UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2023
OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number001-34126
001-34126
HCI Group, Inc.
(Exact name of Registrantregistrant as specified in its charter)
Florida | 20-5961396 | |
(State of Incorporation) | (IRS Employer |
5300 West Cypress Street, Suite 100
3802 Coconut Palm Drive
Tampa, FL 33607
33619
(Address, including zip code, of principal executive offices)
(813)849-9500
(813) 849-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Shares, no par value | HCI | New York Stock Exchange |
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ ☑ No ☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the Registrantregistrant 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 Registrantregistrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒☑
The aggregate number of shares of the Registrant’s Common Stock,registrant’s common stock, no par value, outstanding on October 26, 2017May 1, 2023 was 9,781,952.8,596,673.
HCI GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page | ||||||||||
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Item 1 | ||||||||||
1-2 | ||||||||||
Three | 3 | |||||||||
Three | 4 | |||||||||
5-6 | ||||||||||
Three months ended | 7-9 | |||||||||
10-37 | ||||||||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||
38-49 | ||||||||||
Item 3 | Quantitative and Qualitative Disclosures | |||||||||
50-51 | ||||||||||
Item 4 | 52 | |||||||||
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Item | ||||||||||
53 | ||||||||||
Item 1A | 53 | |||||||||
Item 2 | ||||||||||
53-54 | ||||||||||
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Item 3 | 54 | |||||||||
Item 4 | ||||||||||
54 | ||||||||||
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Item | ||||||||||
54 | ||||||||||
| 55-59 | |||||||||
60 | ||||||||||
Certifications | ||||||||||
PART I – FINANCIAL INFORMATION
HCI GROUP, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
Fixed-maturity securities, available for sale, at fair value (amortized cost: $253,162 and $167,231, respectively) | $ | 256,102 | $ | 166,248 | ||||
Equity securities, available for sale, at fair value (cost: $58,242 and $47,750, respectively) | 63,023 | 53,035 | ||||||
Equity securities, trading, at fair value (cost: $929 and $0, respectively) | 1,003 | — | ||||||
Limited partnership investments, at equity | 20,998 | 29,263 | ||||||
Investment in unconsolidated joint venture, at equity | 1,664 | 2,102 | ||||||
Real estate investments (Note 4 – Consolidated Variable Interest Entity) | 48,961 | 48,086 | ||||||
|
|
|
| |||||
Total investments | 391,751 | 298,734 | ||||||
Cash and cash equivalents (Note 4 – Consolidated Variable Interest Entity) | 292,438 | 280,531 | ||||||
Accrued interest and dividends receivable | 2,241 | 1,654 | ||||||
Income taxes receivable | 24,081 | 2,811 | ||||||
Premiums receivable | 27,179 | 17,276 | ||||||
Prepaid reinsurance premiums | 28,352 | 24,554 | ||||||
Reinsurance recoverable: | ||||||||
Paid losses and loss adjustment expenses | 17 | — | ||||||
Unpaid losses and loss adjustment expenses | 213,729 | — | ||||||
Deferred policy acquisition costs | 21,150 | 16,639 | ||||||
Property and equipment, net | 12,356 | 11,374 | ||||||
Intangible assets, net | 4,498 | 4,899 | ||||||
Deferred income taxes, net | — | 250 | ||||||
Other assets (Note 4 – Consolidated Variable Interest Entity) | 11,461 | 11,342 | ||||||
|
|
|
| |||||
Total assets | $ | 1,029,253 | $ | 670,064 | ||||
|
|
|
| |||||
| (continued) | ||||||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (Unaudited) |
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Fixed-maturity securities, available for sale, at fair value (amortized cost: $531,899 |
| $ | 524,756 |
|
| $ | 483,901 |
|
Equity securities, at fair value (cost: $38,575 and $36,272, respectively) |
|
| 37,415 |
|
|
| 34,583 |
|
Limited partnership investments |
|
| 24,520 |
|
|
| 25,702 |
|
Investment in unconsolidated joint venture, at equity |
|
| — |
|
|
| 18 |
|
Real estate investments |
|
| 43,562 |
|
|
| 71,388 |
|
Total investments |
|
| 630,253 |
|
|
| 615,592 |
|
Cash and cash equivalents |
|
| 302,025 |
|
|
| 234,863 |
|
Restricted cash |
|
| 2,987 |
|
|
| 2,900 |
|
Accrued interest and dividends receivable |
|
| 2,525 |
|
|
| 1,952 |
|
Income taxes receivable |
|
| 707 |
|
|
| 2,807 |
|
Premiums receivable, net (allowance: $10,054 and $5,362, respectively) |
|
| 44,966 |
|
|
| 34,998 |
|
Prepaid reinsurance premiums |
|
| 27,063 |
|
|
| 66,627 |
|
Reinsurance recoverable, net of allowance for credit losses: |
|
|
|
|
|
| ||
Paid losses and loss adjustment expenses (allowance: $0 and $0, respectively) |
|
| 36,896 |
|
|
| 71,594 |
|
Unpaid losses and loss adjustment expenses (allowance: $453 and $454, respectively) |
|
| 559,804 |
|
|
| 616,765 |
|
Deferred policy acquisition costs |
|
| 46,632 |
|
|
| 45,522 |
|
Property and equipment, net |
|
| 26,734 |
|
|
| 17,910 |
|
Right-of-use assets - operating leases |
|
| 1,466 |
|
|
| 777 |
|
Intangible assets, net |
|
| 7,686 |
|
|
| 10,578 |
|
Funds withheld for assumed business |
|
| 45,274 |
|
|
| 48,772 |
|
Other assets |
|
| 36,104 |
|
|
| 31,671 |
|
Total assets |
| $ | 1,771,122 |
|
| $ | 1,803,328 |
|
(continued)
1
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - continued– (Continued)
(Dollar amounts in thousands)
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (Unaudited) |
|
|
|
| ||
Liabilities and Equity |
|
|
|
|
|
| ||
Losses and loss adjustment expenses |
| $ | 806,308 |
|
| $ | 863,765 |
|
Unearned premiums |
|
| 387,833 |
|
|
| 368,047 |
|
Advance premiums |
|
| 25,834 |
|
|
| 18,587 |
|
Reinsurance payable on paid losses and loss adjustment expenses |
|
| 7,043 |
|
|
| 8,606 |
|
Ceded reinsurance premiums payable |
|
| 14,123 |
|
|
| 17,646 |
|
Accrued expenses |
|
| 20,633 |
|
|
| 14,534 |
|
Reinsurance recovered in advance on unpaid losses |
|
| — |
|
|
| 19,863 |
|
Deferred income taxes, net |
|
| 3,160 |
|
|
| 1,704 |
|
Long-term debt |
|
| 196,158 |
|
|
| 211,687 |
|
Lease liabilities - operating leases |
|
| 1,422 |
|
|
| 721 |
|
Other liabilities |
|
| 35,886 |
|
|
| 23,361 |
|
Total liabilities |
|
| 1,498,400 |
|
|
| 1,548,521 |
|
Commitments and contingencies (Note 21) |
|
|
|
|
|
| ||
Redeemable noncontrolling interest (Note 18) |
|
| 92,865 |
|
|
| 93,553 |
|
Equity: |
|
|
|
|
|
| ||
Common stock (no par value, 40,000,000 shares authorized, 8,596,673 and 8,598,682 |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 332 |
|
|
| — |
|
Retained income |
|
| 185,028 |
|
|
| 172,482 |
|
Accumulated other comprehensive loss, net of taxes |
|
| (5,098 | ) |
|
| (9,886 | ) |
Total stockholders’ equity |
|
| 180,262 |
|
|
| 162,596 |
|
Noncontrolling interests |
|
| (405 | ) |
|
| (1,342 | ) |
Total equity |
|
| 179,857 |
|
|
| 161,254 |
|
Total liabilities, redeemable noncontrolling interest and equity |
| $ | 1,771,122 |
|
| $ | 1,803,328 |
|
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
Liabilities and Stockholders’ Equity | ||||||||
Losses and loss adjustment expenses | $ | 344,672 | $ | 70,492 | ||||
Unearned premiums | 206,174 | 175,803 | ||||||
Advance premiums | 10,248 | 4,651 | ||||||
Assumed reinsurance balances payable | 243 | 3,294 | ||||||
Accrued expenses (Note 4 – Consolidated Variable Interest Entity) | 11,803 | 6,513 | ||||||
Reinsurance recovered in advance on unpaid losses | 9,882 | — | ||||||
Deferred income taxes, net | 3,092 | — | ||||||
Long-term debt | 236,311 | 138,863 | ||||||
Other liabilities (Note 4 – Consolidated Variable Interest Entity) | 13,772 | 26,702 | ||||||
|
|
|
| |||||
Total liabilities | 836,197 | 426,318 | ||||||
|
|
|
| |||||
Commitments and contingencies (Note 16) | ||||||||
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, 9,035,609 and 9,662,761 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively) | — | — | ||||||
Additionalpaid-in capital | — | 8,139 | ||||||
Retained income | 188,313 | 232,964 | ||||||
Accumulated other comprehensive income, net of taxes | 4,743 | 2,643 | ||||||
|
|
|
| |||||
Total stockholders’ equity | 193,056 | 243,746 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 1,029,253 | $ | 670,064 | ||||
|
|
|
| |||||
See accompanying Notes to Consolidated Financial Statements.Statements (unaudited).
2
2
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Gross premiums earned | $ | 88,669 | $ | 92,542 | $ | 270,376 | $ | 286,273 | ||||||||
Premiums ceded | (44,705 | ) | (29,242 | ) | (101,529 | ) | (105,998 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net premiums earned | 43,964 | 63,300 | 168,847 | 180,275 | ||||||||||||
Net investment income | 2,878 | 2,785 | 8,522 | 6,000 | ||||||||||||
Net realized and unrealized investment (losses) gains | (152 | ) | 583 | 2,350 | 899 | |||||||||||
Net other-than-temporary impairment losses recognized in income: | ||||||||||||||||
Total other-than-temporary impairment losses | (474 | ) | (575 | ) | (864 | ) | (1,211 | ) | ||||||||
Portion of loss recognized in other comprehensive income, before taxes | — | 351 | — | (230 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net other-than-temporary impairment losses | (474 | ) | (224 | ) | (864 | ) | (1,441 | ) | ||||||||
Policy fee income | 905 | 972 | 2,721 | 2,967 | ||||||||||||
Gain on repurchases of convertible senior notes | — | — | — | 153 | ||||||||||||
Gain on bargain purchase | — | 2,071 | — | 2,071 | ||||||||||||
Other | 369 | 321 | 1,207 | 1,151 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 47,490 | 69,808 | 182,783 | 192,075 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Expenses | ||||||||||||||||
Losses and loss adjustment expenses | 89,231 | 25,909 | 142,425 | 79,261 | ||||||||||||
Policy acquisition and other underwriting expenses | 9,926 | 10,536 | 29,645 | 32,525 | ||||||||||||
Salaries and wages | 4,605 | 5,945 | 15,051 | 17,009 | ||||||||||||
Interest expense | 4,408 | 2,672 | 12,328 | 8,112 | ||||||||||||
Loss on repurchases of senior notes | — | — | 743 | — | ||||||||||||
Other operating expenses | 5,338 | 4,717 | 15,162 | 14,213 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 113,508 | 49,779 | 215,354 | 151,120 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
(Loss) income before income taxes | (66,018 | ) | 20,029 | (32,571 | ) | 40,955 | ||||||||||
Income tax (benefit) expense | (25,472 | ) | 8,696 | (13,587 | ) | 16,542 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net (loss) income | $ | (40,546 | ) | $ | 11,333 | $ | (18,984 | ) | $ | 24,413 | ||||||
|
|
|
|
|
|
|
| |||||||||
Basic (loss) earnings per share | $ | (4.44 | ) | $ | 1.17 | $ | (2.05 | ) | $ | 2.48 | ||||||
|
|
|
|
|
|
|
| |||||||||
Diluted (loss) earnings per share | $ | (4.44 | ) | $ | 1.10 | $ | (2.05 | ) | $ | 2.41 | ||||||
|
|
|
|
|
|
|
| |||||||||
Dividends per share | $ | 0.35 | $ | 0.30 | $ | 1.05 | $ | 0.90 | ||||||||
|
|
|
|
|
|
|
| |||||||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Revenue |
|
|
|
|
|
| ||
Gross premiums earned |
| $ | 180,068 |
|
| $ | 178,925 |
|
Premiums ceded |
|
| (70,509 | ) |
|
| (53,162 | ) |
Net premiums earned |
|
| 109,559 |
|
|
| 125,763 |
|
Net investment income |
|
| 17,715 |
|
|
| 2,868 |
|
Net realized investment losses |
|
| (1,149 | ) |
|
| (314 | ) |
Net unrealized investment gains (losses) |
|
| 529 |
|
|
| (3,576 | ) |
Policy fee income |
|
| 1,090 |
|
|
| 1,057 |
|
Other |
|
| 1,285 |
|
|
| 1,242 |
|
Total revenue |
|
| 129,029 |
|
|
| 127,040 |
|
Expenses |
|
|
|
|
|
| ||
Losses and loss adjustment expenses |
|
| 60,565 |
|
|
| 72,704 |
|
Policy acquisition and other underwriting expenses |
|
| 22,720 |
|
|
| 29,408 |
|
General and administrative personnel expenses |
|
| 13,502 |
|
|
| 14,034 |
|
Interest expense |
|
| 2,801 |
|
|
| 601 |
|
Other operating expenses |
|
| 6,305 |
|
|
| 6,292 |
|
Total expenses |
|
| 105,893 |
|
|
| 123,039 |
|
Income before income taxes |
|
| 23,136 |
|
|
| 4,001 |
|
Income tax expense |
|
| 5,343 |
|
|
| 1,210 |
|
Net income |
|
| 17,793 |
|
|
| 2,791 |
|
Net income attributable to redeemable noncontrolling |
|
| (2,324 | ) |
|
| (2,248 | ) |
Net (income) loss attributable to noncontrolling interests |
|
| (131 | ) |
|
| 360 |
|
Net income after noncontrolling interests |
| $ | 15,338 |
|
| $ | 903 |
|
Basic earnings per share |
| $ | 1.78 |
|
| $ | 0.09 |
|
Diluted earnings per share |
| $ | 1.54 |
|
| $ | 0.09 |
|
See accompanying Notes to Consolidated Financial Statements.
3
3
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Net (loss) income | $ | (40,546 | ) | $ | 11,333 | $ | (18,984 | ) | $ | 24,413 | ||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income: | ||||||||||||||||
Change in unrealized gain on investments: | ||||||||||||||||
Net unrealized gain arising during the period | 2,155 | 2,234 | 4,822 | 10,290 | ||||||||||||
Other-than-temporary impairment loss charged to income | 474 | 224 | 864 | 1,441 | ||||||||||||
Call and repayment losses charged to investment income | — | 3 | 9 | 14 | ||||||||||||
Reclassification adjustment for net realized losses (gains) | 226 | (583 | ) | (2,276 | ) | (899 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net change in unrealized gain | 2,855 | 1,878 | 3,419 | 10,846 | ||||||||||||
Deferred income taxes on above change | (1,101 | ) | (724 | ) | (1,319 | ) | (4,184 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total other comprehensive income, net of income taxes | 1,754 | 1,154 | 2,100 | 6,662 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive (loss) income | $ | (38,792 | ) | $ | 12,487 | $ | (16,884 | ) | $ | 31,075 | ||||||
|
|
|
|
|
|
|
| |||||||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net income |
| $ | 17,793 |
|
| $ | 2,791 |
|
Other comprehensive income (loss): |
|
|
|
|
|
| ||
Change in unrealized gain (loss) on investments: |
|
|
|
|
|
| ||
Net unrealized gains (losses) arising during the period |
|
| 2,415 |
|
|
| (4,151 | ) |
Reclassification adjustment for net realized losses |
|
| 738 |
|
|
| 429 |
|
Net change in unrealized gains (losses) |
|
| 3,153 |
|
|
| (3,722 | ) |
Deferred income taxes on above change |
|
| 1,810 |
|
|
| 938 |
|
Total other comprehensive income (loss), net of income taxes |
|
| 4,963 |
|
|
| (2,784 | ) |
Comprehensive income |
|
| 22,756 |
|
|
| 7 |
|
Comprehensive (income) loss attributable to noncontrolling interests |
|
| (306 | ) |
|
| 461 |
|
Comprehensive income after noncontrolling interests |
| $ | 22,450 |
|
| $ | 468 |
|
See accompanying Notes to Consolidated Financial Statements.
4
4
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsEquity
(Unaudited)For the Three Months Ended March 31, 2023
(Unaudited)
(AmountsDollar amounts in thousands)thousands, except per share amount)
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (18,984 | ) | $ | 24,413 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Stock-based compensation | 3,362 | 3,072 | ||||||
Net amortization of premiums on investments in fixed-maturity securities | 884 | 475 | ||||||
Depreciation and amortization | 6,945 | 3,968 | ||||||
Deferred income tax benefits | (3,822 | ) | (4,967 | ) | ||||
Net realized and unrealized investment gains | (2,350 | ) | (899 | ) | ||||
Other-than-temporary impairment losses | 864 | 1,441 | ||||||
Income from unconsolidated joint venture | (126 | ) | (153 | ) | ||||
Distribution received from unconsolidated joint venture | 147 | — | ||||||
Gain on repurchases of convertible senior notes | — | (153 | ) | |||||
Gain on bargain purchase | — | (2,071 | ) | |||||
Loss on repurchases of senior notes | 743 | — | ||||||
Net income from limited partnership interests | (1,724 | ) | (54 | ) | ||||
Distributions received from limited partnership interests | 854 | 428 | ||||||
Foreign currency remeasurement (gain) loss | (31 | ) | 9 | |||||
Other | 172 | 5 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest and dividends receivable | (587 | ) | (305 | ) | ||||
Income taxes | (21,270 | ) | 2,510 | |||||
Premiums receivable | (9,903 | ) | (6,495 | ) | ||||
Prepaid reinsurance premiums | (3,798 | ) | 11,048 | |||||
Reinsurance recoverable | (213,746 | ) | — | |||||
Deferred policy acquisition costs | (4,511 | ) | (2,619 | ) | ||||
Other assets | 2,441 | 32,073 | ||||||
Losses and loss adjustment expenses | 274,180 | 5,505 | ||||||
Unearned premiums | 30,371 | 22,032 | ||||||
Advance premiums | 5,597 | 4,894 | ||||||
Assumed reinsurance balances payable | (3,051 | ) | (1,084 | ) | ||||
Reinsurance recovered in advance on unpaid losses | 9,882 | — | ||||||
Accrued expenses and other liabilities | (1,146 | ) | (1,180 | ) | ||||
|
|
|
| |||||
Net cash provided by operating activities | 51,393 | 91,893 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Investments in limited partnership interests | (2,623 | ) | (4,670 | ) | ||||
Acquisition of real estate business, net of cash acquired | — | (12,056 | ) | |||||
Distributions received from limited partnership interests | 11,758 | — | ||||||
Proceeds from investment in real estate under acquisition, development and construction arrangement | — | 10,200 | ||||||
Distribution from unconsolidated joint venture | 417 | — | ||||||
Purchase of property and equipment | (1,872 | ) | (543 | ) | ||||
Purchase of real estate investments | (2,095 | ) | (1,522 | ) | ||||
Purchase of fixed-maturity securities - available for sale | (105,258 | ) | (79,232 | ) | ||||
Purchase of equity securities - available for sale | (34,512 | ) | (13,259 | ) | ||||
Purchase of equity securities - trading | (1,507 | ) | — | |||||
Proceeds from sales of fixed-maturity securities - available for sale | 9,638 | 37,415 | ||||||
Proceeds from calls, repayments and maturities of fixed-maturity securities - available for sale | 8,786 | 2,637 | ||||||
Proceeds from sales of equity securities - available for sale | 25,729 | 14,155 | ||||||
Proceeds from sales of equity securities - trading | 580 | — | ||||||
|
|
|
| |||||
Net cash used in investing activities | (90,959 | ) | (46,875 | ) | ||||
|
|
|
| |||||
| (continued) | ||||||||
|
| Common Stock |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
|
| Noncontrolling |
|
| Total |
| |||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Net of Tax |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||
Balance at December 31, 2022 |
|
| 8,598,682 |
|
| $ | — |
|
| $ | — |
|
| $ | 172,482 |
|
| $ | (9,886 | ) |
| $ | 162,596 |
|
| $ | (1,342 | ) |
| $ | 161,254 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,488 |
|
|
| — |
|
|
| 17,488 |
|
|
| 305 |
|
|
| 17,793 |
|
Net income attributable to redeemable |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,150 | ) |
|
| — |
|
|
| (2,150 | ) |
|
| (174 | ) |
|
| (2,324 | ) |
Total other comprehensive income, net of |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,788 |
|
|
| 4,788 |
|
|
| 175 |
|
|
| 4,963 |
|
Issuance of restricted stock |
|
| 6,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of restricted stock |
|
| (2,125 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase and retirement of common |
|
| (5,884 | ) |
|
| — |
|
|
| (305 | ) |
|
| — |
|
|
| — |
|
|
| (305 | ) |
|
| — |
|
|
| (305 | ) |
Dilution from subsidiary stock-based |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 631 |
|
|
| 631 |
|
Common stock dividends ($0.40 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,432 | ) |
|
| — |
|
|
| (3,432 | ) |
|
| — |
|
|
| (3,432 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,277 |
|
|
| — |
|
|
| — |
|
|
| 1,277 |
|
|
| — |
|
|
| 1,277 |
|
Additional paid-in capital shortfall |
|
| — |
|
|
| — |
|
|
| (640 | ) |
|
| 640 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at March 31, 2023 |
|
| 8,596,673 |
|
| $ | — |
|
| $ | 332 |
|
| $ | 185,028 |
|
| $ | (5,098 | ) |
| $ | 180,262 |
|
| $ | (405 | ) |
| $ | 179,857 |
|
5
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - continued
(Unaudited)
(Amounts in thousands)
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Cash flows from financing activities: | ||||||||
Cash dividends paid | (10,512 | ) | (9,368 | ) | ||||
Cash dividends received under share repurchase forward contract | 788 | 561 | ||||||
Proceeds from exercise of common stock options | 75 | — | ||||||
Proceeds from issuance of long-term debt | 143,859 | 18,200 | ||||||
Repurchases of convertible senior notes | — | (11,347 | ) | |||||
Repurchases of senior notes | (40,250 | ) | — | |||||
Repayment of debt | (718 | ) | (264 | ) | ||||
Repurchases of common stock | (30,636 | ) | (464 | ) | ||||
Repurchases of common stock under share repurchase plan | (6,189 | ) | (18,023 | ) | ||||
Debt issuance costs | (4,975 | ) | (339 | ) | ||||
Tax benefits on stock-based compensation | — | 176 | ||||||
|
|
|
| |||||
Net cash provided by (used in) financing activities | 51,442 | (20,868 | ) | |||||
|
|
|
| |||||
Effect of exchange rate changes on cash | 31 | (8 | ) | |||||
|
|
|
| |||||
Net increase in cash and cash equivalents | 11,907 | 24,142 | ||||||
Cash and cash equivalents at beginning of period | 280,531 | 267,738 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 292,438 | $ | 291,880 | ||||
|
|
|
| |||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 11,506 | $ | 18,824 | ||||
|
|
|
| |||||
Cash paid for interest | $ | 8,647 | $ | 6,417 | ||||
|
|
|
| |||||
Non-cash investing and financing activities: | ||||||||
Unrealized gain on investments inavailable-for-sale securities, net of tax | $ | 2,100 | $ | 6,662 | ||||
|
|
|
| |||||
Details of business acquisition: | ||||||||
Fair value of assets acquired | $ | — | $ | 14,677 | ||||
Less: purchase price | — | (12,250 | ) | |||||
gain on bargain purchase | — | (2,071 | ) | |||||
|
|
|
| |||||
Liabilities assumed | $ | — | $ | 356 | ||||
|
|
|
| |||||
Conversion of revolving credit facility to long-term debt | $ | 9,441 | $ | — | ||||
|
|
|
| |||||
Receivable from sales ofavailable-for-sale securities | $ | 3,034 | $ | 270 | ||||
|
|
|
| |||||
Payable on purchases ofavailable-for-sale securities | $ | 3,014 | $ | 388 | ||||
|
|
|
| |||||
See accompanying Notes to Consolidated Financial Statements.Statements (unaudited).
