as the basis of its statutory accounting
practices. At December 31, 2019, 2018 and 2017, HCPCI’s statutory-basis capital and surplus was approximately $159,000, $149,000 and $153,000,
respectively. For the years ended December 31, 2019 and 2018, HCPCI had statutory-basis net income of approximately $18,400 and $20,700, respectively, in
contrast with a statutory-basis net loss of approximately $10,500 for the year ended December 31, 2017. At December 31, 2019, 2018 and 2017, TypTap’s
statutory-basis capital and surplus was approximately $27,200, $26,000 and $24,000, respectively. For the year ended December 31, 2019, TypTap’s statutory-
basis net loss was approximately $5,200. For the year ended December 31, 2018, TypTap had statutory-basis net income of approximately $2,034 as opposed
to statutory-basis net loss of approximately $797 for the year ended December 31, 2017. Statutory-basis surplus differs from stockholders’ equity reported in
accordance with U.S. GAAP primarily because policy acquisition costs are expensed when incurred. In addition, the recognition of deferred tax assets is based
on different recoverability assumptions.
Since inception, HCPCI and TypTap have each maintained a cash deposit with the Insurance Commissioner of the state of Florida in the amount of
$300 to meet regulatory requirements.
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its
available and accumulated capital and surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the FLOIR if the dividend or distribution would
exceed the larger of (1) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward, (2)
10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (3) the lesser of (a) 10.0% of capital
surplus or (b) net investment income plus a three year carry forward with dividends payable constrained to unassigned funds minus 25% of unrealized capital
gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the FLOIR if (1) the dividend is equal to
or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards to policyholders derived from realized net operating profits on its business and net
realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year,
(2) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or
distribution, (3) the insurer files a notice of the dividend or distribution with the FLOIR at least ten business days prior to the dividend payment or distribution and
(4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115%
of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution
(1) subject to prior approval by the FLOIR or (2) 30 days after the FLOIR has received notice of such dividend or distribution and has not disapproved it within
such time.
As a result, HCPCI was qualified to make dividend payments at December 31, 2019, 2018 and 2017.
87
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
In addition, Florida property and casualty insurance companies are required to adhere to prescribed premium-to-capital surplus ratios. Florida state law
requires that the ratio of 90% of written premiums divided by surplus as to policyholders does not exceed 10 to 1 for gross written premiums or 4 to 1 for net
written premiums. The required ratio of gross and net written premium to surplus, which the Company’s insurance companies had exceeded, is summarized
below:
HCPCI:
Gross
Net
TypTap:
Gross
Net
Bermuda
Years Ended December 31,
2019
2018
2017
1.92 to 1
1.15 to 1
2.23 to 1
1.63 to 1
2.17 to 1
1.27 to 1
0.57 to 1
0.38 to 1
2.01 to 1
1.11 to 1
0.33 to 1
0.27 to 1
The Bermuda Monetary Authority requires Claddaugh Casualty Insurance Company, Ltd. (“Claddaugh”), the Company’s Bermuda domiciled
reinsurance subsidiary, to maintain minimum capital and surplus of $2,000. At December 31, 2019 and 2018, Claddaugh’s statutory capital and surplus was
approximately $34,500 and $45,000, respectively. For the years ended December 31, 2019, 2018 and 2017, Claddaugh reported statutory net losses of
approximately $4,400, $8,100 and $5,200, respectively. During 2019 and 2018, Claddaugh made returns of capital distribution of $6,000 and $10,000,
respectively, to the Company. During 2017, Claddaugh made a dividend payment of $20,000 to the Company.
HCPCI and TypTap are subject to risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of
minimum capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risks related to it. Pursuant to
the RBC requirements, insurers having less statutory capital than required by the RBC calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy. At December 31, 2019 and 2018, the Company’s insurance subsidiaries individually exceeded any applicable
minimum risk-based capital requirements and no corrective actions have been required. As of December 31, 2019, the combined statutory capital and surplus
and minimum capital and surplus of the Company’s U.S. insurance subsidiaries were approximately $186,446 and $95,318, respectively.
At December 31, 2019 and 2018, restricted net assets represented by the Company’s insurance subsidiaries amounted to $191,210 and $181,571,
respectively.