5
6
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ Equity – (Continued)
NineFor the Three Months Ended September 30, 2017March 31, 2022
(Unaudited)
(Dollar amounts in thousands)thousands, except per share amount)
| Common Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive Income, | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Net of Tax | Equity | |||||||||||||||||||
Balance at December 31, 2016 | 9,662,761 | $ | — | $ | 8,139 | $ | 232,964 | $ | 2,643 | $ | 243,746 | |||||||||||||
Net loss | — | — | — | (18,984 | ) | — | (18,984 | ) | ||||||||||||||||
Total other comprehensive income, net of income taxes | — | — | — | — | 2,100 | 2,100 | ||||||||||||||||||
Exercise of common stock options | 30,000 | — | 75 | — | — | 75 | ||||||||||||||||||
Issuance of restricted stock | 154,936 | — | — | — | — | — | ||||||||||||||||||
Forfeiture of restricted stock | (23,218 | ) | — | — | — | — | — | |||||||||||||||||
Repurchase and retirement of common stock | (434,505 | ) | — | (21,236 | ) | — | — | (21,236 | ) | |||||||||||||||
Repurchase and retirement of common stock under share repurchase plan | (163,265 | ) | — | (6,189 | ) | — | — | (6,189 | ) | |||||||||||||||
Repurchase of common stock under prepaid forward contract | (191,100 | ) | — | (9,400 | ) | — | — | (9,400 | ) | |||||||||||||||
Equity component on 4.25% convertible senior notes (net of offering costs of $543) | — | — | 15,151 | — | — | 15,151 | ||||||||||||||||||
Deferred taxes on debt discount | — | — | (5,845 | ) | — | — | (5,845 | ) | ||||||||||||||||
Common stock dividends | — | — | — | (9,724 | ) | — | (9,724 | ) | ||||||||||||||||
Stock-based compensation | — | — | 3,362 | — | — | 3,362 | ||||||||||||||||||
Additionalpaid-in capital shortfall allocated to retained income | — | — | 15,943 | (15,943 | ) | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at September 30, 2017 | 9,035,609 | $ | — | $ | — | $ | 188,313 | $ | 4,743 | $ | 193,056 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Common Stock |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
|
| Noncontrolling |
|
| Total |
| |||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Net of Tax |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||
Balance at December 31, 2021 |
|
| 10,131,399 |
|
| $ | — |
|
| $ | 76,077 |
|
| $ | 246,790 |
|
| $ | 498 |
|
| $ | 323,365 |
|
| $ | 1,138 |
|
| $ | 324,503 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,978 |
|
|
| — |
|
|
| 2,978 |
|
|
| (187 | ) |
|
| 2,791 |
|
Net income attributable to redeemable |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,075 | ) |
|
| — |
|
|
| (2,075 | ) |
|
| (173 | ) |
|
| (2,248 | ) |
Total other comprehensive loss, net of |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,683 | ) |
|
| (2,683 | ) |
|
| (101 | ) |
|
| (2,784 | ) |
Issuance of restricted stock |
|
| 4,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of restricted stock |
|
| (3,265 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase and retirement of common |
|
| (6,207 | ) |
|
| — |
|
|
| (398 | ) |
|
| — |
|
|
| — |
|
|
| (398 | ) |
|
| — |
|
|
| (398 | ) |
Dilution from subsidiary stock-based |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 758 |
|
|
| 758 |
|
Common stock dividends ($0.40 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,046 | ) |
|
| — |
|
|
| (4,046 | ) |
|
| — |
|
|
| (4,046 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 3,452 |
|
|
| — |
|
|
| — |
|
|
| 3,452 |
|
|
| — |
|
|
| 3,452 |
|
Balance at March 31, 2022 |
|
| 10,125,927 |
|
| $ | — |
|
| $ | 79,131 |
|
| $ | 243,647 |
|
| $ | (2,185 | ) |
| $ | 320,593 |
|
| $ | 1,435 |
|
| $ | 322,028 |
|
See accompanying Notes to Consolidated Financial Statements.
6
7
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated StatementStatements of Stockholders’ Equity - continuedCash Flows
Nine Months Ended September 30, 2016(Unaudited)
(Unaudited)
(Dollar amountsAmounts in thousands)
| Common Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive (Loss) Income, | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Net of Tax | Equity | |||||||||||||||||||
Balance at December 31, 2015 | 10,292,256 | $ | — | $ | 23,879 | $ | 215,634 | $ | (1,791 | ) | $ | 237,722 | ||||||||||||
Net income | — | — | — | 24,413 | — | 24,413 | ||||||||||||||||||
Total other comprehensive income, net of income taxes | — | — | — | — | 6,662 | 6,662 | ||||||||||||||||||
Issuance of restricted stock | 102,440 | — | — | — | — | — | ||||||||||||||||||
Forfeiture of restricted stock | (11,787 | ) | — | — | — | — | — | |||||||||||||||||
Cancellation of restricted stock | (160,000 | ) | — | — | — | — | — | |||||||||||||||||
Repurchase and retirement of common stock | (14,934 | ) | — | (464 | ) | — | — | (464 | ) | |||||||||||||||
Repurchase and retirement of common stock under share repurchase plan | (574,851 | ) | — | (18,023 | ) | — | — | (18,023 | ) | |||||||||||||||
Common stock dividends | — | — | — | (8,807 | ) | — | (8,807 | ) | ||||||||||||||||
Tax benefits on stock-based compensation | — | — | 176 | — | — | 176 | ||||||||||||||||||
Tax shortfalls on stock-based compensation | — | — | (239 | ) | — | — | (239 | ) | ||||||||||||||||
Stock-based compensation | — | — | 3,072 | — | — | 3,072 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at September 30, 2016 | 9,633,124 | $ | — | $ | 8,401 | $ | 231,240 | $ | 4,871 | $ | 244,512 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income after noncontrolling interests |
| $ | 15,338 |
|
| $ | 903 |
|
Net income attributable to noncontrolling interests |
|
| 2,455 |
|
|
| 1,888 |
|
Net income |
|
| 17,793 |
|
|
| 2,791 |
|
Adjustments to reconcile net income to net cash provided by operating |
|
|
|
|
|
| ||
Stock-based compensation expense |
|
| 2,106 |
|
|
| 4,337 |
|
Net accretion of discount on investments in fixed-maturity |
|
| (1,845 | ) |
|
| (3 | ) |
Depreciation and amortization |
|
| 2,230 |
|
|
| 1,516 |
|
Deferred income tax expense (benefit) |
|
| 3,266 |
|
|
| (5,967 | ) |
Net realized investment losses |
|
| 1,149 |
|
|
| 314 |
|
Net unrealized investment (gains) losses |
|
| (529 | ) |
|
| 3,576 |
|
Credit loss expense - reinsurance recoverable |
|
| (1 | ) |
|
| (11 | ) |
Loss from unconsolidated joint venture |
|
| — |
|
|
| 13 |
|
Net income from limited partnership interests |
|
| (553 | ) |
|
| (1,780 | ) |
Distributions received from limited partnership interests |
|
| 303 |
|
|
| 811 |
|
Loss on extinguishment of debt |
|
| 177 |
|
|
| — |
|
Gain on sales of real estate investments |
|
| (8,936 | ) |
|
| — |
|
Foreign currency remeasurement loss |
|
| 1 |
|
|
| 19 |
|
Other non-cash items |
|
| 71 |
|
|
| 11 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Accrued interest and dividends receivable |
|
| (573 | ) |
|
| (321 | ) |
Income taxes |
|
| 2,100 |
|
|
| 7,145 |
|
Premiums receivable, net |
|
| (9,968 | ) |
|
| 28,267 |
|
Prepaid reinsurance premiums |
|
| 39,564 |
|
|
| 14,794 |
|
Reinsurance recoverable |
|
| 91,660 |
|
|
| 7,065 |
|
Deferred policy acquisition costs |
|
| (1,110 | ) |
|
| 4,025 |
|
Funds withheld for assumed business |
|
| 3,498 |
|
|
| (10,352 | ) |
Other assets |
|
| (5,590 | ) |
|
| (3,102 | ) |
Losses and loss adjustment expenses |
|
| (57,457 | ) |
|
| (2,373 | ) |
Unearned premiums |
|
| 19,786 |
|
|
| (1,632 | ) |
Advance premiums |
|
| 7,247 |
|
|
| 10,127 |
|
Reinsurance payable on paid losses and loss adjustment expenses |
|
| (1,563 | ) |
|
| 2,640 |
|
Reinsurance recovered in advance on unpaid losses |
|
| (19,863 | ) |
|
| — |
|
Ceded reinsurance premiums payable |
|
| (3,523 | ) |
|
| 1,581 |
|
Accrued expenses and other liabilities |
|
| 19,669 |
|
|
| (6,142 | ) |
Net cash provided by operating activities |
|
| 99,109 |
|
|
| 57,349 |
|
(continued)
7
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows – (Continued)
(Unaudited)
(Amounts in thousands)
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash flows from investing activities: |
|
|
|
|
|
| ||
Investments in limited partnership interests |
|
| (170 | ) |
|
| — |
|
Return of excess investments in limited partnership interests |
|
| — |
|
|
| 151 |
|
Distributions received from limited partnership interests |
|
| 1,602 |
|
|
| 785 |
|
Distribution received from unconsolidated joint venture |
|
| 18 |
|
|
| — |
|
Purchase of property and equipment |
|
| (1,469 | ) |
|
| (1,861 | ) |
Purchase of real estate investments |
|
| (175 | ) |
|
| — |
|
Purchase of intangible assets |
|
| — |
|
|
| (3,800 | ) |
Purchase of fixed-maturity securities |
|
| (160,152 | ) |
|
| (122,557 | ) |
Purchase of equity securities |
|
| (6,472 | ) |
|
| (11,486 | ) |
Purchase of short-term and other investments |
|
| (10 | ) |
|
| — |
|
Proceeds from sales of real estate investments |
|
| 21,746 |
|
|
| — |
|
Proceeds from sales of fixed-maturity securities |
|
| 11,060 |
|
|
| 9,058 |
|
Proceeds from calls, repayments and maturities of fixed-maturity securities |
|
| 112,497 |
|
|
| 1,250 |
|
Proceeds from sales of equity securities |
|
| 3,754 |
|
|
| 18,369 |
|
Proceeds from sales, redemptions and maturities of short-term and other investments |
|
| 14 |
|
|
| 192 |
|
Net cash used in investing activities |
|
| (17,757 | ) |
|
| (109,899 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Cash dividends paid |
|
| (3,432 | ) |
|
| (4,123 | ) |
Cash dividends received under share repurchase forward contract |
|
| — |
|
|
| 77 |
|
Cash dividends paid to redeemable noncontrolling interest |
|
| (3,012 | ) |
|
| (2,508 | ) |
Repayment of long-term debt |
|
| (258 | ) |
|
| (249 | ) |
Redemption of long-term debt |
|
| (6,895 | ) |
|
| — |
|
Repurchases of common stock |
|
| (305 | ) |
|
| (398 | ) |
Purchase of noncontrolling interests |
|
| (198 | ) |
|
| (127 | ) |
Net cash used in financing activities |
|
| (14,100 | ) |
|
| (7,328 | ) |
Effect of exchange rate changes on cash |
|
| (3 | ) |
|
| (25 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
|
| 67,249 |
|
|
| (59,903 | ) |
Cash, cash equivalents, and restricted cash at beginning of period |
|
| 237,763 |
|
|
| 631,343 |
|
Cash, cash equivalents, and restricted cash at end of period |
| $ | 305,012 |
|
| $ | 571,440 |
|
(continued)
8
HCI GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows – (Continued)
(Unaudited)
(Amounts in thousands)
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
| ||
Cash paid for income taxes |
| $ | 35 |
|
| $ | 32 |
|
Cash paid for interest |
| $ | 739 |
|
| $ | 727 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
| ||
Unrealized gain (loss) on investments in available-for-sale securities, net of tax |
| $ | 4,963 |
|
| $ | (2,784 | ) |
Sale of real estate investments: |
|
|
|
|
|
| ||
Contingent consideration receivable |
| $ | 125 |
|
| $ | — |
|
Long-term debt obligations assumed by the buyer |
| $ | 8,995 |
|
| $ | — |
|
Acquisition of intangibles: |
|
|
|
|
|
| ||
Contingent consideration payable |
| $ | — |
|
| $ | 1,069 |
|
See accompanying Notes to Consolidated Financial Statements.Statements (unaudited).
89
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note1-- 1 -- Nature of Operations
HCI Group, Inc., together with its majority-owned and controlled subsidiaries (collectively,(“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”), its principal operating subsidiary. and TypTap Insurance Company (“TypTap”). Both HCPCI isand TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsedFlorida and wind-only policies to new andpre-existing Florida customers. HCPCI’sin other states. The operations of each insurance subsidiary are supported by HCI Group, Inc. and certain HCI subsidiaries. During 2017, HCPCI received regulatory approvalThe operations of TypTap are also supported by TypTap Insurance Group, Inc. (“TTIG”), the Company’s majority-owned subsidiary, and certain TTIG subsidiaries. The Company emphasizes the use of internally developed technologies to write residential propertycollect and casualty insuranceanalyze claims and other supplemental data to assist in the statesunderwriting process and generate savings as well as efficiency for the operations of Arkansas, Maryland, North Carolina, New Jersey, Pennsylvania, South Carolinathe insurance subsidiaries. In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the business of owning and Texas.leasing real estate and operating marina facilities.
Note 2 —-- Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements forof HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the Company“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2017March 31, 2023 and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2017.2023. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 20162022 included in the Company’s Form10-K, which was filed with the SEC on February 22, 2017.March 10, 2023.
In preparing the interim unaudited consolidated financial statements, management was required to make certain judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex, and consequently actual results may differ from these estimates.
Material estimates that are particularly susceptible to significant change in the near term are related to the Company’s losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies forspecific to reinsurance contracts with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments, allowance for credit losses, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements.
All significant intercompany balances and transactions have been eliminated.10
9
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
AdoptionIn the case of New Accounting Standards
Effective January 1, 2017,assumed business, the Company adopted relies entirely on the ceding insurance company to provide information about premiums, losses, and loss adjustment expenses. When the information is not available at the reporting date, the Company will make estimates based on all recent available data. Accordingly, the actual results could differ significantly from those estimates.
All significant intercompany balances and transactions have been eliminated.
Revenue from Claims Processing Services
Revenue related to claims processing services is included in other revenue in the consolidated statements of income. For the three months ended March 31, 2023 and 2022, revenues from claims processing services were $527 and $1,007, respectively.
Note 3 -- Recent Accounting Pronouncements
Accounting Standards UpdateNo. 2016-09, Compensation—Stock Compensation2023-01. In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2023-01 (“ASU 2023-01”) Leases (Topic 718), which842). For public entities, this update amends the accountingrequired amortization period for share-based payment transactions includingleasehold improvements associated with common control leases to be over the related income taxes, classificationuseful life of awardsthe leasehold improvements to the common control group, regardless of the lease term, as either equity or liabilities,long as the lessee controls the use of the asset through a lease. In addition, if the lessor is sub-leasing the asset while simultaneously leasing the asset from an entity not within the same common control group, the amortization period may not exceed the amortization period of the common control group. Once the lessee no longer controls the use of the asset, the asset will be accounted for as a transfer between entities under common control through an adjustment to equity. ASU 2023-01 is effective for the Company beginning with the first quarter of 2024. The Company is evaluating the impact of this update on its financial position.
Note 4 -- Cash, Cash Equivalents, and classification on the statementRestricted Cash
The following table provides a reconciliation of cash, flows. Amendments relatedcash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the timingtotal of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures, which is applied using a modified retrospective transition method, have no impact onthe same such amounts shown in the consolidated statements of cash flows.
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Cash and cash equivalents |
| $ | 302,025 |
|
| $ | 234,863 |
|
Restricted cash |
|
| 2,987 |
|
|
| 2,900 |
|
Total |
| $ | 305,012 |
|
| $ | 237,763 |
|
Restricted cash represents funds in the Company’s comparative consolidated financial statements. In addition, the retrospective application of the amendments relatedsole ownership primarily held by certain states to the presentation of employee taxes paid does not have an impact onmeet regulatory requirements in which the Company’s comparative consolidated statement of cash flows. Upon adoption of this standard, the Company elected toinsurance subsidiaries conduct business and not available for immediate business use. Funds withheld in an account for forfeitures of share-based awards when they occur and apply the amendments related to the presentation of excess tax benefits on the statement of cash flows prospectively. Under the new standard,which the Company is required to recognize any excess tax benefitsa co-owner but not the named beneficiary are not considered restricted cash and tax deficienciesare included in funds withheld for assumed business on the Company’s consolidated statement of income.balance sheets.
Investments in Trading Securities
The Company holds certain equity securitiesIn connection with the intention of selling them in a short period of time to generate profits. As such, these equity securities are classified as trading and carried at fair value. Realized investment gains and losses from sales are recorded on the trade date and are determined using thefirst-infirst-out (FIFO) method. Unrealized holding gains and losses from the changes in the fair value are reported in the consolidated statement of income as net unrealized investment gains or losses.
Long-Term Debt
Long-term debt 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 valuessale of the liability and equity components at issuance, the Company measures the fair valueretail shopping center investment property in Melbourne, Florida to a non-affiliate as described in Note 5 -- “Investments” under Real Estate Investments, $87 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 includedrestricted cash was deposited in additionalpaid-in capital.escrow in March 2023 with its release contingent on certain post-sale conditions being met.
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 benon-substantive and would not impact the initial measurement and expected life of the debt instrument’s liability component.11
10
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 5 -- Investments
Transaction costs related to issuing a debt instrument that embodies both liability 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.a) Available-for-Sale Fixed-Maturity Securities
Common Share Repurchases
The Company primarily repurchases its common stock in the open market through share repurchase programs and from institutional investors in private transactions such as prepaid share repurchase forward contracts and share repurchase agreements.
A prepaid share repurchase forward contract is generally a contract that allows a party 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 and there will be no recognition in earnings for changes in fair value in subsequent periods.
In general, the Company first allocates the purchase price or the prepayment amount to additionalpaid-in capital to the extent available and the remaining balance is allocated to retained income. Due to past and recent share repurchases, the Company’s additionalpaid-in capital has been exhausted and shall remain so until the Company fully recoups the total amount allocated to retained income.
Reclassifications. Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Note 3 — Recent Accounting Pronouncements
Accounting Standards Update No. 2017-13. In September 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateNo. 2017-13 (“ASU2017-13”), Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). ASU2017-13 adds SEC paragraphs pursuant to the SEC Staff Announcement at the July 20, 2017 Emerging Issues Task Force meeting concerning the transition related to Accounting Standards UpdatesNo. 2014-09, Revenue from Contracts with Customers (Topic 606) andNo. 2016-02, Leases (Topic 842). ASU2017-13 also supersedes SEC paragraphs pursuant to the rescission of SEC Staff Announcement, “Accounting for Management Fees Based on a Formula,” effective upon the initial adoption of Topic 606 and SEC Staff Announcement, “Lessor Consideration of Third-Party Value Guarantees,” effective upon the initial adoption of Topic 842. ASU2017-13 also rescinds three SEC Observer Comments effective upon the initial adoption of Topic 842. One SEC Staff Observer comment is being moved to Topic 842. The Company does not anticipate significant impact from this guidance.
11
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Accounting Standards Update No. 2017-09. In May 2017, the FASB issued Accounting Standards UpdateNo. 2017-09 (“ASU2017-09”), Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an application of modification accounting. ASU2017-09 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted. This guidance will impact the future modification of the Company’s existing share-based awards.
Accounting Standards Update No. 2017-08. In March 2017, the FASB issued Accounting Standards UpdateNo. 2017-08 (“ASU2017-08”), Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20): Premium Amortization on Purchased Callable Debt Securities, which amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, this update shortens the amortization period of certain purchased callable debt securities to the earliest call date. ASU2017-08 is effective for the Company beginning with the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
Accounting Standards Update No. 2017-05. In February 2017, the FASB issued Accounting Standards UpdateNo. 2017-05 (“ASU2017-05”), Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic610-20), which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. In addition, ASU2017-15 eliminates the exception in the financial asset guidance for transfers of investments including equity method investments in real estate entities and supersedes the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest subsection (Topic 845). ASU2017-05 is effective for the Company beginning with the first quarter of 2018. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
Accounting Standards Update No. 2017-03. In January 2017, the FASB issued Accounting Standards UpdateNo. 2017-03 (“ASU2017-03”), Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323), which adds and amends SEC paragraphs pursuant to the SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force meetings. The announcement made at the September 22, 2016 meeting provides the SEC staff view on the disclosure of the impact that recently issued accounting standards will have on a public entity’s financial statements when the standards are adopted in a future period. This announcement applies to ASU2014-09, Revenue from Contracts with Customers (Topic 606); ASU2016-02, Leases (Topic 842); ASU2016-13, Financial Instruments - Credit Losses (Topic 326) and any subsequent amendments to guidance in the ASUs that are issued prior to the adoption of the aforementioned ASUs.
Accounting Standards Update No. 2017-01. In January 2017, the FASB issued Accounting Standards UpdateNo. 2017-01 (“ASU2017-01”), Business Combinations (Topic 805), which clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. If the screen is not met, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. ASU2017-01 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted under certain circumstances. When adopted, this guidance will impact how the Company determines whether a transaction should be accounted for as a business acquisition or disposal in a future period. The Company elected to adopt this standard in the fourth quarter of 2017.
12
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Accounting Standards to be Adopted in Fiscal Year 2018
In January 2016, the FASB issued Accounting Standards UpdateNo. 2016-01 (“ASU2016-01”), Financial Instruments – Overall (Subtopic825-10), primarily requiring all equity investments other than those accounted for under the equity method of accounting or those that result in consolidation of the investee to be measured at fair value with changes in the fair value recognized through net income. The application of ASU2016-01 could cause the Company to experience significant volatility in earnings. Under current accounting policy, the Company recognizes unrealized holding gains and losses onavailable-for-sale equity securities in stockholders’ equity as a component of accumulated other comprehensive income. In the year of adoption,available-for-sale equity securities’ unrealized holding gains and losses reported in accumulated other comprehensive income at December 31, 2017 will be reclassified to beginning retained income. Any subsequent changes in fair value will be recognized in the consolidated statement of income. In addition, the classification of the Company’s equity securities with readily determinable fair values as“available-for-sale” in the consolidated balance sheet and related disclosures will be eliminated.
In May 2014, the FASB issued Accounting Standards UpdateNo. 2014-09 (“ASU2014-09”), Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. ASU2014-09 also amends the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer to be consistent with the guidance in this ASU. ASU2014-09 permits two methods of adoption: a full retrospective method or a modified retrospective method. This standard could impact the timing and amounts of revenue recognized. The Company has identified and reviewed impacted revenue generating activities in accordance with the five-step revenue recognition model specified by this standard. The Company elects to use a modified retrospective method for transition to the new revenue recognition standard. Based on the Company’s assessment, the impact will be limited to the related disclosures of certain revenue generating activities as its primary source of revenue from insurance premiums is not within the scope of this new standard.
13
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 4 — Investments
a)Available-for-Sale Securities
The Company holds investments in fixed-maturity securities and equity securities that are classified asavailable-for-sale. At September 30, 2017March 31, 2023 and December 31, 2016,2022, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’savailable-for-sale securities by security type were as follows:
| Cost or Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Estimated Fair Value |
| Cost or |
|
| Allowance |
|
| Gross |
|
| Gross |
|
| Estimated |
| ||||||||||||||||||
As of September 30, 2017 | ||||||||||||||||||||||||||||||||||||
Fixed-maturity securities | ||||||||||||||||||||||||||||||||||||
|
| Cost |
|
| Loss |
|
| Gain |
|
| Loss |
|
| Value |
| |||||||||||||||||||||
As of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
U.S. Treasury and U.S. government agencies | $ | 47,348 | $ | 5 | $ | (112 | ) | $ | 47,241 |
| $ | 501,700 |
|
| $ | — |
|
| $ | 421 |
|
| $ | (6,495 | ) |
| $ | 495,626 |
| |||||||
Corporate bonds | 121,459 | 1,862 | (811 | ) | 122,510 |
|
| 28,312 |
|
|
| — |
|
|
| 39 |
|
|
| (1,094 | ) |
|
| 27,257 |
| |||||||||||
State, municipalities, and political subdivisions | 74,924 | 2,099 | (83 | ) | 76,940 | |||||||||||||||||||||||||||||||
States, municipalities, and political subdivisions |
|
| 1,393 |
|
|
| — |
|
|
| 1 |
|
|
| (3 | ) |
|
| 1,391 |
| ||||||||||||||||
Exchange-traded debt |
|
| 494 |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| 482 |
| ||||||||||||||||
Total |
| $ | 531,899 |
|
| $ | — |
|
| $ | 461 |
|
| $ | (7,604 | ) |
| $ | 524,756 |
| ||||||||||||||||
As of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
U.S. Treasury and U.S. government agencies |
| $ | 463,648 |
|
| $ | — |
|
| $ | 59 |
|
| $ | (9,105 | ) |
| $ | 454,602 |
| ||||||||||||||||
Corporate bonds |
|
| 28,378 |
|
|
| — |
|
|
| 20 |
|
|
| (1,205 | ) |
|
| 27,193 |
| ||||||||||||||||
States, municipalities, and political subdivisions |
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| (6 | ) |
|
| 1,383 |
| ||||||||||||||||
Exchange-traded debt | 9,293 | 194 | (211 | ) | 9,276 |
|
| 683 |
|
|
| — |
|
|
| 2 |
|
|
| (52 | ) |
|
| 633 |
| |||||||||||
Redeemable preferred stock | 138 | 2 | (5 | ) | 135 |
|
| 99 |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| 90 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
Total | 253,162 | 4,162 | (1,222 | ) | 256,102 |
| $ | 494,197 |
|
| $ | — |
|
| $ | 81 |
|
| $ | (10,377 | ) |
| $ | 483,901 |
| |||||||||||
Equity securities | 58,242 | 5,361 | (580 | ) | 63,023 | |||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
Totalavailable-for-sale securities | $ | 311,404 | $ | 9,523 | $ | (1,802 | ) | $ | 319,125 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||||||||||||||
Fixed-maturity securities | ||||||||||||||||||||||||||||||||||||
U.S. Treasury and U.S. government agencies | $ | 1,975 | $ | — | $ | (36 | ) | $ | 1,939 | |||||||||||||||||||||||||||
Corporate bonds | 75,538 | 607 | (1,641 | ) | 74,504 | |||||||||||||||||||||||||||||||
State, municipalities, and political subdivisions | 78,018 | 776 | (488 | ) | 78,306 | |||||||||||||||||||||||||||||||
Exchange-traded debt | 11,463 | 36 | (237 | ) | 11,262 | |||||||||||||||||||||||||||||||
Redeemable preferred stock | 237 | 3 | (3 | ) | 237 | |||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
Total | 167,231 | 1,422 | (2,405 | ) | 166,248 | |||||||||||||||||||||||||||||||
Equity securities | 47,750 | 5,769 | (484 | ) | 53,035 | |||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
Totalavailable-for-sale securities | $ | 214,981 | $ | 7,191 | $ | (2,889 | ) | $ | 219,283 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
At September 30, 2017, fixed-maturity securities included $252 of U.S. Treasury securities related to a statutory deposit held in trust for the South Carolina Director of Insurance.
Expected maturities willmay 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 as of September 30, 2017March 31, 2023 and December 31, 20162022 are as follows:
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Cost or |
|
| Estimated |
|
| Cost or |
|
| Estimated |
| ||||
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
| ||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
| $ | 357,645 |
|
| $ | 355,922 |
|
| $ | 266,170 |
|
| $ | 265,353 |
|
Due after one year through five years |
|
| 170,850 |
|
|
| 165,769 |
|
|
| 223,153 |
|
|
| 214,307 |
|
Due after five years through ten years |
|
| 2,910 |
|
|
| 2,583 |
|
|
| 4,380 |
|
|
| 3,797 |
|
Due after ten years |
|
| 494 |
|
|
| 482 |
|
|
| 494 |
|
|
| 444 |
|
| $ | 531,899 |
|
| $ | 524,756 |
|
| $ | 494,197 |
|
| $ | 483,901 |
| |
Sales of Available-for-Sale Fixed-Maturity Securities
| Amortized Cost | Estimated Fair Value | |||||||
As of September 30, 2017 | ||||||||
Available-for-sale | ||||||||
Due in one year or less | $ | 30,082 | $ | 30,115 | ||||
Due after one year through five years | 127,627 | 127,444 | ||||||
Due after five years through ten years | 66,146 | 67,853 | ||||||
Due after ten years | 29,307 | 30,690 | ||||||
|
|
|
| |||||
| $ | 253,162 | $ | 256,102 | |||||
|
|
|
| |||||
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the three months ended March 31, 2023 and 2022 were as follows:
14
|
|
|
|
| Gross |
|
| Gross |
| |||
|
| Proceeds |
|
| Gains |
|
| Losses |
| |||
Three months ended March 31, 2023 |
| $ | 11,060 |
|
| $ | — |
|
| $ | (738 | ) |
Three months ended March 31, 2022 |
| $ | 9,058 |
|
| $ | 2 |
|
| $ | (431 | ) |
12
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Amortized Cost | Estimated Fair Value | |||||||
As of December 31, 2016 | ||||||||
Available-for-sale | ||||||||
Due in one year or less | $ | 2,656 | $ | 2,662 | ||||
Due after one year through five years | 49,915 | 50,023 | ||||||
Due after five years through ten years | 90,360 | 89,332 | ||||||
Due after ten years | 24,300 | 24,231 | ||||||
|
|
|
| |||||
| $ | 167,231 | $ | 166,248 | |||||
|
|
|
| |||||
Sales ofAvailable-for-Sale Securities
Proceeds received,Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities
Securities with gross unrealized loss positions at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the gross realized gains and losses from sales ofavailable-for-saleindividual securities for the three and nine months ended September 30, 2017 and 2016 werehave been in a continuous loss position, are as follows:
| Proceeds | Gross Realized Gains | Gross Realized Losses | ||||||||||
Three months ended September 30, 2017 | ||||||||||||
Fixed-maturity securities | $ | 2,765 | $ | 97 | $ | (23 | ) | |||||
|
|
|
|
|
| |||||||
Equity securities | $ | 4,827 | $ | 223 | $ | (525 | ) | |||||
|
|
|
|
|
| |||||||
Three months ended September 30, 2016 | ||||||||||||
Fixed-maturity securities | $ | 3,891 | $ | 196 | $ | — | ||||||
|
|
|
|
|
| |||||||
Equity securities | $ | 5,000 | $ | 491 | $ | (104 | ) | |||||
|
|
|
|
|
| |||||||
Nine months ended September 30, 2017 | ||||||||||||
Fixed-maturity securities | $ | 9,638 | $ | 126 | $ | (45 | ) | |||||
|
|
|
|
|
| |||||||
Equity securities | $ | 25,729 | $ | 3,058 | $ | (865 | ) | |||||
|
|
|
|
|
| |||||||
Nine months ended September 30, 2016 | ||||||||||||
Fixed-maturity securities | $ | 37,415 | $ | 579 | $ | — | ||||||
|
|
|
|
|
| |||||||
Equity securities | $ | 14,155 | $ | 850 | $ | (530 | ) | |||||
|
|
|
|
|
| |||||||
|
| Less Than Twelve Months |
|
| Twelve Months or Longer |
|
| Total |
| |||||||||||||||
|
| Gross |
|
| Estimated |
|
| Gross |
|
| Estimated |
|
| Gross |
|
| Estimated |
| ||||||
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| ||||||
As of March 31, 2023 |
| Loss |
|
| Value |
|
| Loss |
|
| Value |
|
| Loss |
|
| Value |
| ||||||
U.S. Treasury and U.S. government |
| $ | (1,993 | ) |
| $ | 123,661 |
|
| $ | (4,502 | ) |
| $ | 115,681 |
|
| $ | (6,495 | ) |
| $ | 239,342 |
|
Corporate bonds |
|
| (774 | ) |
|
| 19,228 |
|
|
| (320 | ) |
|
| 4,146 |
|
|
| (1,094 | ) |
|
| 23,374 |
|
States, municipalities, and political |
|
| (3 | ) |
|
| 897 |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| 897 |
|
Exchange-traded debt |
|
| (12 | ) |
|
| 482 |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| 482 |
|
Total available-for-sale securities |
| $ | (2,782 | ) |
| $ | 144,268 |
|
| $ | (4,822 | ) |
| $ | 119,827 |
|
| $ | (7,604 | ) |
| $ | 264,095 |
|
Other-than-temporary Impairment
|
| Less Than Twelve Months |
|
| Twelve Months or Longer |
|
| Total |
| |||||||||||||||
|
| Gross |
|
| Estimated |
|
| Gross |
|
| Estimated |
|
| Gross |
|
| Estimated |
| ||||||
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| ||||||
As of December 31, 2022 |
| Loss |
|
| Value |
|
| Loss |
|
| Value |
|
| Loss |
|
| Value |
| ||||||
U.S. Treasury and U.S. government |
| $ | (8,701 | ) |
| $ | 269,116 |
|
| $ | (404 | ) |
| $ | 4,644 |
|
| $ | (9,105 | ) |
| $ | 273,760 |
|
Corporate bonds |
|
| (909 | ) |
|
| 23,028 |
|
|
| (296 | ) |
|
| 2,541 |
|
|
| (1,205 | ) |
|
| 25,569 |
|
States, municipalities, and political |
|
| (6 | ) |
|
| 1,383 |
|
|
| — |
|
|
| — |
|
|
| (6 | ) |
|
| 1,383 |
|
Exchange-traded debt |
|
| (52 | ) |
|
| 463 |
|
|
| — |
|
|
| — |
|
|
| (52 | ) |
|
| 463 |
|
Redeemable preferred stock |
|
| (9 | ) |
|
| 90 |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| 90 |
|
Total available-for-sale securities |
| $ | (9,677 | ) |
| $ | 294,080 |
|
| $ | (700 | ) |
| $ | 7,185 |
|
| $ | (10,377 | ) |
| $ | 301,265 |
|
At March 31, 2023 and December 31, 2022, there were 73 and 84 securities, respectively, in an unrealized loss position.
Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities
The Company regularly reviews its individual investment securities for other-than-temporarycredit impairment. The Company considers various factors in determining whether a credit loss exists for each individual security, is other-than-temporarily impaired, including-
There was no balance or activity in the allowance for credit losses of available-for-sale fixed-maturity securities during the three months ended March 31, 2023 and 2022.
1513
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Fixed-maturityb) Equity Securities
There was no impairment loss recognizedThe Company holds investments in equity securities measured at fair values which are readily determinable. At March 31, 2023 and December 31, 2022, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:
|
|
|
|
| Gross |
|
| Gross |
|
| Estimated |
| ||||
|
| Cost |
|
| Gain |
|
| Loss |
|
| Value |
| ||||
March 31, 2023 |
| $ | 38,575 |
|
| $ | 2,399 |
|
| $ | (3,559 | ) |
| $ | 37,415 |
|
December 31, 2022 |
| $ | 36,272 |
|
| $ | 2,078 |
|
| $ | (3,767 | ) |
| $ | 34,583 |
|
The table below presents the portion of unrealized gains and losses in the Company’s consolidated statements of income related to equity securities still held.
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net gains (losses) recognized |
| $ | 114 |
|
| $ | (3,542 | ) |
Exclude: Net realized (losses) gains recognized for |
|
| (415 | ) |
|
| 34 |
|
Net unrealized gains (losses) recognized |
| $ | 529 |
|
| $ | (3,576 | ) |
Sales of Equity Securities
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three months ended September 30, 2017. For the nine months ended September 30, 2017, the Company recognized $100 of impairment losses related to the sale of twointent-to-sell fixed-maturity securities. At September 30, 2017, two fixed-maturity securitiesMarch 31, 2023 and 2022 were considered other-than-temporarily impaired due to their credit risk. The Company intends to hold these two fixed-maturity securities until maturity, but does not expect a full recovery of their carrying value.as follows:
In June 2016, the Company sold one impaired fixed-maturity security that was previously intended to hold until maturity due to uncertainties surrounding the issuer’s announced restructuring plan. Prior to the sale of this security, the remaining $202 of unrealized impairment loss was reclassified from comprehensive income and recognized in total other-than-temporary impairment losses in the Company’s consolidated statement of income. For the three months ended September 30, 2016, the Company recorded $531 of impairment loss, of which $180 was considered other-than-temporarily impaired due to a credit related loss and recorded in the consolidated statement of income, with the remaining amount of $351 related tonon-credit factors and recorded in other comprehensive income. For the nine months ended September 30, 2016, the Company recognized $675 of impairment loss in the consolidated statement of income, representing $206 of additional losses recorded during the period and the reclassification of $469 previously recorded in other comprehensive income. At September 30, 2016, one fixed-maturity security the Company intended to hold to maturity had a credit related loss.
|
|
|
|
| Gross |
|
| Gross |
| |||
|
| Proceeds |
|
| Gains |
|
| Losses |
| |||
Three months ended March 31, 2023 |
| $ | 3,754 |
|
| $ | 17 |
|
| $ | (432 | ) |
Three months ended March 31, 2022 |
| $ | 18,369 |
|
| $ | 1,420 |
|
| $ | (1,386 | ) |
The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in income from available for sale fixed-maturity securities.14
| 2017 | 2016 | |||||||
Balance at January 1 | $ | 475 | $ | 111 | ||||
Additional credit impairments on previously impaired securities | — | 293 | ||||||
|
|
|
| |||||
Balance at March 31 | 475 | 404 | ||||||
Credit impaired security fully disposed of for which there was no prior intent or requirement to sell | — | (385 | ) | |||||
Reduction due to increase in expected cash flows recognized over the remaining life of the previously impaired security | — | (19 | ) | |||||
|
|
|
| |||||
Balance at June 30 | 475 | — | ||||||
Credit impairment on impaired securities | — | 180 | ||||||
|
|
|
| |||||
Balance at September 30 | $ | 475 | $ | 180 | ||||
|
|
|
| |||||
Equity Securities
In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, the length of time each security has been in an unrealized loss position, the extent of the decline and the near-term prospect for recovery. The Company recognized impairment losses of $474 and $44 in the consolidated statement of income for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized impairment losses of $764 and $766, respectively. At September 30, 2017 and 2016, the Company had four and 16 equity securities, respectively, that were other-than-temporarily impaired.
16
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Securities with gross unrealized loss positions at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| Less Than Twelve Months | Twelve Months or Longer | Total | ||||||||||||||||||||||
| As of September 30, 2017 | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | ||||||||||||||||||
Fixed-maturity securities | ||||||||||||||||||||||||
U.S. Treasury and U.S. government agencies | $ | (112 | ) | $ | 45,344 | $ | — | $ | — | $ | (112 | ) | $ | 45,344 | ||||||||||
Corporate bonds | (530 | ) | 49,789 | (281 | ) | 15,346 | (811 | ) | 65,135 | |||||||||||||||
State, municipalities, and political subdivisions | (29 | ) | 4,332 | (54 | ) | 3,889 | (83 | ) | 8,221 | |||||||||||||||
Exchange-traded debt | (209 | ) | 3,189 | (2 | ) | 80 | (211 | ) | 3,269 | |||||||||||||||
Redeemable preferred stock | (5 | ) | 45 | — | — | (5 | ) | 45 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed-maturity securities | (885 | ) | 102,699 | (337 | ) | 19,315 | (1,222 | ) | 122,014 | |||||||||||||||
Equity securities | (545 | ) | 11,154 | (35 | ) | 1,260 | (580 | ) | 12,414 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Totalavailable-for-sale securities | $ | (1,430 | ) | $ | 113,853 | $ | (372 | ) | $ | 20,575 | $ | (1,802 | ) | $ | 134,428 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
At September 30, 2017, there were 127 securities in an unrealized loss position. Of these securities, 17 securities had been in an unrealized loss position for 12 months or longer. The gross unrealized loss of corporate bonds in an unrealized loss position for less than twelve months included $133 of other-than-temporary impairment losses related tonon-credit factors.
| Less Than Twelve Months | Twelve Months or Longer | Total | ||||||||||||||||||||||
| As of December 31, 2016 | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | ||||||||||||||||||
Fixed-maturity securities | ||||||||||||||||||||||||
U.S. Treasury and U.S. government agencies | $ | (36 | ) | $ | 1,939 | $ | — | $ | — | $ | (36 | ) | $ | 1,939 | ||||||||||
Corporate bonds | (1,546 | ) | 43,859 | (95 | ) | 2,814 | (1,641 | ) | 46,673 | |||||||||||||||
State, municipalities, and political subdivisions | (441 | ) | 26,029 | (47 | ) | 3,036 | (488 | ) | 29,065 | |||||||||||||||
Exchange-traded debt | (191 | ) | 4,980 | (46 | ) | 1,954 | (237 | ) | 6,934 | |||||||||||||||
Redeemable preferred stock | (3 | ) | 47 | — | — | (3 | ) | 47 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed-maturity securities | (2,217 | ) | 76,854 | (188 | ) | 7,804 | (2,405 | ) | 84,658 | |||||||||||||||
Equity securities | (293 | ) | 10,042 | (191 | ) | 3,209 | (484 | ) | 13,251 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Totalavailable-for-sale securities | $ | (2,510 | ) | $ | 86,896 | $ | (379 | ) | $ | 11,013 | $ | (2,889 | ) | $ | 97,909 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
At December 31, 2016, there were 134 securities in an unrealized loss position. Of these securities, 20 securities had been in an unrealized loss position for 12 months or longer. The gross unrealized loss of corporate bonds in an unrealized loss position for twelve months or longer included $76 of other-than-temporary impairment losses related tonon-credit factors.
b) Trading Securities
At September 30, 2017, the cost, net unrealized gains, and estimated fair value of the Company’s trading equity securities were $929, $74, and $1,003, respectively. There were no investments in trading equity securities at December 31, 2016.