Note 26 -- Related Party Transactions
Claddaugh had a reinsurance agreement with Oxbridge Reinsurance Limited (“Oxbridge”) whereby a portion of the business assumed from the
Company’s insurance subsidiary, HCPCI, was ceded by Claddaugh to Oxbridge. On May 28, 2018, Claddaugh terminated its multi-year reinsurance contract
with Oxbridge, effective June 1, 2018. Upon termination, Claddaugh agreed to pay Oxbridge a settlement fee of $600 and derecognized the benefits accrued in
connection with retrospective provisions. The settlement fee and the derecognition of the $622 of accrued benefits were recorded in premiums ceded. With
respect to the period from June 1, 2016 through May 31, 2017, Oxbridge assumed $6,000 of the total covered exposure for approximately $3,400 in premiums.
With respect to the period from June 1, 2017 through May 31, 2018, Oxbridge assumed $7,400 of the total covered exposure for approximately $3,400 in
premiums. Among the Oxbridge shareholders are Paresh Patel, the Company’s chief executive officer, and members of his immediate family and three of the
Company’s non-employee directors including Sanjay Madhu who serves as Oxbridge’s president and chief executive officer.
In March 2018, the Company purchased six-month certificates of deposit totaling approximately $15,094 from First Home Bank, a local bank in the
Tampa Bay area where two of the Company’s directors are members of the bank’s board of directors. In May 2018, the Company moved the funds from the
certificate of deposit accounts to a money market account. The interest rates and terms of the accounts were comparable to those offered at the time to other
clients of the bank. At December 31, 2019, all accounts with this bank were closed.
88
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HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 27 -- Condensed Financial Information of HCI Group, Inc.
Condensed financial information of HCI Group, Inc. is as follows:
Balance Sheets
Assets
Cash and cash equivalents
Fixed-maturity securities, available for sale, at fair value
Equity securities, at fair value
Short-term investments
Limited partnership investments, at equity
Note receivable – related party
Investment in subsidiaries
Property and equipment, net
Income tax receivable
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accrued expenses and other liabilities
Income tax payable
Deferred income taxes, net
Revolving credit facility
Long-term debt
Due to related parties
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
89
December 31,
2019
2018
$
$
$
$
17,738 $
745
6,689
—
21,405
1,280
290,675
345
—
4,466
343,343 $
6,526 $
1,443
2,587
9,750
134,080
3,414
157,800
185,543
343,343 $
42,292
38,224
7,299
25,275
21,711
1,280
290,469
445
3,019
1,136
431,150
4,772
—
3,594
—
219,301
22,042
249,709
181,441
431,150
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Statements of Income
Net investment income
Net realized investment (losses) gains
Net unrealized investment gains (losses)
Other-than-temporary impairment losses
Loss on repurchases of senior notes
Interest expense
Operating expenses
Loss before income tax benefit and equity in income of subsidiaries
Income tax benefit
Net loss before equity in income of subsidiaries
Equity in income of subsidiaries
Net income (loss)
90
Years Ended December 31,
2019
2018
2017
$
$
2,295 $
(541 )
1,385
—
—
(12,042 )
(6,353)
(15,256 )
3,092
(12,164 )
38,740
26,576 $
5,348 $
1,544
(1,514)
(80)
—
(17,007 )
(5,429)
(17,138 )
1,856
(15,282 )
33,007
17,725 $
2,799
367
92
(209 )
(743 )
(15,704 )
(5,489)
(18,887 )
9,605
(9,282)
2,389
(6,893)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Stock-based compensation
Net realized investment losses (gains)
Net unrealized investment (gains) losses
Amortization of premiums (discounts) on investments in
fixed-maturity securities
Depreciation and amortization
Net income from limited partnership investments
Distributions from limited partnership interests
Other-than-temporary impairment losses
Loss on repurchases of senior notes
Loss from disposal of property and equipment
Equity in income of subsidiaries
Deferred income taxes
Changes in operating assets and liabilities:
Income taxes
Other assets
Accrued expenses and other liabilities
Due to related parties
Net cash used in operating activities
Cash flows from investing activities:
Investment in limited partnership interest
Investment in note receivable – related party
Purchase of fixed-maturity securities
Purchase of equity securities
Purchase of short-term and other investments
Purchase of property and equipment
Proceeds from sales of fixed-maturity securities
Proceeds from calls, repayments and maturities of fixed-maturity
securities
Proceeds from sales of equity securities
Proceeds from sales, redemptions and maturities of short-term and other
investments
Collection of note receivable – related party
Distributions from limited partnership interests
Dividends received from subsidiary
Return of capital from subsidiary
Investment in subsidiaries
Net cash provided by investing activities
91
Years Ended December 31,
2019
2018
2017
$
26,576 $
17,725 $
(6,893)
3,638
541
(1,385)
66
5,194
(701 )
1,661
—
—
—
(38,740 )
(916 )
4,462
(3,042)
1,750
(16,754 )
(17,650 )
(1,602)
—
(234 )
(8,733)
(187 )
(176 )
477
35,361
9,906
25,733
—
948
44,000
6,000
(5,000)
106,493
2,550
(1,544)
1,514
(3 )
7,737
(3,007)
1,495
80
—
—
(33,007 )
1,075
4
(144 )
273
(2,600)
(7,852)
(5,125)
—
(5,864)
(16,913 )
(50,510 )
(154 )
2,215
—
20,698
25,401
6,000
158
42,000
10,000
—
27,906
2,630
(367 )
(92)
51
6,673
(1,354)
881
209
743
17
(2,389)
(4,224)
(1,461)
(106 )
1,544
(54,896 )
(59,034 )
(4,611)
(7,280)
(31,034 )
(12,483 )
—
(306 )
667
—
8,886
—
—
11,758
105,000
—
—
70,597
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Statements of Cash Flows (Continued)
Cash flows from financing activities:
Repurchases of common stock
Repurchases of common stock under share repurchase plan
Repurchases of senior notes
Debt issuance costs paid
Cash dividends paid to stockholders
Cash dividends received under share repurchase forward contract
Proceeds from revolving credit facility
Proceeds from exercise of stock options
Proceeds from issuance of long-term debt
Repayment of long-term debt
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
92
Years Ended December 31,
2019
2018
2017
(1,203)
(18,851 )
—
(459 )
(13,012 )
306
9,750
63
—
(89,991 )
(113,397)
(1,151)
(20,015 )
—
—
(11,318 )
967
—
—
—
—
(31,517 )
(24,554 )
42,292
17,738 $
(11,463 )
53,755
42,292 $
$
(30,718 )
(15,154 )
(40,250 )
(4,975)
(13,906 )
1,073
—
75
143,750
—
39,895
51,458
2,297
53,755
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 28 -- Subsequent Events
On February 28, 2020, the Company entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of
$10,000. The agreement bears interest at a fixed rate of 3.90% and is secured by the property in Melbourne, Florida and the assignment of associated lease
agreements. Approximately $60 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of $5,007
including principal and unpaid interest payable on March 1, 2032. The promissory note may be repaid in full at any time as long as the Company provides at
least 60 days’ written notice and pays a prepayment premium and a processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due
in February 2020.
On February 5, 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”). Under
the agreement, Anchor will cancel all its policies as of April 1, 2020 and HCPCI will offer short-term replacement policies to those policyholders, who are under
no obligation to accept them. The replacement policies will have substantially the same terms and rates as the cancelled polices and will expire on the same
dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI will offer renewals to those
policyholders at its own rates and terms. At April 1, 2020, HCPCI expects to offer up to approximately 43,000 replacement policies, representing annualized
premiums of up to $69,000. In addition, HCPCI will pay a cash bonus at the agreed rate ($50 per $1,000 of premium in force), provided that Anchor is in
compliance with the covenants specified in the agreement.
On January 21, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are scheduled for
payment on March 20, 2020 to stockholders of record on February 21, 2020.
On January 16, 2020, the Company granted 40,000 shares of restricted stock and 110,000 options to purchase the Company’s common shares at an
exercise price of $48 per share to its chief executive officer, Paresh Patel. The options will expire on January 16, 2030. These share-based awards were granted
pursuant to the 2012 Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by the Company. The grant date fair
values of the restricted stock and options were $1,839 and $1,234, respectively.