17
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Sales of Trading Securities
Proceeds received, and the gross realized gains and losses from sales of trading equity securities, for the three and nine months ended September 30, 2017 were as follows:
| Proceeds | Gross Realized Gains | Gross Realized Losses | ||||||||||
Three months ended September 30, 2017 | ||||||||||||
Equity securities | $ | 580 | $ | 12 | $ | (10 | ) | |||||
|
|
|
|
|
| |||||||
Nine months ended September 30, 2017 | ||||||||||||
Equity securities | $ | 580 | $ | 12 | $ | (10 | ) | |||||
|
|
|
|
|
| |||||||
The Company did not hold any trading equity security during 2016.
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 all decisions with regard to financial policies and operations. As such, the Company is not the primary beneficiary and does not consolidate these partnerships. In August 2017, the Company entered into a subscription agreement with another limited partnership. The following table provides information related to the Company’s investments in limited partnerships.partnerships:
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||||||||||||||||
|
| Carrying |
|
| Unfunded |
|
|
|
|
| Carrying |
|
| Unfunded |
|
|
|
| ||||||
Investment Strategy |
| Value |
|
| Balance |
|
| (%) (a) |
|
| Value |
|
| Balance |
|
| (%) (a) |
| ||||||
Primarily in senior secured loans and, to a |
| $ | 4,062 |
|
| $ | — |
|
|
| 15.37 |
|
| $ | 4,146 |
|
| $ | — |
|
|
| 15.37 |
|
Value creation through active distressed debt |
|
| 2,326 |
|
|
| — |
|
|
| 1.27 |
|
|
| 2,528 |
|
|
| — |
|
|
| 1.66 |
|
High returns and long-term capital appreciation |
|
| 4,477 |
|
|
| — |
|
|
| 0.18 |
|
|
| 5,319 |
|
|
| — |
|
|
| 0.18 |
|
Value-oriented investments in less liquid and |
|
| 3,258 |
|
|
| — |
|
|
| 0.56 |
|
|
| 3,470 |
|
|
| — |
|
|
| 0.56 |
|
Value-oriented investments in mature real |
|
| 7,581 |
|
|
| 2,982 |
|
|
| 1.32 |
|
|
| 7,457 |
|
|
| 3,125 |
|
|
| 1.32 |
|
Risk-adjusted returns on credit and equity |
|
| 2,816 |
|
|
| 2,519 |
|
|
| 0.85 |
|
|
| 2,782 |
|
|
| 2,536 |
|
|
| 0.98 |
|
Total |
| $ | 24,520 |
|
| $ | 5,501 |
|
|
|
|
| $ | 25,702 |
|
| $ | 5,661 |
|
|
|
| ||
18
15
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Investment Strategy | Carrying Value | Unfunded Balance | (%)(a) | Carrying Value | Unfunded Balance | (%)(a) | ||||||||||||||||||
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) | $ | 7,134 | $ | 5,505 | 15.37 | $ | 6,246 | $ | 6,428 | 16.50 | ||||||||||||||
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) | 7,630 | 1,746 | 1.76 | 7,358 | 1,360 | 1.76 | ||||||||||||||||||
Maximum long-term capital appreciation through long and short positions in equity and/or debt securities of publicly traded U.S. andnon-U.S. issuers, derivative instruments and certain other financial instruments. (f) | — | — | — | 11,333 | — | 66.58 | ||||||||||||||||||
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(g)(h) | 6,148 | 3,766 | 0.18 | 4,326 | 5,766 | 0.18 | ||||||||||||||||||
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(i)(j) | 86 | 4,914 | 0.62 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 20,998 | $ | 15,931 | $ | 29,263 | $ | 13,554 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
The following is the summary of 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.
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Operating results: |
|
|
|
|
|
| ||
Total income |
| $ | 182,360 |
|
| $ | 336,828 |
|
Total expenses |
|
| (2,257 | ) |
|
| (49,317 | ) |
Net income |
| $ | 180,103 |
|
| $ | 287,511 |
|
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Balance sheet: |
|
|
|
|
|
| ||
Total assets |
| $ | 5,228,330 |
|
| $ | 5,119,695 |
|
Total liabilities |
| $ | 397,463 |
|
| $ | 430,354 |
|
19For the three months ended March 31, 2023 and 2022, the Company recognized net investment income from limited partnerships of $553 and $1,780, respectively. Included in net investment income for the three months ended March 31, 2023 was an estimated favorable change in net asset value of $124. During the three months ended March 31, 2023 and 2022, the Company received total cash distributions of $1,905 and $1,596, respectively, including returns on investment of $303 and $811, respectively.
At March 31, 2023 and December 31, 2022, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $23,546 and $24,978, respectively, and the Company’s maximum exposure to loss aggregated $24,520 and $25,702, respectively.
d) Investment in Unconsolidated Joint Venture
Melbourne FMA, LLC, a wholly owned subsidiary, had an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. In January 2023, the Company received the final distribution of $18 from FMKT Mel JV, the unconsolidated joint venture that the Company had a 90% equity interest in, which was liquidated on December 31, 2022 following the sale of its last remaining outparcel in June 2022.
16
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Operating results: | ||||||||||||||||
Total income | $ | 71,854 | $ | 166,374 | $ | 301,604 | $ | 143,305 | ||||||||
Total expenses | (24,663 | ) | (54,577 | ) | (78,482 | ) | (184,598 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | $ | 47,191 | $ | 111,797 | $ | 223,122 | $ | (41,293 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Fore) Real Estate Investments
Real estate investments consist of the three and nine months ended September 30, 2017, the Company recognized net investment incomefollowing as of $392 and $1,724, respectively, for these investments. During the third quarter of 2017, the Company received in cash a return on investment totaling $428. During the nine-month period ended September 30, 2017, the Company received total cash distributions of $12,612, representing $11,758 of returned capital and $854 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 three and nine months ended September 30, 2016, the Company recognized net investment income of $1,119 and $54, respectively. During the three and nine months ended September 30, 2016, the Company received cash distributions of $384 and $428, respectively, of return on investment. At September 30, 2017March 31, 2023 and December 31, 2016, the Company’s cumulative contributed capital2022:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Land |
| $ | 29,471 |
|
| $ | 38,327 |
|
Land improvements |
|
| 4,387 |
|
|
| 12,138 |
|
Buildings and building improvements |
|
| 12,544 |
|
|
| 29,410 |
|
Tenant and leasehold improvements |
|
| 1,270 |
|
|
| 1,742 |
|
Other |
|
| 1,593 |
|
|
| 1,649 |
|
Total, at cost |
|
| 49,265 |
|
|
| 83,266 |
|
Less: accumulated depreciation and amortization |
|
| (5,703 | ) |
|
| (11,878 | ) |
Real estate investments |
| $ | 43,562 |
|
| $ | 71,388 |
|
Since January 1, 2023, a Tampa office building property that was previously leased to the partnerships existing at each respective balance sheet date totaled $19,569 and $31,946, respectively, and the Company’s maximum exposure to loss aggregated $20,998 and $29,263, respectively.
d) Investmentan unaffiliated company has been used in Unconsolidated Joint Venture
The Company has an equity investment in FMKT Mel JV, which is a limited liability company treated as a joint venture under U.S. GAAP. In March 2017, FMKT Mel JV sold a portion of its outparcel land for gross proceeds of $825 and recognized a $331 gain on sale of which $199 was allocated tooperations by the Company and serves as TTIG’s corporate headquarters. As a result, in accordance withJanuary 2023, $8,135 was reclassified out of real estate investments to property and equipment, net on the profit allocation specifiedconsolidated balance sheet.
On March 31, 2023, the Company closed on its agreement to sell the retail shopping center investment property in Melbourne, Florida to a non-affiliate for a price of $18,500, and also closed on its agreement to sell the operating agreement.
At September 30, 2017retail shopping center investment property in Sorrento, Florida to a non-affiliate for a price of $13,418. See additional information under f) Net Investment Income below. Depreciation and December 31, 2016, the Company’s maximum exposureamortization expense related to loss relating to this variable interest entityreal estate investments was $1,664$453 and $2,102, respectively, representing the carrying value of the investment. At September 30, 2017, there was $0 of undistributed income from this equity method investment as compared with an undistributed loss, after an equity distribution, of $25 at December 31, 2016, the amounts of which were included in the Company’s consolidated retained income.
The limited liability company members received no cash distributions during$506 for the three months ended September 30, 2017March 31, 2023 and 2016. During2022, respectively.
f) Net Investment Income
Net investment income (loss), by source, is summarized as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Available-for-sale fixed-maturity securities |
| $ | 4,035 |
|
| $ | 448 |
|
Equity securities |
|
| 296 |
|
|
| 287 |
|
Investment expense |
|
| (129 | ) |
|
| (134 | ) |
Limited partnership investments |
|
| 553 |
|
|
| 1,780 |
|
Real estate investments |
|
| 9,293 |
|
|
| 347 |
|
Loss from unconsolidated joint venture |
|
| — |
|
|
| (13 | ) |
Cash and cash equivalents |
|
| 3,667 |
|
|
| 153 |
|
Net investment income |
| $ | 17,715 |
|
| $ | 2,868 |
|
For the ninethree months ended September 30, 2017,March 31, 2023, income from real estate investments included a net realized gain of $6,476 resulting from the Company receivedsale of the retail shopping center investment property in Melbourne, Florida in March 2023 for a cash distributionprice of $564, representing$18,500, and also included a combined distributionnet realized gain of $147$2,460 resulting from the sale of the retail shopping center investment property in earnings and $417Sorrento, Florida in capital as compared with no cash distribution during the nine months ended September 30, 2016. The following tables provide FMKT Mel JV’s summarized unaudited financial results and the unaudited financial positions:March 2023 for a price of $13,418.
17
20
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Operating results: | ||||||||||||||||
Total revenues and gain | $ | — | $ | 235 | $ | 331 | $ | 949 | ||||||||
Total expenses | (18 | ) | (318 | ) | (83 | ) | (801 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net (loss) income | $ | (18 | ) | $ | (83 | ) | $ | 248 | $ | 148 | ||||||
|
|
|
|
|
|
|
| |||||||||
The Company’s share of net (loss) income* | $ | (16 | ) | $ | (75 | ) | $ | 126 | $ | 153 | ||||||
| September 30, 2017 | December 31, 2016 | |||||||
Balance Sheet: | ||||||||
Construction in progress - real estate | $ | 375 | $ | 334 | ||||
Property and equipment, net | 1,213 | 1,654 | ||||||
Cash | 110 | 179 | ||||||
Other | 180 | 180 | ||||||
|
|
|
| |||||
Total assets | $ | 1,878 | $ | 2,347 | ||||
|
|
|
| |||||
Accounts payable | $ | 15 | $ | 11 | ||||
Other liabilities | 14 | — | ||||||
Members’ capital | 1,849 | 2,336 | ||||||
|
|
|
| |||||
Total liabilities and members’ capital | $ | 1,878 | $ | 2,347 | ||||
|
|
|
| |||||
Investment in unconsolidated joint venture, at equity* | $ | 1,664 | $ | 2,102 | ||||
e) Real Estate Investments
Real estate investments include officeg) Other Investments
From time to time, the Company may invest in financial assets other than stocks, mutual funds, and retail space that is leased to tenants, wet and dry boat storage, one restaurant, and two marinas. Real estate investments consist of the following as of September 30, 2017 and December 31, 2016.
| September 30, 2017 | December 31, 2016 | |||||||
Land | $ | 20,422 | $ | 17,592 | ||||
Land improvements | 9,904 | 9,336 | ||||||
Buildings | 17,742 | 16,154 | ||||||
Tenant and leasehold improvements | 996 | 872 | ||||||
Construction in progress* | — | 3,404 | ||||||
Other | 2,911 | 2,683 | ||||||
|
|
|
| |||||
Total, at cost | 51,975 | 50,041 | ||||||
Less: accumulated depreciation and amortization | (3,014 | ) | (1,955 | ) | ||||
|
|
|
| |||||
Real estate investments | $ | 48,961 | $ | 48,086 | ||||
|
|
|
| |||||
Depreciation and amortization expense related to real estate investments was $374 and $126 forbonds. For the three months ended September 30, 2017March 31, 2023 and 2016, respectively, and $1,062 and $314 for the nine months ended September 30, 2017 and 2016, respectively.
21
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
f) Consolidated Variable Interest Entity
The Company has a commercial property in Riverview, Florida. The development project of this property was completed in July 2017 through a limited liability company treated under U.S. GAAP as a joint venture in which the Company’s subsidiary has a controlling financial interest and, as a result, it is the primary beneficiary. The following table summarizes the assets and liabilities2022, net realized gains related to this variable interest entity which are included in the accompanying consolidated balance sheets.
| September 30, 2017 | December 31, 2016 | |||||||
Cash and cash equivalents | $ | 90 | $ | 65 | ||||
Construction in progress included in real estate investments | $ | — | $ | 3,404 | ||||
Real estate investments | $ | 4,472 | $ | — | ||||
Other assets | $ | 139 | $ | — | ||||
Accrued expenses | $ | 59 | $ | 68 | ||||
Other liabilities | $ | 42 | $ | 11 | ||||
g) Net Investment Income
Net investment income (loss)other investments were $4 and $81, by source, is summarized as follows:respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Available-for-sale securities: | ||||||||||||||||
Fixed-maturity securities | $ | 1,532 | $ | 1,164 | $ | 4,172 | $ | 3,394 | ||||||||
Equity securities | 790 | 817 | 2,461 | 2,552 | ||||||||||||
Investment expense | (176 | ) | (165 | ) | (526 | ) | (488 | ) | ||||||||
Limited partnership investments | 392 | 1,119 | 1,724 | 54 | ||||||||||||
Real estate investments | (292 | ) | (372 | ) | (856 | ) | (455 | ) | ||||||||
(Loss) income from unconsolidated joint venture | (16 | ) | (75 | ) | 126 | 153 | ||||||||||
Cash and cash equivalents | 648 | 285 | 1,415 | 755 | ||||||||||||
Other | — | 12 | 6 | 35 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net investment income | $ | 2,878 | $ | 2,785 | $ | 8,522 | $ | 6,000 | ||||||||
|
|
|
|
|
|
|
| |||||||||
22
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 5 —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 investmentsavailable-for-sale fixed-maturity securities carried at fair value and changes in the unrealized other-than-temporary impairmentto any credit 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:
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||
| Before Tax | Income Tax Expense (Benefit) | Net of Tax | Before Tax | Income Tax Expense (Benefit) | Net of Tax | |||||||||||||||||||
Unrealized gain arising during the period | $ | 2,155 | $ | 831 | $ | 1,324 | $ | 2,234 | $ | 862 | $ | 1,372 | ||||||||||||
Other-than-temporary impairment loss | 474 | 183 | 291 | 224 | 86 | 138 | ||||||||||||||||||
Call and repayment losses charged to investment income | — | — | — | 3 | 1 | 2 | ||||||||||||||||||
Reclassification adjustment for realized losses (gains) | 226 | 87 | 139 | (583 | ) | (225 | ) | (358 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other comprehensive income | $ | 2,855 | $ | 1,101 | $ | 1,754 | $ | 1,878 | $ | 724 | $ | 1,154 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||
|
| March 31, 2023 |
|
| March 31, 2022 |
| ||||||||||||||||||
|
| Before |
|
| Income |
|
| Net of |
|
| Before |
|
| Income |
|
| Net of |
| ||||||
|
| Tax |
|
| Tax Effect |
|
| Tax |
|
| Tax |
|
| Tax Effect |
|
| Tax |
| ||||||
Net unrealized gains (losses) |
| $ | 2,415 |
|
| $ | (1,997 | ) |
| $ | 4,412 |
|
| $ | (4,151 | ) |
| $ | (1,047 | ) |
| $ | (3,104 | ) |
Reclassification adjustment for net |
|
| 738 |
|
|
| 187 |
|
|
| 551 |
|
|
| 429 |
|
|
| 109 |
|
|
| 320 |
|
Total other comprehensive income |
| $ | 3,153 |
|
| $ | (1,810 | ) |
| $ | 4,963 |
|
| $ | (3,722 | ) |
| $ | (938 | ) |
| $ | (2,784 | ) |
| Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
| Before Tax | Income Tax Expense (Benefit) | Net of Tax | Before Tax | Income Tax Expense (Benefit) | Net of Tax | |||||||||||||||||||
Unrealized gain arising during the period | $ | 4,822 | $ | 1,860 | $ | 2,962 | $ | 10,290 | $ | 3,970 | $ | 6,320 | ||||||||||||
Other-than-temporary impairment loss | 864 | 333 | 531 | 1,441 | 556 | 885 | ||||||||||||||||||
Call and repayment losses charged to investment income | 9 | 4 | 5 | 14 | 5 | 9 | ||||||||||||||||||
Reclassification adjustment for realized gains | (2,276 | ) | (878 | ) | (1,398 | ) | (899 | ) | (347 | ) | (552 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other comprehensive income | $ | 3,419 | $ | 1,319 | $ | 2,100 | $ | 10,846 | $ | 4,184 | $ | 6,662 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Note 6 —7 -- Fair Value Measurements
The Company records and discloses certain financial assets at their estimated fair value.values. 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 | ||||
Level 2 | – | Other inputs that are observable for the asset, | ||||
Level 3 | – | Inputs that are unobservable. | ||||
Valuation Methodology
Cash and cash equivalentsCash Equivalents
Cash and cash equivalents primarily consist of money-market funds and certificates of deposit.deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.
Available-for-sale18
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and trading securitiesper share amounts, unless otherwise stated)
Restricted Cash
Restricted cash represents cash held by state authorities or deposited in escrow. Its carrying value approximates fair value.
Fixed-Maturity and Equity Securities
Estimated fair values of the Company’savailable-for-sale fixed-maturity and tradingequity securities 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
23
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
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 InvestmentsRevolving Credit Facility
As described in Note 4 — “Investments” under Limited Partnership Investments,From time to time, 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.
Revolving Credit Facility
an amount outstanding under a revolving credit facility. The interest rate on the Company’s revolving credit facility wasis variable and is periodically adjusted based on the London Interbank OfferedSecured Overnight Financing Rate (“SOFR”) plus a spread.ten basis points adjustment plus a margin based on the debt-to-capital ratio. As a result, its carrying value, at December 31, 2016 approximatedwhen outstanding, approximates fair value. In February 2017, this credit facility was converted into a 3.95% three-year promissory note. See Note 8 — “Long-Term Debt” under3.95% Promissory Note.