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ITEM 9 – Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure
None.
ITEM 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report (December 31, 2019). Our disclosure controls and procedures are
intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and
communicated to our management, including the principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.
Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Annual
Report, our disclosure controls and procedures were effective.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our management, with the participation of our principal executive officer and principal financial officer,
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our principal executive officer and
principal financial officer concluded that, as of December 31, 2019, our internal control over financial reporting was effective.
Dixon Hughes Goodman, LLP, an independent registered public accounting firm, has audited the 2019 consolidated financial statements included in
this Annual Report on Form 10-K and, as part of their audit, has issued an attestation report, included herein, on our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B – Other Information
None.
94
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ITEM 10 – Directors, Executive Officers and Corporate Governance
Code of Ethics
PART III
We have adopted a code of ethics applicable to all of our employees and directors, including our Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial officer). We have posted the text of our code of ethics to our Internet web site: www.hcigroup.com. Select “Investor
Information” on the top and then select “Corporate Governance” and then “Code of Conduct.” We intend to disclose any change to or waiver from our code of
ethics by posting such change or waiver to our Internet web site within the same section as described above.
The other information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2019.
ITEM 11 – Executive Compensation
The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders,
which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2019.
ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders,
which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2019.
Securities authorized for issuance under equity compensation plans are summarized under Part II – Item 5 of this Form 10-K.
ITEM 13 – Certain Relationships and Related Transactions, and Director Independence
The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders,
which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2019.
ITEM 14 – Principal Accounting Fees and Services
The following table sets forth the aggregate fees for services related to the years ended December 31, 2019 and 2018 provided by Dixon Hughes
Goodman, LLP, our principal accountant:
Audit fees (a)
All other fees (b)
2019
2018
$
$
390 $
—
390 $
385
9
394
(a)
(b)
Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements, review of our quarterly financial statements included in
our quarterly reports on Form 10-Q, and audit services provided in connection with other statutory and regulatory filings.
All Other Fees represent fees billed for services provided to us not otherwise included in the category above.
The Audit Committee pre-approved all 2019 engagements and fees for services provided by our principal accountant.
Other information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2019.
95
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ITEM 15 – Exhibits, Financial Statement Schedules
(a)
Financial Statements, Financial Statement Schedules and Exhibits
PART IV
(1)
(2)
Consolidated Financial Statements: See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Financial Statement Schedules:
Any supplemental information we are required to file with respect to our property and casualty insurance operations is included in Part II, Item 8 of this
Form 10-K or is not applicable.
(3)
Exhibits: See the exhibit listing set forth below:
The following documents are filed as part of this report:
EXHIBIT
NUMBER
3.1
3.1.1
3.2
4.1
4.8
4.9
4.10
4.11
DESCRIPTION
Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7,
2013.
Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred
Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed October 18, 2013.
Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed September 13, 2019.
Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed November 7, 2013.
Indenture, dated December 11, 2013, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. (including Global Note).
Incorporated by reference to Exhibit 4.1 to our Form 8-K filed December 12, 2013.
See Exhibits 3.1, 3.1.1 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining
certain rights of security holders.
Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to
Exhibit 4.1 of our Form 8-K filed March 3, 2017.
Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form 8-K filed
March 3, 2017.
10.5**
Restated HCI Group, Inc. 2012 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.1 of our Form 8-K filed March 23, 2017.
10.6**
10.7**
10.8
10.17
10.18
10.19
HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the
correspondingly numbered exhibit to our Form 10-Q filed August 29, 2008.
Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the
corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.
Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2016, issued to Homeowners Choice Property & Casualty
Insurance Company, Inc. by subscribing reinsurers (National Fire). Portions of this exhibit have been omitted pursuant to a request for confidential
treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2017 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by
reference to the corresponding number exhibit to our Form 10-Q filed August 3, 2017.
Property Catastrophe Second Event Excess of Loss Reinsurance Contract effective June 1, 2017 issued to Homeowners Choice Property &
Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential
treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2017 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by
reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.
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10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Property Catastrophe Fifth Excess of Loss Reinsurance Contract (Odyssey Re) effective June 1, 2018 issued to Homeowners Choice Property &
Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to
a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Property Catastrophe First Excess of Loss Reinsurance Contract (Endurance) effective June 1, 2018 issued to Homeowners Choice Property &
Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to
a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Assumption Agreement effective October 15, 2014 by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and Citizens
Property Insurance Corporation. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed January 28, 2015.
Assumption Agreement effective November 9, 2017 by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and
Citizens Property Insurance Corporation. Incorporated by reference to Exhibit 10.24 of our Form 8-K filed December 21, 2017.
Property Catastrophe First Excess of Loss Reinsurance Contract (Ren Re) effective June 1, 2018 issued to Homeowners Choice Property &
Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to
a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat U8GR0006) effective June 1, 2018 issued to Homeowners Choice
Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3,
2018.
Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat U8GR0008) effective June 1, 2018 issued to Homeowners Choice
Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3,
2018.
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Working Layer Catastrophe Excess of Loss Reinsurance Contract (Endurance) effective June 1, 2018 issued to Homeowners Choice Property &
Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to
a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.
Reimbursement Contract effective June 1, 2018 between Homeowners Choice Property & Casualty Insurance Company and the State Board of
Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our
Form 10-Q filed August 3, 2018.
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty
Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
97
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.40
10.41
10.42
10.43
10.44
10.45
10.46**
10.47
10.57
10.58
10.59
10.60
10.88**
10.89**
10.99**
Top Layer Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty
Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty
Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance
Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.
Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR000D) effective June 1, 2019 issued to Homeowners Choice
Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7,
2019.
Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR0008) effective June 1, 2019 issued to Homeowners Choice
Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7,
2019.
Reimbursement Contract effective June 1, 2019 between Homeowners Choice Property & Casualty Insurance Company and the State Board of
Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our
Form 10-Q filed August 7, 2019.
Written Description of Non-Employee Director Compensation Arrangement adopted September 9, 2019 establishing compensation of our non-
employee directors. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 6, 2019.
Policy Replacement Agreement, dated February 12, 2020, by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and
Anchor Property & Casualty Insurance Company together with Anchor Insurance Managers, Inc. Incorporated by reference to Exhibit 99.1 of our
Form 8-K filed February 14, 2020.
Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 of our Form 10-Q for the quarter ended March 31,
2014 filed May 1, 2014.
Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc.,
as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed February 28,
2017.
Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated
by reference to Exhibit 10.1 of our Form 8-K filed March 3, 2017.
Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank.
Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018.
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.2
to our Form 8-K filed January 11, 2017.
Employment Agreement between Paresh Patel and HCI Group, Inc. dated December 30, 2016. Incorporated by reference to the exhibit numbered
99.1 to our Form 8-K filed December 30, 2016.
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.1 to our
Form 8-K filed January 11, 2017.
10.100**
Restricted Stock Award Contract between Mark Harmsworth and HCI Group, Inc. dated December 5, 2016. Incorporated by reference to the
corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.
10.101**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.1 to our
Form 8-K filed February 14, 2018.
10.102**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.2
to our Form 8-K filed February 14, 2018.
98
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.103**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.1 to
our Form 8-K filed January 22, 2019.
10.104**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.2
to our Form 8-K filed January 22, 2019.
10.105**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. date January 16, 2020. Incorporated by reference to exhibit 99.1 to our
Form 8-K filed January 23, 2020.
10.106**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to exhibit 99.2
to our Form 8-K filed January 23, 2020.
14
21
23.1
31.1
31.2
32.1
32.2
Code of Conduct of HCI Group, Inc. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.
Subsidiaries of HCI Group, Inc.
Consent of Dixon Hughes Goodman LLP.
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF XBRL Definition Linkbase.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
**
Management contract or compensatory plan.
99
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SIGNATURES
March 6, 2020
HCI GROUP, INC.