Long-Term Debt
24
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Long-term debt
The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:
Maturity Date | Valuation Methodology | |||
| 2042 | Quoted price | ||
| 2037 | Quoted price | ||
3.90% Promissory Note | * | Discounted cash flow method/Level 3 inputs | ||
| ||||
| Discounted cash flow method/Level 3 inputs | |||
| 2036 | Discounted cash flow method/Level 3 inputs |
| Debt derecognized in March 2023. See Note 11 -- “Long-Term Debt” for additional information. |
19
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Assets Measured at Estimated Fair Value on a Recurring Basis
The following table presentstables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicatestables indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2017March 31, 2023 and December 31, 2016:2022:
| Fair Value Measurements Using |
| Fair Value Measurements Using |
|
|
|
| ||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | �� | Total |
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Total |
| ||||||||||||||||
As of September 30, 2017 | ||||||||||||||||||||||||||||||||
As of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Cash and cash equivalents | $ | 292,438 | $ | — | $ | — | $ | 292,438 |
| $ | 302,025 |
|
| $ | — |
|
| $ | — |
|
| $ | 302,025 |
| ||||||||
Restricted cash |
| $ | 2,987 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,987 |
| ||||||||||||||||
Fixed-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
U.S. Treasury and U.S. government agencies | 45,739 | 1,502 | — | 47,241 |
| $ | 487,750 |
|
| $ | 7,876 |
|
| $ | — |
|
| $ | 495,626 |
| ||||||||||||
Corporate bonds | 121,516 | 994 | — | 122,510 |
|
| 27,257 |
|
|
| — |
|
|
| — |
|
|
| 27,257 |
| ||||||||||||
State, municipalities, and political subdivisions | — | 76,940 | — | 76,940 |
|
| — |
|
|
| 1,391 |
|
|
| — |
|
|
| 1,391 |
| ||||||||||||
Exchange-traded debt | 9,276 | — | — | 9,276 |
|
| 482 |
|
|
| — |
|
|
| — |
|
|
| 482 |
| ||||||||||||
Redeemable preferred stock | 135 | — | — | 135 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total fixed-maturity securities | 176,666 | 79,436 | — | 256,102 | ||||||||||||||||||||||||||||
Total available-for-sale securities |
| $ | 515,489 |
|
| $ | 9,267 |
|
| $ | — |
|
| $ | 524,756 |
| ||||||||||||||||
Equity securities | 63,023 | — | — | 63,023 |
| $ | 37,415 |
|
| $ | — |
|
| $ | — |
|
| $ | 37,415 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Totalavailable-for-sale securities | 239,689 | 79,436 | — | 319,125 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Trading equity securities | 1,003 | — | — | 1,003 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | $ | 533,130 | $ | 79,436 | $ | — | $ | 612,566 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
25
|
| Fair Value Measurements Using |
|
|
|
| ||||||||||
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Total |
| ||||
As of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 234,863 |
|
| $ | — |
|
| $ | — |
|
| $ | 234,863 |
|
Restricted cash |
| $ | 2,900 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,900 |
|
Fixed-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury and U.S. government agencies |
| $ | 446,233 |
|
| $ | 8,369 |
|
| $ | — |
|
| $ | 454,602 |
|
Corporate bonds |
|
| 27,193 |
|
|
| — |
|
|
| — |
|
|
| 27,193 |
|
State, municipalities, and political subdivisions |
|
| — |
|
|
| 1,383 |
|
|
| — |
|
|
| 1,383 |
|
Exchange-traded debt |
|
| 633 |
|
|
| — |
|
|
| — |
|
|
| 633 |
|
Redeemable preferred stock |
|
| 90 |
|
|
| — |
|
|
| — |
|
|
| 90 |
|
Total available-for-sale securities |
| $ | 474,149 |
|
| $ | 9,752 |
|
| $ | — |
|
| $ | 483,901 |
|
Equity securities |
| $ | 34,583 |
|
| $ | — |
|
| $ | — |
|
| $ | 34,583 |
|
Liabilities Carried at Other Than Fair Value
The following tables present fair value information for liabilities that are carried on the consolidated balance sheets at amounts other than fair value as of March 31, 2023 and December 31, 2022:
|
| Carrying |
|
| Fair Value Measurements Using |
|
| Estimated |
| |||||||||||
|
| Value |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Fair Value |
| |||||
As of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
4.75% Convertible Senior Notes |
| $ | 167,396 |
|
| $ | — |
|
| $ | 157,805 |
|
| $ | — |
|
| $ | 157,805 |
|
4.25% Convertible Senior Notes |
|
| 23,916 |
|
|
| — |
|
|
| 22,089 |
|
|
| — |
|
|
| 22,089 |
|
4.55% Promissory Note |
|
| 4,836 |
|
|
| — |
|
|
| — |
|
|
| 4,617 |
|
|
| 4,617 |
|
Total long-term debt |
| $ | 196,148 |
|
| $ | — |
|
| $ | 179,894 |
|
| $ | 4,617 |
|
| $ | 184,511 |
|
20
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Fair Value Measurements Using | ||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
As of December 31, 2016 | ||||||||||||||||
Financial Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 280,531 | $ | — | $ | — | $ | 280,531 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Fixed-maturity securities: | ||||||||||||||||
U.S. Treasury and U.S. government agencies | 1,939 | — | — | 1,939 | ||||||||||||
Corporate bonds | 73,519 | 985 | — | 74,504 | ||||||||||||
State, municipalities, and political subdivisions | — | 78,306 | — | 78,306 | ||||||||||||
Exchange-traded debt | 11,262 | — | — | 11,262 | ||||||||||||
Redeemable preferred stock | 237 | — | — | 237 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities | 86,957 | 79,291 | — | 166,248 | ||||||||||||
Equity securities | 53,035 | — | — | 53,035 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Totalavailable-for-sale securities | 139,992 | 79,291 | — | 219,283 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 420,523 | $ | 79,291 | $ | — | $ | 499,814 | ||||||||
|
|
|
|
|
|
|
| |||||||||
|
| Carrying |
|
| Fair Value Measurements Using |
|
| Estimated |
| |||||||||||
|
| Value |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Fair Value |
| |||||
As of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
4.75% Convertible Senior Notes |
| $ | 167,126 |
|
| $ | — |
|
| $ | 133,167 |
|
| $ | — |
|
| $ | 133,167 |
|
4.25% Convertible Senior Notes |
|
| 23,916 |
|
|
| — |
|
|
| 19,473 |
|
|
| — |
|
|
| 19,473 |
|
3.90% Promissory Note |
|
| 8,943 |
|
|
| — |
|
|
| — |
|
|
| 8,152 |
|
|
| 8,152 |
|
3.75% Callable Promissory Note |
|
| 6,789 |
|
|
| — |
|
|
| — |
|
|
| 6,171 |
|
|
| 6,171 |
|
4.55% Promissory Note |
|
| 4,900 |
|
|
| — |
|
|
| — |
|
|
| 4,642 |
|
|
| 4,642 |
|
Total long-term debt |
| $ | 211,674 |
|
| $ | — |
|
| $ | 152,640 |
|
| $ | 18,965 |
|
| $ | 171,605 |
|
Note 8 -- Intangible Assets, and Liabilities Carried at Other Than Fair ValueNet
The Company’s intangible assets, net consist of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Anchor tenant relationships (a) |
| $ | — |
|
| $ | 1,761 |
|
In-place leases |
|
| 410 |
|
|
| 3,579 |
|
Policy renewal rights |
|
| 10,100 |
|
|
| 10,100 |
|
Non-compete agreements (b) |
|
| 314 |
|
|
| 314 |
|
Total, at cost |
|
| 10,824 |
|
|
| 15,754 |
|
Less: accumulated amortization |
|
| (3,138 | ) |
|
| (5,176 | ) |
Intangible assets, net |
| $ | 7,686 |
|
| $ | 10,578 |
|
The following tables present fair value informationremaining weighted-average amortization periods for assets and liabilities that are carried on the balance sheet at amounts other than fair valueintangible assets as of September 30, 2017March 31, 2023 are summarized in the table below:
In-place leases | 12.1 years | |
Policy renewal rights | 3.1 years |
In connection with the sales of the retail shopping center investment properties in Melbourne, Florida and Sorrento, Florida as described in Note 5 -- “Investments” under Real Estate Investments, the Company derecognized $2,200 of intangible assets, net on March 31, 2023.
At March 31, 2023 and December 31, 2016.2022, contingent liabilities related to renewal rights intangible assets were $371 and are included in other liabilities on the consolidated balance sheets.
21
| Carrying | Fair Value Measurements Using | Estimated | ||||||||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | ||||||||||||||||
As of September 30, 2017 | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Limited partnership investments | $ | 20,998 | $ | — | $ | — | $ | 20,998 | $ | 20,998 | ||||||||||
Financial Liabilities: | ||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||
3.875% Convertible senior notes | $ | 84,547 | $ | — | $ | 88,874 | $ | — | $ | 88,874 | ||||||||||
4.25% Convertible senior notes | 125,581 | — | 128,656 | — | 128,656 | |||||||||||||||
3.95% Promissory note | 9,317 | — | — | 9,361 | 9,361 | |||||||||||||||
4% Promissory note | 8,321 | — | — | 8,108 | 8,108 | |||||||||||||||
3.75% Promissory note | 8,545 | — | — | 7,984 | 7,984 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total long-term debt | $ | 236,311 | $ | — | $ | 217,530 | $ | 25,453 | $ | 242,983 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Carrying | Fair Value Measurements Using | Estimated | ||||||||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | ||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Limited partnership investments | $ | 29,263 | $ | — | $ | — | $ | 29,263 | $ | 29,263 | ||||||||||
Financial Liabilities: | ||||||||||||||||||||
Revolving credit facility | $ | 9,463 | $ | — | $ | — | $ | 9,463 | $ | 9,463 | ||||||||||
Long-term debt: | ||||||||||||||||||||
8% Senior notes | $ | 39,448 | $ | — | $ | 41,618 | $ | — | $ | 41,618 | ||||||||||
3.875% Convertible senior notes | 81,988 | — | — | 84,696 | 84,696 | |||||||||||||||
4% Promissory note | 8,660 | — | — | 8,664 | 8,664 | |||||||||||||||
3.75% Promissory note | 8,767 | — | — | 8,506 | 8,506 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total long-term debt | $ | 138,863 | $ | — | $ | 41,618 | $ | 101,866 | $ | 143,484 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
26
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 7 —9 -- Other Assets
The following table summarizes the Company’s other assets:
| September 30, 2017 | December 31, 2016 |
| March 31, |
|
| December 31, |
| |||||||||
Benefits receivable related to retrospective reinsurance contracts | $ | 1,969 | $ | 5,810 | ||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
Benefits receivable related to retrospective reinsurance contract |
| $ | 23,310 |
|
| $ | 16,317 |
| ||||||||
Reimbursement and fees receivable under TPA service |
|
| 5,339 |
|
|
| 7,303 |
| ||||||||
Prepaid expenses | 2,233 | 1,581 |
|
| 2,394 |
|
|
| 2,826 |
| ||||||
Deposits |
|
| 709 |
|
|
| 491 |
| ||||||||
Lease acquisition costs, net | 580 | 615 |
|
| 696 |
|
|
| 832 |
| ||||||
Restricted cash | 709 | 600 | ||||||||||||||
Other | 5,970 | 2,736 |
|
| 3,656 |
|
|
| 3,902 |
| ||||||
|
| |||||||||||||||
Total other assets | $ | 11,461 | $ | 11,342 |
| $ | 36,104 |
|
| $ | 31,671 |
| ||||
|
| |||||||||||||||
Management reviewed the collectability of the reimbursement and fees receivable under third-party administrator (“TPA”) service as of March 31, 2023 and, considering the net balance due to the counterparty as well as the balance of funds withheld for assumed business as of March 31, 2023, determined that an allowance for credit losses is not necessary for the reimbursement and fees receivable under TPA service.
Note 8 —10 -- Revolving Credit Facility
At March 31, 2023, the Company had no borrowings outstanding under the credit facility. For the three months ended March 31, 2023 and 2022, interest expense was $25 and $89, respectively, including $25 and $25 of amortization of issuance costs, respectively. At March 31, 2023, the Company was in compliance with all required covenants and had available borrowing capacity of $50,000.
Note 11 -- Long-Term Debt
The following table summarizes the Company’s long-term debt.debt:
| September 30, 2017 | December 31, 2016 | |||||||
8% Senior Notes, redeemed in April 2017 | $ | — | $ | 40,250 | ||||
3.875% Convertible Senior Notes, due March 15, 2019 | 89,990 | 89,990 | ||||||
4.25% Convertible Senior Notes, due March 1, 2037 | 143,750 | — | ||||||
3.95% Promissory note, due through February 17, 2020 | 9,417 | — | ||||||
4% Promissory note, due through February 1, 2031 | 8,468 | 8,821 | ||||||
3.75% Promissory note, due through September 1, 2036 | 8,692 | 8,924 | ||||||
|
|
|
| |||||
Total principal amount | 260,317 | 147,985 | ||||||
Less: unamortized discount and issuance costs | (24,006 | ) | (9,122 | ) | ||||
|
|
|
| |||||
Total long-term debt | $ | 236,311 | $ | 138,863 | ||||
|
|
|
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
4.75% Convertible Senior Notes, due June 1, 2042 |
| $ | 172,500 |
|
| $ | 172,500 |
|
4.25% Convertible Senior Notes, due March 1, 2037 |
|
| 23,916 |
|
|
| 23,916 |
|
3.90% Promissory Note, due through April 1, 2032 |
|
| — |
|
|
| 9,072 |
|
3.75% Callable Promissory Note, due through |
|
| — |
|
|
| 6,871 |
|
4.55% Promissory Note, due through August 1, 2036 |
|
| 4,902 |
|
|
| 4,968 |
|
Finance lease liabilities, due through October 15, 2024 |
|
| 10 |
|
|
| 13 |
|
Total principal amount |
|
| 201,328 |
|
|
| 217,340 |
|
Less: unamortized issuance costs |
|
| (5,170 | ) |
|
| (5,653 | ) |
Total long-term debt |
| $ | 196,158 |
|
| $ | 211,687 |
|
The following table summarizes future maturities of long-term debt as of September 30, 2017, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.
22
Due in 12 months following September 30, | ||||
2017 | $ | 1,039 | ||
2018 | 91,070 | |||
2019 | 9,815 | |||
2020 | 906 | |||
2021 | 144,693 | |||
Thereafter | 12,794 | |||
|
| |||
Total | $ | 260,317 | ||
|
|
27
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table summarizes future maturities of long-term debt as of March 31, 2023, which takes into consideration the assumption that the 4.75% Convertible Senior Notes and 4.25% Convertible Senior Notes are repurchased at their respective next earliest call dates:
Due in 12 months following March 31, |
|
|
| |
2023 |
| $ | 280 |
|
2024 |
|
| 285 |
|
2025 |
|
| 297 |
|
2026 |
|
| 24,227 |
|
2027 |
|
| 172,826 |
|
Thereafter |
|
| 3,413 |
|
Total |
| $ | 201,328 |
|
Information with respect to interest expense related to long-term debt is as follows:
| Three Months Ended |
| ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, |
| March 31, |
| ||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 |
| 2023 |
|
| 2022 |
| |||||||||||||||
Interest Expense: |
|
|
|
|
|
| ||||||||||||||||||
Contractual interest | $ | 2,662 | $ | 1,810 | $ | 7,766 | $ | 5,466 |
| $ | 2,497 |
|
| $ | 472 |
| ||||||||
Non-cash expense (a) | 1,746 | 862 | 4,623 | 2,646 |
|
| 279 |
|
|
| 40 |
| ||||||||||||
Capitalized interest (b) | — | — | (61 | ) | — | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 4,408 | $ | 2,672 | $ | 12,328 | $ | 8,112 |
| $ | 2,776 |
|
| $ | 512 |
| ||||||||
|
|
|
| |||||||||||||||||||||
(a) Includes amortization |
Convertible Senior Notes
The Company’s Convertible Senior Notes consist of 3.875% Convertible Senior Notes due 2019 (“3.875% Convertible Notes”) and debt issuance costs.
4.25% Convertible Senior Notes due 2037 (“4.25% Convertible Notes”).
The 3.875% Convertible Notes were issued in late 2013 in a private offering for an aggregate principal amount of $103,000. During the first quarter of 2016, the Company repurchased an aggregate of $13,010 in principal, thereby decreasing the aggregate principal balance of its 3.875% Convertible Notes to $89,990. On March 3, 2017, the Company issued 4.25% Convertible Notes in a private offering for an aggregate principal amount of $143,750. The net proceeds of the 4.25% Convertible Notes were $138,775 after $4,975 in related issuance and transaction costs. The following table summarizes the principal and interest payment terms of these Convertible Senior Notes:
|
| |
| ||
|
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 each respective indenture. These Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. In conjunction with the issuances of the Convertible Senior Notes, the Company entered into prepaid share repurchase forward contracts and share repurchase agreements providing for the repurchase of shares of the Company’s common stock. See Note 14 — “Stockholders’ Equity” underShare Repurchase Agreements andPrepaid Share Repurchase Forward Contracts for additional information.
28
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table summarizes information regarding the equity and liability components of the Convertible Senior Notes:
| September 30, 2017 | December 31 2016 | |||||||
Principal amount | $ | 233,740 | $ | 89,990 | ||||
Unamortized discount | (18,790 | ) | (6,795 | ) | ||||
|
|
|
| |||||
Liability component – net carrying value before issuance costs | $ | 214,950 | $ | 83,195 | ||||
|
|
|
| |||||
Equity component – conversion, net of offering costs | $ | 31,051 | $ | 15,900 | ||||
|
|
|
| |||||
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.
3.875% Convertible Notes. Since January 2015, the Company’srecent cash dividends on common stock have exceeded $0.275$0.35 per share, resulting in adjustments to the conversion rate of the 3.875%4.25% Convertible Senior Notes. Accordingly, as of September 30, 2017,March 31, 2023, the conversion rate of the Company’s 3.875%4.25% Convertible Senior Notes was 16.180116.5486 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.80$60.43 per share.
There were no unamortized debt issuance costs for the 4.25% Convertible Senior Notes. at March 31, 2023.
4.75% Convertible Senior Notes
The conversion rate of the 4.25%4.75% Convertible Senior Notes is currently 16.263512.4166 shares of common stock for each $1 in principal amount, which is the equivalent of approximately $61.49$80.54 per share.
The holders ofeffective interest rate for the 4.75% Convertible Senior Notes, may convert all ortaking into account both cash and non-cash components, approximates 5.6%. Had a portion20-year term been used for the amortization of theirthe issuance costs of the 4.75% Convertible Senior Notes, during specified periods as follows: (1) during any calendar quarter commencing after the calendar quarter ending on the dates specified in each respective 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 fivebusiness-day period after any ten consecutivetrading-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 conversionannual effective interest 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 each respective indenture.
The note holders who electcharged to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures will be entitledearnings would have decreased 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.approximately 5.0%. As of September 30, 2017, none ofMarch 31, 2023, the conditions allowing the holders of either class 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 amountremaining amortization period of the debt and an increase in additionalpaid-in capital.issuance costs was expected to be 4.2 years for the 4.75% Convertible Senior Notes.
23
29
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Embedded Redemption Feature – Fundamental Change3.90% Promissory Note
The note holders haveOn March 31, 2023, in conjunction with the right to require the Company to repurchase for cash all or any portionsale of the Convertible Senior Notes at par prior to the maturity date should any of the fundamental change events described in the indentures 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 4.25% Convertible Notes, the Company is required to repurchase for cash all or any portion of the 4.25% Convertible 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 4.25% Convertible 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 4.25% Convertible Notes over the period from March 3, 2017 to March 1, 2022.
The effective interest rates for the 3.875% Convertible Notes and the 4.25% Convertible Notes, taking into account both cash andnon-cash components, approximate 8.3% and 7.6%, respectively. Had a20-year term been used for the amortization of the liability component and issuance costs of the 4.25% Convertible Notes, the annual effective interest rate charged to earnings would have been decreased to approximately 5.4%. As of September 30, 2017, the remaining amortization periods of the debt discounts were expected to be 1.5 years for the 3.875% Convertible Notes and 4.4 years for the 4.25% Convertible Notes.
8% Senior Notes
On April 3, 2017, the Company redeemed its 8% publicly traded, unsecured senior notes which had unamortized debt issuance costs of $743 at par for $40,805, including accrued and unpaid interest of $555. For the nine months ended September 30, 2017, the Company recognized a loss of $743 associated with the early extinguishment of this debt. The redemption was funded by the net proceeds from the issuance of the 4.25% Convertible Senior 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 investment property in Melbourne, Florida. Shortly afterFlorida for a price of $18,500, the loan conversion,buyer assumed the 3.90% Promissory Note from the Company withdrewwhich consisted of the $8,979 principal balance plus $16 of accrued interest at March 31, 2023.
3.75% Callable Promissory Note
On March 31, 2023, the Company made an additional amountearly repayment of $109, thereby increasing the loan amount to $9,550. The loan bears a fixed annual interest rateentirety of 3.95%. Approximately $50its 3.75% Callable Promissory Note which included $6,775 of principal and interest is payablebalance plus $22 of accrued interest. As a result, the Company incurred a $177 loss on extinguishment of debt. The note was collateralized by the retail shopping center investment property 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. The promissory note may be repaidSorrento, Florida which was sold as described in part or in full at any time without penalty.Note 5 -- “Investments” under Real Estate Investments.
Note 12 -- Reinsurance
Reinsurance obtained from other insurance companies
30
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 9 — Reinsurance
The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance treatiescontracts and a portion of its flood insurance exposure under 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, effective January 1, 2017, the Company wasis entitled to a 30%30% ceding commission on ceded premiums written. Duringwritten and a profit commission equal to 10% of net profit. On January 12, 2023, HCPCI and TypTap received approval from the third quarterFlorida Office of 2017,Insurance Regulation (“FLOIR”) to discontinue flood insurance policies written in Florida with policy cancellation effective dates no later than May 31, 2023. The reason for discontinuation is primarily attributable to the Company entered intoincreased costs and reduced availability of flood reinsurance. The discontinuation will not have a three-year flood catastrophe excessmaterial impact to the Company’s results of loss reinsurance contract effective July 1, 2017. The reinsurance premiums under this three-year 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. Effective September 1, 2017, the quota share reinsurance agreement was terminated and replaced with a new quota share agreement with revised terms and conditions. Under the new agreement, the Company is also entitled to a 30% ceding commission on ceded premiums written.operations.
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 1st1st of 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:24
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Premiums Written: | ||||||||||||||||
Direct | $ | 94,935 | $ | 93,282 | $ | 301,930 | $ | 308,682 | ||||||||
Assumed | (63 | ) | (18 | ) | (1,184 | ) | (377 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Gross written | 94,872 | 93,264 | 300,746 | 308,305 | ||||||||||||
Ceded | (44,704 | ) | (29,242 | ) | (101,528 | ) | (105,998 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net premiums written | $ | 50,168 | $ | 64,022 | $ | 199,218 | $ | 202,307 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Premiums Earned: | ||||||||||||||||
Direct | $ | 87,118 | $ | 92,112 | $ | 259,698 | $ | 283,011 | ||||||||
Assumed | 1,551 | 430 | 10,678 | 3,262 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross earned | 88,669 | 92,542 | 270,376 | 286,273 | ||||||||||||
Ceded | (44,705 | ) | (29,242 | ) | (101,529 | ) | (105,998 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net premiums earned | $ | 43,964 | $ | 63,300 | $ | 168,847 | $ | 180,275 | ||||||||
|
|
|
|
|
|
|
| |||||||||
During the three and nine months ended September 30, 2017, reinsurance recoveries of $213,746 and $213,751, respectively, were deducted from losses incurred. During the three and nine months ended September 30, 2016, there were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred. The recoveries in 2017 were related to Hurricane Irma which
31
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The impact of the reinsurance contracts on premiums written and earned is as follows:
made landfall
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Premiums Written: |
|
|
|
|
|
| ||
Direct |
| $ | 207,423 |
|
| $ | 171,981 |
|
Assumed |
|
| (7,569 | ) |
|
| 5,313 |
|
Gross written |
|
| 199,854 |
|
|
| 177,294 |
|
Ceded |
|
| (70,509 | ) |
|
| (53,162 | ) |
Net premiums written |
| $ | 129,345 |
|
| $ | 124,132 |
|
Premiums Earned: |
|
|
|
|
|
| ||
Direct |
| $ | 172,905 |
|
| $ | 148,846 |
|
Assumed |
|
| 7,163 |
|
|
| 30,079 |
|
Gross earned |
|
| 180,068 |
|
|
| 178,925 |
|
Ceded |
|
| (70,509 | ) |
|
| (53,162 | ) |
Net premiums earned |
| $ | 109,559 |
|
| $ | 125,763 |
|
During the three months ended March 31, 2023 and 2022, the Company recognized ceded losses of $2,751 and $870, respectively, as reductions in the Florida Peninsulalosses and caused significant property damages across the region.loss adjustment expenses. At September 30, 2017March 31, 2023 and December 31, 2016,2022, there were 37 and 3545 reinsurers respectively, participating in the Company’s reinsurance program. AmountsTotal net amounts recoverable and receivable with respect tofrom reinsurers at September 30, 2017March 31, 2023 and December 31, 20162022 were $213,746$596,700 and $0,$688,359, respectively. Included in the amounts receivable at September 30, 2017 was $7,400 related to the Company’s contract with Oxbridge Reinsurance Limited, a related party. Approximately 31.3%60.6% of the reinsurance recoverable balance at September 30, 2017March 31, 2023 was concentrated in two reinsurers.receivable from six reinsurers, one of which was the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on all available information considered in the insurance ratings,rating-based method, the payment historyCompany recognized decreases in credit loss expense of $1 and $11 for the financial strength ofthree months ended March 31, 2023 and 2022, respectively. Allowances for credit losses related to the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of September 30, 2017.were $453 and $454 at March 31, 2023 and December 31, 2022, respectively.
CertainOne of the existing reinsurance contracts includeincludes retrospective provisions that adjust premiums increase the amount of future coverage, or result in a profit commission in the event losses are minimal or zero. The Company’s preliminary losses relatedPrior to Hurricane Irma beforeJune 1, 2022, there were two reinsurance recoveries are estimated to be in the range of $250,000 to $300,000. As a result, the balances of previously accrued benefits and deferred reinsurance premiums were adjustedcontracts with the changes recognized in the consolidated statement of income as additional ceded premiums.retrospective provisions. For the three and nine months ended September 30, 2017,March 31, 2023 and 2022, the Company recognized netreductions in premiums ceded premiums of $12,464$6,993 and $5,508,$1,484, respectively, related to these adjustments. Includedadjustments in these amounts attributablethe consolidated statements of income. See Note 21 -- “Commitments and Contingencies” for additional information.
Amounts receivable pursuant to the Company’s contract with Oxbridge for the three and nine months ended September 30, 2017 were $2,415 and $903, respectively. In contrast, these adjustments were reflected as a net reduction in ceded premiums of $3,428 for the three months ended September 30, 2016, of which $594 related to the Company’s contract with Oxbridge. For the nine months ended September 30, 2016, these adjustments were $9,250, of which $1,334 related to the Company’s contract with Oxbridge. In June 2016, the Company received a total of $37,800 in cash benefits related to two retrospective reinsurance contracts that terminated May 31, 2016 of which $7,560 was received from Oxbridge. In September 2016, the Company received the final cash payment of $5,716 under the terms of the remaining retrospective reinsurance contract which terminated May 31, 2016.
In addition, these adjustmentsprovisions are reflected in other assets and prepaid reinsurance premiums.assets. At September 30, 2017March 31, 2023 and December 31, 2016,2022, other assets included $1,969$23,310 and $5,810,$16,317, respectively, of which $393 and $1,043 relatedamounts receivable pursuant to the contract with Oxbridge and prepaid reinsurance premiums included $484 and $2,152, respectively, of which $85 and $338 related to the contract with Oxbridge.retrospective provisions. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer with a good credit rating and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial position.condition.
25
32
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Reinsurance provided to other insurance companies
In 2022, the Company provided quota share reinsurance on all policies issued by United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), in the states of Connecticut, New Jersey, Massachusetts, and Rhode Island (collectively “Northeast Region”) and the states of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”). These policies were renewed and/or replaced by the Company. As of the financial reporting date, there was no reinsurance provided to United by the Company. However, additional losses may be incurred pertaining to the previous coverage periods of the quota share reinsurance agreements.
For the three months ended March 31, 2023, assumed premiums written related to the Northeast Region’s insurance policies were $0, whereas for the three months ended March 31, 2022, $6,849 of assumed premiums written related to the Northeast Region’s insurance policies were derecognized, which primarily resulted from the return of the unearned portion of assumed written premiums subsequent to the Company’s renewal and/or replacement of insurance policies in New Jersey. At March 31, 2023, the Company had a net balance of $1,207 due to United related to the Northeast Region, consisting of payable on paid losses and loss adjustment expenses of $626 and ceding commission payable of $581. At December 31, 2022, the Company had a net balance of $1,581 due to United related to the Northeast Region, consisting of payable on paid losses and loss adjustment expenses of $1,000 and ceding commission payable of $581. Effective December 30, 2022, the Company’s quota share reinsurance agreement to provide 100% reinsurance on United’s policies in the Northeast Region was commuted.
For the three months ended March 31, 2023, $7,569 of assumed premiums written related to the Southeast Region’s insurance policies were derecognized, which primarily resulted from the return of the unearned portion of assumed written premiums subsequent to the Company’s renewal and/or replacement of insurance policies in the Southeast Region, whereas for the three months ended March 31, 2022 assumed premiums written related to the Southeast Region’s insurance policies were $12,162. At March 31, 2023, the Company had a net balance of $14,402 due to United related to the Southeast Region, consisting of premiums payable of $9,506 and payable on paid losses and loss adjustment expenses of $6,417, offset by ceding commission receivable of $1,521. At December 31, 2022, the Company had a net balance of $7,521 due to United related to the Southeast Region, consisting of payable on paid losses and loss adjustment expenses of $7,606 and ceding commission payable of $16, offset by premiums receivable of $101.
On February 27, 2023, United’s Florida-domiciled residential insurance subsidiary was placed into receivership by the State of Florida due to its financial insolvency. At March 31, 2023, the Company had a net amount due to United of $10,270 and funds withheld for assumed business in trust accounts totaling $45,274 for the benefit of policies assumed from United. As of March 31, 2023, the Company no longer provided TPA services to United. The Company cannot predict the actions a receiver might take, which may include restrictions on, or use of, funds held in trust. Any such actions could have a material adverse effect on the Company’s financial position and results of operations.
At March 31, 2023 and December 31, 2022, the balance of funds withheld for assumed business related to the Company’s quota share reinsurance agreements with United was $45,274 and $48,772, respectively.
26
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 10 —13 -- Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (“LAE”) is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claimclaims development and losses incurred but not reported.
The Company primarily writes insurance in the state of Florida,states 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 unpaid losses and loss adjustment expensesLAE is summarized as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Three Months Ended |
| ||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 |
| March 31, |
| ||||||||||||||||||
Gross balance, beginning of period | $ | 73,089 | $ | 54,727 | $ | 70,492 | $ | 51,690 | ||||||||||||||||
Less: reinsurance recoverable | 5 | — | — | — | ||||||||||||||||||||
|
|
|
|
| 2023 |
|
| 2022 |
| |||||||||||||||
Net balance, beginning of period | 73,084 | 54,727 | 70,492 | 51,690 | ||||||||||||||||||||
Net balance, beginning of period* |
| $ | 246,546 |
|
| $ | 172,410 |
| ||||||||||||||||
Incurred, net of reinsurance, related to: |
|
|
|
|
|
| ||||||||||||||||||
Current period | 78,337 | 21,283 | 123,710 | 68,703 |
|
| 56,698 |
|
|
| 70,076 |
| ||||||||||||
Prior period | 10,894 | 4,626 | 18,715 | 10,558 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Prior periods |
|
| 3,867 |
|
|
| 2,628 |
| ||||||||||||||||
Total incurred, net of reinsurance | 89,231 | 25,909 | 142,425 | 79,261 |
|
| 60,565 |
|
|
| 72,704 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Paid, net of reinsurance, related to: |
|
|
|
|
|
| ||||||||||||||||||
Current period | (20,888 | ) | (16,078 | ) | (40,392 | ) | (38,674 | ) |
|
| (11,110 | ) |
|
| (18,796 | ) | ||||||||
Prior period | (10,484 | ) | (7,363 | ) | (41,582 | ) | (35,082 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Prior periods |
|
| (49,950 | ) |
|
| (46,481 | ) | ||||||||||||||||
Total paid, net of reinsurance | (31,372 | ) | (23,441 | ) | (81,974 | ) | (73,756 | ) |
|
| (61,060 | ) |
|
| (65,277 | ) | ||||||||
|
|
|
| |||||||||||||||||||||
Net balance, end of period | 130,943 | 57,195 | 130,943 | 57,195 |
|
| 246,051 |
|
|
| 179,837 |
| ||||||||||||
Add: reinsurance recoverable | 213,729 | — | 213,729 | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Add: reinsurance recoverable before allowance for credit losses |
|
| 560,257 |
|
|
| 54,955 |
| ||||||||||||||||
Gross balance, end of period | $ | 344,672 | $ | 57,195 | $ | 344,672 | $ | 57,195 |
| $ | 806,308 |
|
| $ | 234,792 |
| ||||||||
|
|
|
| |||||||||||||||||||||
* 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 and LAE reserves is an inherently uncertain process and changes in loss and LAE 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 estimates are adjusted. During the three and nine months ended September 30, 2017,March 31, 2023, the Company incurred $267,000 of estimated gross losses or $54,000 of estimated netrecognized losses related to Hurricane Irmaprior periods of $3,867 primarily to increase reserves in response to litigation and experienced unfavorable developmentclaim severity. Losses and LAE for the three months ended March 31, 2023 included net estimated losses of $10,894approximately $21,635 related to United policies assumed, renewed and/or replaced. Lower losses and $18,715, respectively, of which $9,442LAE for the three months ended March 31, 2023 resulted from a decrease in claims and $17,438, respectively, pertainlitigation related to claims in the 2015 and 2016 loss years.Florida policies.
27
33
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 11 —14 -- Segment Information
The Company’s businesses consist of fourCompany identifies its operating divisions:divisions or segments based on managerial emphasis, organizational structure and revenue source. The Company has four reportable segments: HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance investmentoperations, excluding the insurance operations under TypTap Group, are grouped together into one reportable segment under HCPCI insurance operations. The TypTap Group segment includes its property and casualty insurance operations, information technology operations and its management company’s activities. 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 information technology.other segment represents the activities of the holding companies and any other companies that do not meet the quantitative and qualitative 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 performancesperformance based on revenue and operating income. The Company aggregates its operating divisions into segments based on organizational structure and revenue source.
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. For the three months ended September 30, 2017March 31, 2023 and 2016,2022, revenues from the Company’sHCPCI insurance operations segment before intracompany elimination represented 96.1%61.2% and 94.8%69.8%, respectively, and revenues from the TypTap Group segment represented 36.5% and 28.3%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2017 and 2016, revenues from the Company’s insurance operations before intracompany elimination represented 96.4% of total revenues of all operating segments in each of the periods. At September 30, 2017March 31, 2023 and December 31, 2016,2022, HCPCI insurance operations’ total assets represented 90.7%52.5% and 87.9%53.4%, respectively, and TypTap Group’s total assets represented 39.0% and 37.9%, respectively, of the combined assets of all operating segments. There was no other operating division representing ten percent or more of the Company’s total revenues or combined assets. In addition, there was no other operating division representing ten percent or more of the greater,
28
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in absolute amount, of the combined profits of all operating divisions reporting a profit or the combined losses of all operating divisions reporting a loss. thousands, except share and per share amounts, unless otherwise stated)
The following tables present segment information reconciled to the Company’s consolidated statements of income. Othernon-reportable divisions are combined and disclosed in Corporate and Other. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.
|
| HCPCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Insurance |
|
| TypTap |
|
| Real |
|
| Corporate/ |
|
| Reclassification/ |
|
|
|
| ||||||
For Three Months Ended March 31, 2023 |
| Operations |
|
| Group |
|
| Estate (a) |
|
| Other (b) |
|
| Elimination |
|
| Consolidated |
| ||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross premiums earned (c) |
| $ | 96,991 |
|
| $ | 87,612 |
|
| $ | — |
|
| $ | — |
|
| $ | (4,535 | ) |
| $ | 180,068 |
|
Premiums ceded |
|
| (40,195 | ) |
|
| (34,823 | ) |
|
| — |
|
|
| — |
|
|
| 4,509 |
|
|
| (70,509 | ) |
Net premiums earned |
|
| 56,796 |
|
|
| 52,789 |
|
|
| — |
|
|
| — |
|
|
| (26 | ) |
|
| 109,559 |
|
Net income from investment portfolio |
|
| 2,954 |
|
|
| 3,379 |
|
|
| — |
|
|
| 1,900 |
|
|
| 8,862 |
|
|
| 17,095 |
|
Gain from sales of real estate investments |
|
| — |
|
|
| — |
|
|
| 8,936 |
|
|
| — |
|
|
| (8,936 | ) |
|
| — |
|
Policy fee income |
|
| 563 |
|
|
| 527 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,090 |
|
Other |
|
| 4,653 |
|
|
| 1,643 |
|
|
| 2,923 |
|
|
| 595 |
|
|
| (8,529 | ) |
|
| 1,285 |
|
Total revenue |
|
| 64,966 |
|
|
| 58,338 |
|
|
| 11,859 |
|
|
| 2,495 |
|
|
| (8,629 | ) |
|
| 129,029 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Losses and loss adjustment expenses |
|
| 28,782 |
|
|
| 33,056 |
|
|
| — |
|
|
| — |
|
|
| (1,273 | ) |
|
| 60,565 |
|
Amortization of deferred policy acquisition costs |
|
| 9,621 |
|
|
| 11,863 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 21,484 |
|
Other policy acquisition expenses |
|
| 655 |
|
|
| 611 |
|
|
| — |
|
|
| — |
|
|
| (30 | ) |
|
| 1,236 |
|
Stock-based compensation expense |
|
| 496 |
|
|
| 829 |
|
|
| — |
|
|
| 781 |
|
|
| — |
|
|
| 2,106 |
|
Interest expense |
|
| — |
|
|
| 431 |
|
|
| 203 |
|
|
| 2,598 |
|
|
| (431 | ) |
|
| 2,801 |
|
Depreciation and amortization |
|
| 139 |
|
|
| 956 |
|
|
| 627 |
|
|
| 202 |
|
|
| (537 | ) |
|
| 1,387 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| 177 |
|
|
| — |
|
|
| (177 | ) |
|
| — |
|
Personnel and other operating expenses |
|
| 9,919 |
|
|
| 9,433 |
|
|
| 1,554 |
|
|
| 1,589 |
|
|
| (6,181 | ) |
|
| 16,314 |
|
Total expenses |
|
| 49,612 |
|
|
| 57,179 |
|
|
| 2,561 |
|
|
| 5,170 |
|
|
| (8,629 | ) |
|
| 105,893 |
|
Income (loss) before income taxes |
| $ | 15,354 |
|
| $ | 1,159 |
|
| $ | 9,298 |
|
| $ | (2,675 | ) |
| $ | — |
|
| $ | 23,136 |
|
Total revenue from non-affiliates (d) |
| $ | 56,929 |
|
| $ | 61,286 |
|
| $ | 11,051 |
|
| $ | 1,926 |
|
|
|
|
|
|
| ||
Gross premiums written |
| $ | 85,153 |
|
| $ | 114,701 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
3429
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Three Months Ended September 30, 2017 | Insurance Operations | Corporate/ Other(a) | Reclassification/ Elimination | Consolidated | ||||||||||||||||||||||||||||||||||||
|
| HCPCI |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| Insurance |
|
| TypTap |
|
| Real |
|
| Corporate/ |
|
| Reclassification/ |
|
|
|
| ||||||||||||||||||||||
For Three Months Ended March 31, 2022 |
| Operations |
|
| Group |
|
| Estate (a) |
|
| Other (b) |
|
| Elimination |
|
| Consolidated |
| ||||||||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Gross premiums earned (c) |
| $ | 119,305 |
|
| $ | 60,622 |
|
| $ | — |
|
| $ | — |
|
| $ | (1,002 | ) |
| $ | 178,925 |
| ||||||||||||||||
Premiums ceded |
|
| (36,953 | ) |
|
| (16,933 | ) |
|
| — |
|
|
| — |
|
|
| 724 |
|
|
| (53,162 | ) | ||||||||||||||||
Net premiums earned | $ | 43,964 | $ | — | $ | — | $ | 43,964 |
|
| 82,352 |
|
|
| 43,689 |
|
|
| — |
|
|
| — |
|
|
| (278 | ) |
|
| 125,763 |
| ||||||||
Net investment income | 2,563 | 623 | (308 | ) | 2,878 | |||||||||||||||||||||||||||||||||||
Net realized and unrealized investment (losses) gains | (226 | ) | 74 | — | (152 | ) | ||||||||||||||||||||||||||||||||||
Net other-than-temporary impairment losses | (464 | ) | (10 | ) | — | (474 | ) | |||||||||||||||||||||||||||||||||
Net (loss) income from investment portfolio |
|
| (1,457 | ) |
|
| (16 | ) |
|
| — |
|
|
| 316 |
|
|
| 135 |
|
|
| (1,022 | ) | ||||||||||||||||
Policy fee income | 905 | — | — | 905 |
|
| 654 |
|
|
| 403 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,057 |
| ||||||||||||
Other | 85 | 2,706 | (2,422 | ) | 369 |
|
| 1,247 |
|
|
| 469 |
|
|
| 2,403 |
|
|
| 836 |
|
|
| (3,713 | ) |
|
| 1,242 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total revenue | 46,827 | 3,393 | (2,730 | ) | 47,490 |
|
| 82,796 |
|
|
| 44,545 |
|
|
| 2,403 |
|
|
| 1,152 |
|
|
| (3,856 | ) |
|
| 127,040 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Losses and loss adjustment expenses | 89,231 | — | — | 89,231 |
|
| 43,995 |
|
|
| 28,988 |
|
|
| — |
|
|
| — |
|
|
| (279 | ) |
|
| 72,704 |
| ||||||||||||
Amortization of deferred policy acquisition costs | 9,031 | — | — | 9,031 |
|
| 19,102 |
|
|
| 9,422 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 28,524 |
| ||||||||||||
Other policy acquisition expenses |
|
| 663 |
|
|
| 283 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 946 |
| ||||||||||||||||
Stock-based compensation expense |
|
| 1,144 |
|
|
| 885 |
|
|
| — |
|
|
| 2,308 |
|
|
| — |
|
|
| 4,337 |
| ||||||||||||||||
Interest expense | — | 4,408 | — | 4,408 |
|
| — |
|
|
| 200 |
|
|
| 227 |
|
|
| 374 |
|
|
| (200 | ) |
|
| 601 |
| ||||||||||||
Depreciation and amortization | 33 | 785 | (494 | ) | 324 |
|
| 114 |
|
|
| 561 |
|
|
| 605 |
|
|
| 172 |
|
|
| (623 | ) |
|
| 829 |
| |||||||||||
Other | 7,155 | 5,595 | (2,236 | ) | 10,514 | |||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Personnel and other operating expenses |
|
| 7,318 |
|
|
| 7,493 |
|
|
| 1,307 |
|
|
| 1,734 |
|
|
| (2,754 | ) |
|
| 15,098 |
| ||||||||||||||||
Total expenses | 105,450 | 10,788 | (2,730 | ) | 113,508 |
|
| 72,336 |
|
|
| 47,832 |
|
|
| 2,139 |
|
|
| 4,588 |
|
|
| (3,856 | ) |
|
| 123,039 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Loss before income taxes | $ | (58,623 | ) | $ | (7,395 | ) | $ | — | $ | (66,018 | ) | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes |
| $ | 10,460 |
|
| $ | (3,287 | ) |
| $ | 264 |
|
| $ | (3,436 | ) |
| $ | — |
|
| $ | 4,001 |
| ||||||||||||||||
Total revenue from non-affiliates (d) |
| $ | 81,733 |
|
| $ | 44,823 |
|
| $ | 2,064 |
|
| $ | 449 |
|
|
|
|
|
|
| ||||||||||||||||||
Gross premiums written |
| $ | 91,141 |
|
| $ | 86,153 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| Three Months Ended September 30, 2016 | Insurance Operations | Corporate/ Other(a) | Reclassification/ Elimination | Consolidated | ||||||||||||
Revenue: | ||||||||||||||||
Net premiums earned | $ | 63,300 | $ | — | $ | — | $ | 63,300 | ||||||||
Net investment income | 2,316 | 989 | (520 | ) | 2,785 | |||||||||||
Net realized investment gains | 532 | 51 | — | 583 | ||||||||||||
Net other-than-temporary impairment losses | (225 | ) | 1 | — | (224 | ) | ||||||||||
Policy fee income | 972 | — | — | 972 | ||||||||||||
Gain on bargain purchase | — | 2,071 | — | 2,071 | ||||||||||||
Other | 106 | 2,001 | (1,786 | ) | 321 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 67,001 | 5,113 | (2,306 | ) | 69,808 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Expenses: | ||||||||||||||||
Losses and loss adjustment expenses | 25,909 | — | — | 25,909 | ||||||||||||
Amortization of deferred policy acquisition costs | 9,335 | — | — | 9,335 | ||||||||||||
Interest expense | — | 2,672 | — | 2,672 | ||||||||||||
Depreciation and amortization | 31 | 419 | (147 | ) | 303 | |||||||||||
Other | 8,426 | 5,293 | (2,159 | ) | 11,560 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total expenses | 43,701 | 8,384 | (2,306 | ) | 49,779 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | $ | 23,300 | $ | (3,271 | ) | $ | — | $ | 20,029 | |||||||
|
|
|
|
|
|
|
| |||||||||
The following table presents segment assets reconciled to the Company’s total assets on the consolidated balance sheets:
35
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Segments: |
|
|
|
|
|
| ||
HCPCI Insurance Operations |
| $ | 880,107 |
|
| $ | 912,233 |
|
TypTap Group |
|
| 719,774 |
|
|
| 704,429 |
|
Real Estate Operations |
|
| 119,646 |
|
|
| 126,001 |
|
Corporate and Other |
|
| 150,118 |
|
|
| 159,378 |
|
Consolidation and Elimination |
|
| (98,523 | ) |
|
| (98,713 | ) |
Total assets |
| $ | 1,771,122 |
|
| $ | 1,803,328 |
|
30
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Nine Months Ended September 30, 2017 | Insurance Operations | Corporate/ Other(a) | Reclassification/ Elimination | Consolidated | ||||||||||||
Revenue: | ||||||||||||||||
Net premiums earned | $ | 168,847 | $ | — | $ | — | $ | 168,847 | ||||||||
Net investment income | 7,153 | 2,099 | (730 | ) | 8,522 | |||||||||||
Net realized and unrealized investment gains | 2,193 | 157 | — | 2,350 | ||||||||||||
Net other-than-temporary impairment losses | (854 | ) | (10 | ) | — | (864 | ) | |||||||||
Policy fee income | 2,721 | — | — | 2,721 | ||||||||||||
Other | 428 | 8,063 | (7,284 | ) | 1,207 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 180,488 | 10,309 | (8,014 | ) | 182,783 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Expenses: | ||||||||||||||||
Losses and loss adjustment expenses | 142,425 | — | — | 142,425 | ||||||||||||
Amortization of deferred policy acquisition costs | 26,668 | — | — | 26,668 | ||||||||||||
Interest expense | — | 12,328 | — | 12,328 | ||||||||||||
Loss on repurchases of senior notes | — | 743 | — | 743 | ||||||||||||
Depreciation and amortization | 94 | 2,227 | (1,425 | ) | 896 | |||||||||||
Other | 22,601 | 16,282 | (6,589 | ) | 32,294 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total expenses | 191,788 | 31,580 | (8,014 | ) | 215,354 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss before income taxes | $ | (11,300 | ) | $ | (21,271 | ) | $ | — | $ | (32,571 | ) | |||||
|
|
|
|
|
|
|
| |||||||||
Note 15 -- Leases
| Nine Months Ended September 30, 2016 | Insurance Operations | Corporate/ Other(a) | Reclassification/ Elimination | Consolidated | ||||||||||||
Revenue: | ||||||||||||||||
Net premiums earned | $ | 180,275 | $ | — | $ | — | $ | 180,275 | ||||||||
Net investment income | 5,802 | 876 | (678 | ) | 6,000 | |||||||||||
Net realized investment gains | 856 | 43 | — | 899 | ||||||||||||
Net other-than-temporary impairment losses | (1,426 | ) | (15 | ) | — | (1,441 | ) | |||||||||
Policy fee income | 2,967 | — | — | 2,967 | ||||||||||||
Gain on repurchases of convertible senior notes | — | 153 | — | 153 | ||||||||||||
Gain on bargain purchase | — | 2,071 | — | 2,071 | ||||||||||||
Other | 543 | 5,808 | (5,200 | ) | 1,151 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 189,017 | 8,936 | (5,878 | ) | 192,075 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Expenses: | ||||||||||||||||
Losses and loss adjustment expenses | 79,261 | — | — | 79,261 | ||||||||||||
Amortization of deferred policy acquisition costs | 28,674 | — | — | 28,674 | ||||||||||||
Interest expense | — | 8,112 | — | 8,112 | ||||||||||||
Depreciation and amortization | 131 | 1,191 | (335 | ) | 987 | |||||||||||
Other | 25,159 | 14,470 | (5,543 | ) | 34,086 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total expenses | 133,225 | 23,773 | (5,878 | ) | 151,120 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | $ | 55,792 | $ | (14,837 | ) | $ | — | $ | 40,955 | |||||||
|
|
|
|
|
|
|
| |||||||||
The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Operating leases: |
|
|
|
|
|
| ||
ROU assets |
| $ | 1,466 |
|
| $ | 777 |
|
Liabilities |
| $ | 1,422 |
|
| $ | 721 |
|
Finance leases: |
|
|
|
|
|
| ||
ROU assets |
| $ | 80 |
|
| $ | 80 |
|
Liabilities |
| $ | 10 |
|
| $ | 13 |
|
The Company entered into a new lease effective March 2023 for its office space in Plantation, Florida which relates to its claims related administration. The new lease has an initial term of 5.25 years.