By
/s/ Paresh Patel
Paresh Patel, Chief Executive Officer and
Chairman of The Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
By
/s/ Paresh Patel
Paresh Patel, Chief Executive Officer and
Chairman of The Board of Directors
(Principal Executive Officer)
By
By
By
By
By
By
By
By
By
/s/ James Mark Harmsworth
James Mark Harmsworth,
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Wayne Burks
Wayne Burks, Director
/s/ James Macchiarola
James Macchiarola, Director
/s/ Sanjay Madhu
Sanjay Madhu, Director
/s/ Harish M. Patel
Harish M. Patel, Director
/s/ Gregory Politis
Gregory Politis, Director
/s/ Anthony Saravanos
Anthony Saravanos, Director
/s/ Loreen Spencer
Loreen Spencer, Director
/s/ Susan Watts
Susan Watts, Director
A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
100
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of December 31, 2019, the Company had the following active subsidiaries:
HCI GROUP, INC.
Subsidiaries
Wholly-owned subsidiaries of HCI Group, Inc.
Homeowners Choice Property & Casualty Insurance Company, Inc.
Homeowners Choice Managers, Inc.
Claddaugh Casualty Insurance Company Ltd.
Cypress Property Management Services, Inc.
Cypress Claims Services, Inc.
Cypress Tech Development Company, Inc.
Exzeo USA, Inc.
Greenleaf Capital LLC
Omega Insurance Agency, Inc.
Southern Administration, Inc.
TypTap Insurance Company
TypTap Management Company
Enclave Services, Inc.
HCI Insurance Administration Services, Inc.
Wholly-owned subsidiaries of Greenleaf Capital LLC
Gators on the Pass Holdings, LLC
John’s Pass Marina Investment Holdings, LLC
JP Beach Holdings, LLC
Pass Investment Holdings, LLC
TI Marina Company, Inc.
Treasure Island Restaurant Company, Inc.
TV Investment Holdings LLC
Silver Springs Property Investments LLC
Melbourne FMA, LLC
FMKT Mel Owner LLC
HCPCI Holdings LLC
Sorrento PBX LLC
Greenleaf Essence, LLC
Century Park Holdings, LLC
Gulf To Bay LM, LLC
Westview Holdings, LLC
Mirama Property Holdings, LLC
Wholly-owned subsidiary of HCI Insurance Administration Services, Inc.
Griston Claim Services, Inc.
Wholly-owned subsidiary of Cypress Tech Development Company, Inc.
Exzeo Software Private Limited
Exhibit 21
State or Sovereign Power
of Incorporation
Florida
Florida
Bermuda
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
State or Sovereign Power
of Incorporation
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida
State or Sovereign Power
of Incorporation
Florida
State or Sovereign Power
of Incorporation
India
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consent of Dixon Hughes Goodman LLP
Independent Registered Public Accounting Firm
Exhibit 23.1
To the Board of Directors
HCI Group, Inc. and Subsidiaries:
We consent to the incorporation by reference in the registration statements (Nos. 333-180322 and 333-185228) on Form S-3 and registration
statements (Nos. 333-154436 and 333-184227) on Form S-8 of HCI Group, Inc. of our reports dated March 6, 2020, with respect to the consolidated financial
statements of HCI Group, Inc. and Subsidiaries and the effectiveness of internal control over financial reporting, which reports appear in HCI Group, Inc.’s 2019
Annual Report on Form 10-K.
/s/ Dixon Hughes Goodman LLP
DIXON HUGHES GOODMAN, LLP
Tampa, Florida
March 6, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Paresh Patel, certify that:
1. I have reviewed this annual report on Form 10-K of HCI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
March 6, 2020
/s/ PARESH PATEL
Paresh Patel
President and Chief Executive Officer
(Principal Executive Officer)
A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, James Mark Harmsworth, certify that:
1. I have reviewed this annual report on Form 10-K of HCI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
March 6, 2020
/s/ JAMES MARK HARMSWORTH
James Mark Harmsworth
Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Exhibit 32.1
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of HCI Group, Inc. (the “Company”), hereby
certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2019 as filed with the
Securities and Exchange Commission on March 6, 2020 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
/s/ PARESH PATEL
Paresh Patel
President and Chief Executive Officer
March 6, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of HCI Group, Inc. (the “Company”), hereby
certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2019 as filed with the
Securities and Exchange Commission on March 6, 2020 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
/s/ JAMES MARK HARMSWORTH
James Mark Harmsworth
Chief Financial Officer
March 6, 2020
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.