The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:
Renewal | Other | |||||
Class of | Initial Term | Option | Conditions | |||
Operating lease: | ||||||
Office equipment | 1 month | Yes | (a) | |||
Office space | 3 to 9 years | Yes | (a), (b) | |||
Finance lease: | ||||||
Office equipment | 3 to 5 years | Not applicable | (c) |
As of March 31, 2023, maturities of lease liabilities were as follows:
36
|
| Leases |
| |||||
|
| Operating |
|
| Finance |
| ||
Due in 12 months following March 31, |
|
|
|
|
|
| ||
2023 |
| $ | 258 |
|
| $ | 9 |
|
2024 |
|
| 255 |
|
|
| 1 |
|
2025 |
|
| 264 |
|
|
| — |
|
2026 |
|
| 274 |
|
|
| — |
|
2027 |
|
| 315 |
|
|
| — |
|
Thereafter |
|
| 336 |
|
|
| — |
|
Total lease payments |
|
| 1,702 |
|
|
| 10 |
|
Less: interest |
|
| 280 |
|
|
| — |
|
Total lease obligations |
| $ | 1,422 |
|
| $ | 10 |
|
31
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table presents segment assets reconciledprovides quantitative information with regards to the Company’s total assetsoperating and finance leases:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Lease costs: |
|
|
|
|
|
| ||
Finance lease costs: |
|
|
|
|
|
| ||
Amortization – ROU assets* |
| $ | 4 |
|
| $ | 5 |
|
Operating lease costs* |
|
| 52 |
|
|
| 374 |
|
Short-term lease costs* |
|
| 93 |
|
|
| 110 |
|
Total lease costs |
| $ | 149 |
|
| $ | 489 |
|
Cash paid for amounts included in the |
|
|
|
|
|
| ||
Operating cash flows – operating leases |
| $ | 44 |
|
| $ | 372 |
|
Financing cash flows – finance leases |
| $ | 4 |
|
| $ | 5 |
|
|
|
|
|
|
|
| ||
|
| March 31, |
|
|
|
| ||
|
| 2023 |
|
|
|
| ||
Weighted-average remaining lease term: |
|
|
|
|
|
| ||
Finance leases (in years) |
|
| 0.9 |
|
|
|
| |
Operating leases (in years) |
|
| 6.4 |
|
|
|
| |
Weighted-average discount rate: |
|
|
|
|
|
| ||
Finance leases (%) |
|
| 3.3 | % |
|
|
| |
Operating leases (%) |
|
| 5.9 | % |
|
|
| |
* Included in other operating expenses on the consolidated balance sheets.statements of income.
The following table summarizes the Company’s operating leases in which the Company is a lessor:
| September 30, 2017 | December 31, 2016 | |||||||
Segment: | ||||||||
Insurance Operations | $ | 871,601 | $ | 651,927 | ||||
Corporate and Other | 213,299 | 116,849 | ||||||
Consolidation and Elimination | (55,647 | ) | (98,712 | ) | ||||
|
|
|
| |||||
Total assets | $ | 1,029,253 | $ | 670,064 | ||||
|
|
|
| |||||
Renewal | Other Terms and | |||||
Class of Assets | Initial Term | Option | Conditions | |||
Operating lease: | ||||||
Retail space | 3 to 15 years | Yes | (d) | |||
Boat docks/wet slips | 1 to 12 months | Yes | (d) |
Note 12 —16 -- Income Taxes
A valuation allowance must be established for deferred tax assets when it is more likely than not that the deferred tax assets will not be realized based on available evidence both positive and negative, including recent operating results, available tax planning strategies, and projected future taxable income. As of December 31, 2022, management concluded that it was more likely than not that the deferred tax assets would not be realized and therefore recorded a valuation allowance. The Company evaluates the realizability of its deferred tax assets each quarter, and as of March 31, 2023, based on all of the available evidence, management concluded that it is more likely than not that the deferred tax assets will be realized and therefore is releasing the entire valuation allowance in 2023, as a part of the effective tax rate. During the first quarter of 2023, approximately $890 of valuation allowance was released through income tax expense.
32
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
During the three months ended September 30, 2017,March 31, 2023 and 2022, the Company recorded approximately $25,472$5,343 and $1,210, respectively, of income tax benefits,expense, which resulted in aneffective tax rates of 23.1% and 30.2%, respectively. The decrease in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the release of 38.6%. Duringvaluation allowance established in 2022 during the three months ended September 30, 2016,first quarter of 2023 and the Company recorded approximately $8,696 of income taxes, which resulteddecrease in an effective tax rate of 43.4%. During the nine months ended September 30, 2017, the Company recorded approximately $13,587 of income tax benefits, resulting in an effective tax rate of 41.7%. During the nine months ended September 30, 2016, the Company recorded approximately $16,542 of income taxes, which resulted in an effective tax rate of 40.4%.non-deductible compensation expense. The Company’s estimated annual effective tax rate differs from the statutory federal tax rate due to state and foreign income taxes as well as certain nondeductible andtax-exempt items.
In July 2017, the Company received notice from the Internal Revenue Service stating the Company’s 2015 federal income tax return would be examined. The examination is currently in the process of gathering information.
Note 13 —17 -- Earnings Per Share
U.S. GAAP requires the Company to use thetwo-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.income or loss. For a majority-owned subsidiary, its basic and diluted earnings (loss) per share are first computed separately. Then, the Company’s proportionate share in that majority-owned subsidiary’s earnings is added to the computation of both basic and diluted earnings (loss) per share at a consolidated level.
A summary of the numerator and denominator of the basic and diluted earnings per common share is presented below:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||
|
| March 31, 2023 |
|
| March 31, 2022 |
| ||||||||||||||||||
|
| Income |
|
| Shares (a) |
|
| Per Share |
|
| Income |
|
| Shares (a) |
|
| Per Share |
| ||||||
|
| (Numerator) |
|
| (Denominator) |
|
| Amount |
|
| (Numerator) |
|
| (Denominator) |
|
| Amount |
| ||||||
Net income |
| $ | 17,793 |
|
|
|
|
|
|
|
| $ | 2,791 |
|
|
|
|
|
|
| ||||
Less: Net income attributable to redeemable |
|
| (2,324 | ) |
|
|
|
|
|
|
|
| (2,248 | ) |
|
|
|
|
|
| ||||
Less: TypTap Group’s net (income) loss |
|
| (131 | ) |
|
|
|
|
|
|
|
| 360 |
|
|
|
|
|
|
| ||||
Net income attributable to HCI |
|
| 15,338 |
|
|
|
|
|
|
|
|
| 903 |
|
|
|
|
|
|
| ||||
Less: Income attributable to participating |
|
| (564 | ) |
|
|
|
|
|
|
|
| (52 | ) |
|
|
|
|
|
| ||||
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income allocated to common stockholders |
|
| 14,774 |
|
|
| 8,278 |
|
| $ | 1.78 |
|
|
| 851 |
|
|
| 9,479 |
|
| $ | 0.09 |
|
Effect of Dilutive Securities: * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options |
|
| — |
|
|
| 45 |
|
|
|
|
|
| — |
|
|
| 135 |
|
|
|
| ||
Convertible senior notes |
|
| 1,921 |
|
|
| 2,537 |
|
|
|
|
|
| — |
|
|
| — |
|
|
|
| ||
Warrants |
|
| — |
|
|
| — |
|
|
|
|
|
| — |
|
|
| 153 |
|
|
|
| ||
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income available to common stockholders |
| $ | 16,695 |
|
|
| 10,860 |
|
| $ | 1.54 |
|
| $ | 851 |
|
|
| 9,767 |
|
| $ | 0.09 |
|
37
* For the three months ended March 31, 2023, warrants were excluded due to anti-dilutive effect. For the three months ended March 31, 2022, convertible senior notes were excluded due to anti-dilutive effect.
33
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 18 -- Redeemable Noncontrolling Interest
The following table summarizes the activity of redeemable noncontrolling interest during the three months ended March 31, 2023 and 2022:
A summary
|
| 2023 |
|
| 2022 |
| ||
Balance at January 1 |
| $ | 93,553 |
|
| $ | 89,955 |
|
Increase (decrease): |
|
|
|
|
|
| ||
Accrued cash dividends |
|
| 1,637 |
|
|
| 1,342 |
|
Accretion - increasing dividend rates |
|
| 687 |
|
|
| 906 |
|
Dividends paid |
|
| (3,012 | ) |
|
| (2,508 | ) |
Balance at March 31 |
| $ | 92,865 |
|
| $ | 89,695 |
|
For the three months ended March 31, 2023 and 2022, net income attributable to redeemable noncontrolling interest was $2,324 and $2,248, respectively, consisting of accrued cash dividends of $1,637 and $1,342, respectively, and accretion related to increasing dividend rates of $687 and $906, respectively.
Note 19 -- Equity
Stockholders’ Equity
Common Stock
The Company’s 2022 stock repurchase plan was considered expired and there was no new stock repurchase plan approved by the Board of Directors during the first quarter of 2023.
In March 2022, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the numeratorCompany’s common shares before commissions and denominatorfees during 2022. During the three months ended March 31, 2022, there were no shares repurchased by the Company under the 2022 stock repurchase plan.
On January 11, 2023, the Company’s Board of the basic and diluted (loss) earningsDirectors declared a quarterly dividend of $0.40 per common share is presented below.share. The dividends were paid on March 17, 2023 to stockholders of record on February 17, 2023.
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||
| Loss (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | |||||||||||||||||||
Net (loss) income | $ | (40,546 | ) | $ | 11,333 | |||||||||||||||||||
Less: Loss (income) attributable to participating securities | 2,737 | (557 | ) | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Basic (Loss) Earnings Per Share: | ||||||||||||||||||||||||
(Loss) income allocated to common stockholders | (37,809 | ) | 8,519 | $ | (4.44 | ) | 10,776 | 9,209 | $ | 1.17 | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Effect of Dilutive Securities: | ||||||||||||||||||||||||
Stock options* | — | — | — | 62 | ||||||||||||||||||||
Convertible senior notes* | — | — | 1,028 | 1,447 | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Diluted (Loss) Earnings Per Share: | ||||||||||||||||||||||||
(Loss) income available to common stockholders and assumed conversions | $ | (37,809 | ) | 8,519 | $ | (4.44 | ) | $ | 11,804 | 10,718 | $ | 1.10 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
| Loss (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | |||||||||||||||||||
Net (loss) income | $ | (18,984 | ) | $ | 24,413 | |||||||||||||||||||
Less: Loss (income) attributable to participating securities | 1,236 | (1,158 | ) | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Basic (Loss) Earnings Per Share: | ||||||||||||||||||||||||
(Loss) income allocated to common stockholders | (17,748 | ) | 8,648 | $ | (2.05 | ) | 23,255 | 9,395 | $ | 2.48 | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Effect of Dilutive Securities: | ||||||||||||||||||||||||
Stock options* | — | — | — | 62 | ||||||||||||||||||||
Convertible senior notes* | — | — | 3,206 | 1,507 | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Diluted (Loss) Earnings Per Share: | ||||||||||||||||||||||||
(Loss) income available to common stockholders and assumed conversions | $ | (17,748 | ) | 8,648 | $ | (2.05 | ) | $ | 26,461 | 10,964 | $ | 2.41 | ||||||||||||
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Warrants
38At March 31, 2023, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock at an exercise price of $54.40. The warrants expire on February 26, 2025.
Noncontrolling Interests
At March 31, 2023, there were 81,016,355 shares of TTIG’s common stock outstanding, of which 6,016,355 shares were not owned by HCI.
During the three months ended March 31, 2023 and 2022, TTIG repurchased and retired a total of 34,108 and 21,744 shares, respectively, of its common stock surrendered by its employees to satisfy payroll tax liabilities associated with the vesting of restricted shares. The total cost of purchasing noncontrolling interests during the three months ended March 31, 2023 and 2022 was $198 and $127, respectively.
34
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 14 — Stockholders’ Equity
Common Stock
In December 2016, the Company’s Board of Directors authorized aone-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended September 30, 2017, the Company repurchased and retired a total of 124,849 shares at a weighted average price per share of $36.79 under this repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2017 was $4,599, or $36.83 per share. During the nine months ended September 30, 2017, the Company repurchased and retired a total of 163,265 shares at a weighted average price per share of $37.86 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2017 was $6,189, or $37.91 per share.
In December 2015, the Company’s Board of Directors authorized aone-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended September 30, 2016, the Company repurchased and retired a total of 198,055 shares at a weighted average price per share of $30.29 under this repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2016 was $6,008, or $30.33 per share. During the nine months ended September 30, 2016, the Company repurchased and retired a total of 574,851 shares at a weighted average price per share of $31.31. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2016 was $18,023, or $31.35 per share.
On October 19, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.35 per common share. The dividends are payable on December 15, 2017 to shareholders of record on November 17, 2017.
Share Repurchase Agreements
In conjunction with the issuance of the 4.25% Convertible Notes as described in Note 8 — “Long-Term Debt” underConvertible 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 two outstanding prepaid share repurchase forward contracts, one of which was entered into with Deutsche Bank AG, London Branch in conjunction with the issuance of the 3.875% Convertible Notes. The other was entered into with Societe Generale in conjunction with the issuance of the 4.25% Convertible Notes as described in Note 8 — “Long-Term Debt” underConvertible Senior Notes. Both Deutsche Bank AG, London Branch and Societe Generale are considered forward counterparties. Under these forward contracts, the Company made initial upfront payments in exchange for the future deliveries of the Company’s common stock from the forward counterparties. Pursuant to the forward contract entered into in December 2013 with Deutsche Bank AG, London Branch, the Company prepaid $29,923 to repurchase 622,751 shares of the Company’s
39
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
common stock, which shares will be delivered over a settlement period in 2019. Pursuant to the forward contract entered into in March 2017 with Societe Generale, the Company prepaid $9,400 of the net proceeds of the offering to repurchase 191,100 shares of the Company’s common stock, which shares will be delivered over a settlement period in 2022.
Each 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 each 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, each forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contracts will be treated as retired for financial statement purposes as of the effective date of each forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders votes.
The Company determined that each 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 per share.
Note 15 —20 -- Stock-Based Compensation
2012 Omnibus Incentive PlansPlan
The Company currently has outstanding stock-based awards granted under the 2007 Stock Option and Incentive Plan and the 2012 Omnibus Incentive Plan. Only the 2012 Planwhich is currently active and available for future grants. OnAt March 17, 2017, the Company’s board of directors amended the 2012 Omnibus Incentive Plan and reduced the number of shares reserved under the plan from 5,000,000 shares to 3,000,000 shares. At September 30, 2017,31, 2023, there were 1,995,1071,112,330 shares available for grant.
Stock Options
Stock options granted and outstanding under the incentive plansplan vest over periods ranging from immediately vested to fivea period of four years and are exercisable over the contractual term of ten years.years.
40
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
A summary of the stock option activity for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 is as follows (option amounts not in thousands):
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2017 | 50,000 | $ | 4.02 | 2.3 years | $ | 1,773 | ||||||||||
Granted | �� | 110,000 | $ | 40.00 | ||||||||||||
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Outstanding at March 31, 2017 | 160,000 | $ | 28.76 | 7.4 years | $ | 2,591 | ||||||||||
Exercised | (30,000 | ) | $ | 2.50 | ||||||||||||
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Outstanding at June 30, 2017 | 130,000 | $ | 34.82 | 8.7 years | $ | 1,675 | ||||||||||
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Outstanding at September 30, 2017 | 130,000 | $ | 34.82 | 8.5 years | $ | 639 | ||||||||||
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Exercisable at September 30, 2017 | 20,000 | $ | 6.30 | 3.9 years | $ | 639 | ||||||||||
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Outstanding at January 1, 2016 | 110,000 | $ | 3.19 | 2.3 years | $ | 3,482 | ||||||||||
Outstanding at March 31, 2016 | 110,000 | $ | 3.19 | 2.1 years | $ | 3,312 | ||||||||||
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Outstanding at June 30, 2016 | 110,000 | $ | 3.19 | 1.8 years | $ | 2,650 | ||||||||||
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Outstanding at September 30, 2016 | 110,000 | $ | 3.19 | 1.6 years | $ | 2,989 | ||||||||||
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Exercisable at September 30, 2016 | 110,000 | $ | 3.19 | 1.6 years | $ | 2,989 | ||||||||||
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| Aggregate |
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| Intrinsic |
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| Options |
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| Term |
| Value |
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Outstanding at January 1, 2023 |
|
| 440,000 |
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| $ | 45.25 |
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| 5.6 years |
| $ | — |
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Outstanding at March 31, 2023 |
|
| 440,000 |
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| $ | 45.25 |
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| 5.3 years |
| $ | 3,146 |
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Exercisable at March 31, 2023 |
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| 412,500 |
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| $ | 45.07 |
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| 5.2 years |
| $ | 3,031 |
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Outstanding at January 1, 2022 |
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| 440,000 |
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| $ | 45.25 |
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| 6.6 years |
| $ | 18,119 |
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Outstanding at March 31, 2022 |
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| 440,000 |
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| $ | 45.25 |
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| 6.3 years |
| $ | 10,494 |
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Exercisable at March 31, 2022 |
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| 357,500 |
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| $ | 44.23 |
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| 6.0 years |
| $ | 8,891 |
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The aggregate intrinsic value and realized tax benefits of the options exercised during the nine months ended September 30, 2017 were $1,319 and $509.
There were no options exercised during the three and nine months ended September 30, 2016.March 31, 2023 and 2022. For the three months ended September 30, 2017March 31, 2023 and 2016,2022, the Company recognized $79$90 and $0, respectively, of compensation expense. For the nine months ended September 30, 2017 and 2016, the Company recognized $228 and $0,$184, respectively, of compensation expense related to stock options which wasis included in other operatinggeneral and administrative personnel expenses. Deferred tax benefits related to stock options were $30 and $0$0 for the three months ended September 30, 2017March 31, 2023 and 2016, respectively, and $88 and $0 for the nine months ended September 30, 2017 and 2016, respectively.2022. At September 30, 2017March 31, 2023 and December 31, 2016,2022, there was $1,020$246 and $0,$336, 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 3.3 years.10 months.
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 nine months ended September 30, 2017:
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Restricted Stock Awards
From time to time, the Company has granted and may grant restricted stock awards to itscertain executive officers, other employees, and nonemployeenon-employee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service,
41
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
performance, and market-based conditions. The determination of fair value with respect to the awards containing only service-based conditions is based on the market value of the Company’s common stock on the grant date. For awards with market-based conditions, the fair value is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect
35
HCI GROUP, INC. AND SUBSIDIARIES
Notes to the awards concerning only performance or service-based conditions is based on the market value of the Company’s common stock on the grant date.Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Information with respect to the activity of unvested restricted stock awards during the three and nine months ended September 30, 2017March 31, 2023 and 20162022 is as follows:
| Number of Restricted Stock Awards | Weighted Average Grant Date Fair Value |
| Number of |
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| Weighted |
| |||||||||
Nonvested at January 1, 2017 | 542,503 | $ | 30.81 | |||||||||||||
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| Restricted |
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| Grant Date |
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| Awards |
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Nonvested at January 1, 2023 |
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| 342,459 |
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| $ | 39.86 |
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Granted | 45,000 | $ | 40.15 |
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| 6,000 |
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| $ | 51.76 |
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Vested | (20,109 | ) | $ | 48.42 |
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| (40,352 | ) |
| $ | 54.83 |
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Forfeited | (926 | ) | $ | 35.52 |
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| (2,125 | ) |
| $ | 40.33 |
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Nonvested at March 31, 2023 |
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| 305,982 |
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| $ | 38.11 |
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Nonvested at March 31, 2017 | 566,468 | $ | 30.92 | |||||||||||||
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Nonvested at January 1, 2022 |
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| 679,997 |
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| $ | 39.72 |
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Granted | 109,936 | $ | 44.05 |
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| 4,000 |
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| $ | 70.58 |
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Vested | (45,874 | ) | $ | 34.51 |
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| (50,667 | ) |
| $ | 50.68 |
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Forfeited | (9,948 | ) | $ | 40.90 |
|
| (3,265 | ) |
| $ | 45.85 |
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Nonvested at June 30, 2017 | 620,582 | $ | 32.82 | |||||||||||||
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Forfeited | (12,344 | ) | $ | 32.34 | ||||||||||||
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Nonvested at September 30, 2017 | 608,238 | $ | 32.83 | |||||||||||||
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Nonvested at January 1, 2016 | 620,513 | $ | 30.33 | |||||||||||||
Vested | (20,917 | ) | $ | 48.42 | ||||||||||||
Cancelled | (160,000 | ) | $ | 26.27 | ||||||||||||
Forfeited | (750 | ) | $ | 45.25 | ||||||||||||
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Nonvested at March 31, 2016 | 438,846 | $ | 30.93 | |||||||||||||
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Granted | 102,440 | $ | 32.21 | |||||||||||||
Vested | (24,235 | ) | $ | 37.34 | ||||||||||||
Forfeited | (5,147 | ) | $ | 42.20 | ||||||||||||
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Nonvested at June 30, 2016 | 511,904 | $ | 30.77 | |||||||||||||
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Vested | (2,000 | ) | $ | 37.68 | ||||||||||||
Forfeited | (5,890 | ) | $ | 36.67 | ||||||||||||
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Nonvested at September 30, 2016 | 504,014 | $ | 30.67 | |||||||||||||
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Nonvested at March 31, 2022 |
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| 630,065 |
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| $ | 39.00 |
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The Company recognized compensation expense related to restricted stock, which is included in other operatinggeneral and administrative personnel expenses, of $1,144$1,187 and $1,124$3,268 for the three months ended September 30, 2017March 31, 2023 and 2016, respectively, and $3,134 and $3,072 for the nine months ended September 30, 2017 and 2016,2022, respectively. At September 30, 2017March 31, 2023 and December 31, 2016,2022, there was approximately $10,208$7,086 and $7,531,$8,048, 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 35 months. 2.0 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 three and nine months ended September 30, 2017March 31, 2023 and 2016.2022.
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| Three Months Ended |
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| March 31, |
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| 2023 |
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| 2022 |
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Deferred tax benefits recognized |
| $ | 263 |
|
| $ | 652 |
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Tax benefits realized for restricted stock and paid dividends |
| $ | 299 |
|
| $ | 402 |
|
Fair value of vested restricted stock |
| $ | 2,213 |
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| $ | 2,568 |
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Subsidiary Equity Plan
42For the three months ended March 31, 2023 and 2022, TypTap Group recognized compensation expense related to its stock-based awards of $829 and $885, respectively. At March 31, 2023 and December 31, 2022, there was $6,999 and $7,876, respectively, of unrecognized compensation expense related to nonvested restricted stock and stock options.
36
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Deferred tax benefits recognized | $ | 403 | $ | 434 | $ | 1,097 | $ | 1,185 | ||||||||
Tax benefits realized for restricted stock and paid dividends | $ | 49 | $ | 45 | $ | 1,232 | $ | 176 | ||||||||
Fair value of vested restricted stock | $ | — | $ | 75 | $ | 2,557 | $ | 1,993 | ||||||||
Note 16 —21 -- Commitments and Contingencies
Obligations under One Multi-Year Reinsurance ContractsContract
As of September 30, 2017,March 31, 2023, the Company has a contractual obligationsobligation related to threeone multi-year reinsurance contracts. Two of these contracts havecontract entered into effective dates of June 1, 2016 and the other has an effective date of July 1, 2017. These contracts2022. The contract may be cancelled only with the other party’s consent. consent or when its experience account is positive at the end of each contract year. The table below presents the future minimum aggregate premiums amountpremium amounts payable to the reinsurers.reinsurer.
Due in 12 months following March 31, |
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| |
2023 |
| $ | 91,350 |
|
2024 |
|
| 91,350 |
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Total |
| $ | 182,700 |
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Due in 12 months following September 30, | ||||
2017* | $ | 21,971 | ||
2018* | 2,571 | |||
2019* | 1,929 | |||
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Total | $ | 26,471 | ||
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Capital CommitmentCommitments
As described in Note 4 —5 -- “Investments” underLimited Partnership Investments, the Company is contractually committed to capital contributions for four limited partnership interests. At September 30, 2017,March 31, 2023, there was an aggregate unfunded balance of $15,931.$5,501.
FIGA Assessments
During 2022, the FLOIR approved assessments for the Florida Insurance Guaranty Association (“FIGA”) in order to secure funds for the payment of covered claims relating to the liquidation of three insurance companies. The FIGA assessments are levied on collected premiums of all covered lines of business except auto insurance. The surcharges, which are collectible from a policyholder, are assessed on new and renewal policies with specified effective dates.
The Company’s insurance subsidiaries, as member insurers, are required to collect and remit the pass-through assessments to FIGA on a quarterly basis. As of March 31, 2023, the FIGA assessments payable by the Company were $3,205.
Note 17 — Related Party Transactions22 -- Subsequent Events
Claddaugh CasualtyOn April 10, 2023, the FLOIR approved an assessment for FIGA in order to secure funds for the payment of covered claims relating to the liquidation of one insurance company. The FIGA assessment will be levied at 1% on collected premiums of all covered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, will be assessed on new and renewal policies with effective dates beginning October 1, 2023 through September 30, 2024 and continuing until the end of the assessment year in which the Series 2023A Bonds issued by the Florida Insurance Company, Ltd.Assistance Interlocal Agency have been paid in full.
On April 14, 2023, the Company’s Bermuda domiciled reinsurance subsidiary, hasBoard of Directors declared a reinsurance agreement with Oxbridge Reinsurance Limited wherebyquarterly dividend of $0.40 per common share. The dividends are payable on June 16, 2023 to stockholders of record on May 19, 2023.
On April 19, 2023, the Company incorporated a portion of the business assumed from the Company’snew property and casualty insurance subsidiary, Homeowners Choice Property & CasualtyTailrow Insurance Company Inc.(“Tailrow”), is ceded by Claddaugh to Oxbridge. 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. See Note 9 — Reinsurance – which includes the amounts due from and paid by Oxbridge during the nine months ended September 30, 2017 and 2016 with respect to benefits accrued in connection with the Oxbridge agreements. The premiums charged by Oxbridge are at rates which management believes to be competitive with market rates available to Claddaugh. Oxbridge has deposited funds into a trust account to satisfy certain collateral requirements under its reinsurance contract with Claddaugh. Trust assets may be withdrawn by Claddaugh, the trust beneficiary, in the State of Florida. Tailrow currently has no operations.
37
43
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
event amounts are due under the Oxbridge reinsurance agreements. Among the Oxbridge shareholders are Paresh Patel, the Company’s chief executive officer, who is also chairman of the board of directors for Oxbridge, and members of his immediate family and three of the Company’snon-employee directors including Sanjay Madhu who serves as Oxbridge’s president and chief executive officer.
Note 18 — Subsequent Event
On October 17, 2017, the Company, through a wholly owned subsidiary, acquired commercial real estate in Tampa, Florida for a purchase price of $9,100. The acquired assets primarily consisted of land, building andin-place lease agreements. The Company incurred approximately $115 of acquisition-related costs and accounted for this transaction as an asset acquisition in accordance with ASU2017-01 which the Company early adopted in the fourth quarter of 2017. As a result, all transaction-related costs were allocated among the assets acquired.
44
ITEM 2 –MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form10-Q and in our Form10-K filed with the Securities and Exchange Commission (“SEC”) on February 22, 2017.March 10, 2023. Unless the context requires otherwise, as used in this Form10-Q, the terms “HCI,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in whole dollars unless specified otherwise.
Forward-Looking Statements
In addition to historical information, this quarterly report contains forward-looking statements as defined under federal securities laws. Such statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. Typically, forward-looking statements can be identified by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions. The important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited to the effects of governmental regulation; changes in insurance regulations; the frequency and extent of claims; uncertainties inherent in reserve estimates; catastrophic events; changes in the demand for, pricing of, availability of or collectability of reinsurance; restrictions on our ability to change premium rates; increased rate pressure on premiums; the severity and impact of a pandemic; and other risks and uncertainties detailed herein and from time to time in our SEC reports.
OVERVIEW –General
HCI Group, Inc. is a Florida-based InsurTech company that, through its subsidiaries, is engagedwith operations in a variety of business activities, including property and casualty insurance, reinsurance,information technology services, insurance management, real estate and information technology. Basedreinsurance. We manage our operations in the following organizational segments, based on our organizational structure, revenue sources,managerial emphasis and evaluation of financial and operating performances by management, we manage four operating divisions, which includes the following operations:performances:
For the three months ended September 30, 2017March 31, 2023 and 2016,2022, revenues from HCPCI insurance operations before intracompany elimination represented 96.1%61.2% and 94.8%69.8%, respectively, and revenues from TypTap Group
38
represented 36.5% and 28.3%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2017 and 2016, revenues from insurance operations before intracompany elimination represented 96.4% of total
45
revenues of all operating segments in each of the periods. At September 30, 2017March 31, 2023 and December 31, 2016,2022, HCPCI insurance operations’ total assets represented 90.7%52.5% and 89.8%53.4%, respectively, and TypTap Group’s total assets represented 39.0% and 37.9%, respectively, of the combined assets of all operating segments. There was no other operating division representing ten percent or more of our total revenues or combined assets. See Note 11 —14 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q for additional information.
HCPCI Insurance Operations
Property and Casualty Insurance
Homeowners Choice Property & Casualty Insurance Company, Inc.
Our principal operating subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), is a leading providerHCPCI provides various forms of property and casualtyresidential insurance in the state of Florida. HCPCI along with certain of our other subsidiaries currently provides property and casualtyproducts such as homeowners insurance, to homeowners, condominium owners, and tenants in the state of Florida. HCPCI offers flood-endorsedfire insurance, flood insurance and wind-only policies to eligible new andpre-existing Florida customers. In addition,insurance. HCPCI was approved by the Florida Office of Insurance Regulation to write standalone flood insurance policies for Florida homeowners. HCPCI strives to offer insurance products at competitive rates, while pursuing profitability using selective underwriting criteria.
HCPCI began operations in 2007 by participating in a“take-out program,” which is a legislatively mandated program designed to encourage private insurance companies to assume policies from Citizens Property Insurance Corporation, a Florida state-supported insurer. Our growth since inception has resulted primarily from a series of policy assumptions. This growth track has been beneficial to us although there are fewer policies available for assumption today as a result of increased competition in the Florida market. Thus, we plan to seek other opportunities to expand by providing new or additional product offerings in and outside the state of Florida. During 2017, HCPCI received regulatory approvalauthorized to write residential property and casualty insurance in the states of Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas. Currently, Florida is HCPCI’s primary market.
Due to the reduced availability and affordability of flood reinsurance coverage, HCPCI expectswill cease to begin writingoffer flood insurance policies in those states2023. Gross premiums earned from such policies comprised less than 1% of total HCPCI gross premiums earned during 2018.2022.
TypTap Insurance CompanyReinsurance and other auxiliary operations
TypTap Insurance Company was organized by HCI Group, Inc. and approved by the Florida Office of Insurance Regulation in January 2016 to transact insurance business in the state of Florida. TypTap began writing standalone flood coverage to Florida homeowners in March 2016.
We expect the flood insurance products offered by TypTap and HCPCI to become significant contributors to future financial results.
Reinsurance
We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd.Ltd (“Claddaugh”). We selectively retain risk in Claddaugh, displacingreducing the need for HCPCI to pay premiums to third party reinsurers.cost of third-party reinsurance. Claddaugh fully collateralizes its exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh also from time to time mitigatesmay mitigate a portion of its risk through retrocession contracts.
TypTap Group
46TypTap Insurance Group, Inc. (“TTIG”), our majority-owned subsidiary, currently has four subsidiaries: TypTap Insurance Company (“TypTap”), TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India. TTIG is primarily engaged in the property and casualty insurance business and is currently using internally developed technology to collect and analyze claims and other supplemental data to generate savings and efficiency for its insurance operations.
Property and Casualty Insurance
TypTap, TTIG’s insurance subsidiary, has been the primary source of our organic growth in gross written premium since 2016. TypTap’s policies in force have increased from 6,721 in January 2018 to 102,839 at March 31, 2023. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently. As of April 28, 2023, TypTap has been approved to offer homeowners coverage in 29 states outside of Florida.
TypTap is also phasing out its flood insurance products during 2023 due to the reduced availability and affordability of flood reinsurance coverage. Gross premiums earned from such policies comprised less than 5% of total TypTap gross premiums earned during 2022.
39
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. 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. These products include SAMSTM, HarmonyTM, AtlasViewer® and ClaimColonyTM.
Real Estate Operations
Our real estate operations consist of multiple properties we own and operate.operate for investment purposes and also properties we own and use for our own operations. Properties used in operations consist of ourtwo Tampa headquarters buildingoffice buildings and a secondaryan insurance operations site in Ocala, Florida. Properties held as investmentsOur investment properties include retail shopping centers, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.
In March 2023, we finalized the sales of two retail shopping centerscenter investment properties in Melbourne and a combined 24 acres of waterfront property where two marinas and one restaurant are located.
In July 2017, we completed one real estate development and construction project described as a joint venture arrangementSorrento, Florida. See Real Estate Investments under U.S. GAAP, which we consolidate with our operations. In October 2017, we added commercial real estate in Tampa, Florida to our portfolio of real estate investments. See Note 4 —5 -- “Investments” and Note 18 — “Subsequent Event” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q for additional information.
Information TechnologyOther Operations
Our information technologyHolding company operations include
Activities of our holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a teamreportable segment comprise the operations of experienced software developers with extensive knowledge in developingweb-based products and applications for mobile devices. The operations, which are in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products or services that supportin-house operations as well as our third party relationships with our agency partners and claim vendors. These products includePropletTM, TypTapTM,SAMSTM,Exzeo®,Atlas ViewerTM, and CasaClueTM.this segment.
Recent Events
On October 17, 2017, we acquired commercial real estate in Tampa, Florida for $9,215,000, including acquisition-related costs. The acquired assets primarily consisted of land, building andin-place lease agreements.
On October 19, 2017,April 14, 2023, our Board of Directors declared a quarterly dividend of $0.35$0.40 per common share. The dividends are payable on December 15, 2017June 16, 2023 to stockholders of record on November 17, 2017.
On April 19, 2023, we incorporated a new property and casualty insurance subsidiary, Tailrow Insurance Company (“Tailrow”), in the State of Florida. Tailrow currently has no operations.
47
40
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 (dollar amounts in thousands, except per share amounts):
| Three Months Ended |
| ||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, |
| March 31, |
| ||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 |
| 2023 |
|
| 2022 |
| |||||||||||||||
Revenue |
|
|
|
|
|
| ||||||||||||||||||
Gross premiums earned | $ | 88,669 | $ | 92,542 | $ | 270,376 | $ | 286,273 |
| $ | 180,068 |
|
| $ | 178,925 |
| ||||||||
Premiums ceded | (44,705 | ) | (29,242 | ) | (101,529 | ) | (105,998 | ) |
|
| (70,509 | ) |
|
| (53,162 | ) | ||||||||
|
|
|
| |||||||||||||||||||||
Net premiums earned | 43,964 | 63,300 | 168,847 | 180,275 |
|
| 109,559 |
|
|
| 125,763 |
| ||||||||||||
Net investment income | 2,878 | 2,785 | 8,522 | 6,000 |
|
| 17,715 |
|
|
| 2,868 |
| ||||||||||||
Net realized and unrealized investment (losses) gains | (152 | ) | 583 | 2,350 | 899 | |||||||||||||||||||
Net other-than-temporary impairment losses recognized in income: | ||||||||||||||||||||||||
Total other-than-temporary impairment losses | (474 | ) | (575 | ) | (864 | ) | (1,211 | ) | ||||||||||||||||
Portion of loss recognized in other comprehensive income, before taxes | — | 351 | — | (230 | ) | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net other-than-temporary impairment losses | (474 | ) | (224 | ) | (864 | ) | (1,441 | ) | ||||||||||||||||
Net realized investment losses |
|
| (1,149 | ) |
|
| (314 | ) | ||||||||||||||||
Net unrealized investment gains (losses) |
|
| 529 |
|
|
| (3,576 | ) | ||||||||||||||||
Policy fee income | 905 | 972 | 2,721 | 2,967 |
|
| 1,090 |
|
|
| 1,057 |
| ||||||||||||
Gain on repurchases of convertible senior notes | — | — | — | 153 | ||||||||||||||||||||
Gain on bargain purchase | — | 2,071 | — | 2,071 | ||||||||||||||||||||
Other income | 369 | 321 | 1,207 | 1,151 |
|
| 1,285 |
|
|
| 1,242 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Total revenue | 47,490 | 69,808 | 182,783 | 192,075 |
|
| 129,029 |
|
|
| 127,040 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Expenses |
|
|
|
|
|
| ||||||||||||||||||
Losses and loss adjustment expenses | 89,231 | 25,909 | 142,425 | 79,261 |
|
| 60,565 |
|
|
| 72,704 |
| ||||||||||||
Policy acquisition and other underwriting expenses | 9,926 | 10,536 | 29,645 | 32,525 |
|
| 22,720 |
|
|
| 29,408 |
| ||||||||||||
Salaries and wages | 4,605 | 5,945 | 15,051 | 17,009 | ||||||||||||||||||||
General and administrative personnel expenses |
|
| 13,502 |
|
|
| 14,034 |
| ||||||||||||||||
Interest expense | 4,408 | 2,672 | 12,328 | 8,112 |
|
| 2,801 |
|
|
| 601 |
| ||||||||||||
Loss on repurchases of senior notes | — | — | 743 | — | ||||||||||||||||||||
Other operating expenses | 5,338 | 4,717 | 15,162 | 14,213 |
|
| 6,305 |
|
|
| 6,292 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||
Total operating expenses | 113,508 | 49,779 | 215,354 | 151,120 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
(Loss) income before income taxes | (66,018 | ) | 20,029 | (32,571 | ) | 40,955 | ||||||||||||||||||
Income tax (benefit) expense | (25,472 | ) | 8,696 | (13,587 | ) | 16,542 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net (loss) income | $ | (40,546 | ) | $ | 11,333 | $ | (18,984 | ) | $ | 24,413 | ||||||||||||||
|
|
|
| |||||||||||||||||||||
Total expenses |
|
| 105,893 |
|
|
| 123,039 |
| ||||||||||||||||
Income before income taxes |
|
| 23,136 |
|
|
| 4,001 |
| ||||||||||||||||
Income tax expense |
|
| 5,343 |
|
|
| 1,210 |
| ||||||||||||||||
Net income |
|
| 17,793 |
|
|
| 2,791 |
| ||||||||||||||||
Net income attributable to noncontrolling interests |
|
| (2,455 | ) |
|
| (1,888 | ) | ||||||||||||||||
Net income after noncontrolling interests |
| $ | 15,338 |
|
| $ | 903 |
| ||||||||||||||||
Ratios to Net Premiums Earned: |
|
|
|
|
|
| ||||||||||||||||||
Loss Ratio | 202.96 | % | 40.93 | % | 84.35 | % | 43.97 | % |
|
| 55.28 | % |
|
| 57.81 | % | ||||||||
Expense Ratio | 55.22 | % | 37.71 | % | 43.19 | % | 39.86 | % |
|
| 41.37 | % |
|
| 40.02 | % | ||||||||
|
|
|
| |||||||||||||||||||||
Combined Ratio | 258.18 | % | 78.64 | % | 127.54 | % | 83.83 | % |
|
| 96.65 | % |
|
| 97.83 | % | ||||||||
|
|
|
| |||||||||||||||||||||
Ratios to Gross Premiums Earned: |
|
|
|
|
|
| ||||||||||||||||||
Loss Ratio | 100.63 | % | 28.00 | % | 52.68 | % | 27.69 | % |
|
| 33.63 | % |
|
| 40.63 | % | ||||||||
Expense Ratio | 27.38 | % | 25.79 | % | 26.97 | % | 25.10 | % |
|
| 25.17 | % |
|
| 28.14 | % | ||||||||
|
|
|
| |||||||||||||||||||||
Combined Ratio | 128.01 | % | 53.79 | % | 79.65 | % | 52.79 | % |
|
| 58.80 | % |
|
| 68.77 | % | ||||||||
|
|
|
| |||||||||||||||||||||
(Loss) Earnings Per Share Data: | ||||||||||||||||||||||||
Earnings Per Share Data: |
|
|
|
|
|
| ||||||||||||||||||
Basic | $ | (4.44 | ) | $ | 1.17 | $ | (2.05 | ) | $ | 2.48 |
| $ | 1.78 |
|
| $ | 0.09 |
| ||||||
|
|
|
| |||||||||||||||||||||
Diluted | $ | (4.44 | ) | $ | 1.10 | $ | (2.05 | ) | $ | 2.41 |
| $ | 1.54 |
|
| $ | 0.09 |
| ||||||
|
|
|
| |||||||||||||||||||||
48
Comparison of the Three Months ended September 30, 2017 withEnded March 31, 2023 to the Three Months ended September 30, 2016Ended March 31, 2022
Our results of operations for the three months ended September 30, 2017 reflectedMarch 31, 2023 reflect net losses allocable to common stockholdersincome of approximately $40,546,000,$17,793,000 or $4.44 loss$1.54 diluted earnings per share, compared with net income of approximately $11,333,000,$2,791,000 or $1.10$0.09 diluted earnings per diluted share, for the three months ended September 30, 2016.March 31, 2022. The quarter-over-quarter decreaseincrease was primarily due to an $18,117,000 net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses), a $63,322,000 increase$12,139,000 decrease in losses and loss adjustment expenses, which included $54,000,000 of estimated net losses from Hurricane Irma, and a $15,463,000$6,688,000 decrease in policy acquisition and other underwriting expenses, offset by a $17,347,000 increase in premiums ceded premiums, which included $12,464,000 of adjustments to ceded premiums related to retrospective provisions. The lossesand a $2,200,000 increase in the quarter were offset by $25,472,000 of income tax benefits.interest expense.
Revenue41
Revenue
Gross Premiums Earned on a consolidated basis for the three months ended September 30, 2017March 31, 2023 and 20162022 were approximately $88,669,000$180,068,000 and $92,542,000,$178,925,000, respectively. The decrease in 2017$1,143,000 increase was primarily attributable to policy attrition as well asthe effect of premium rate increases, offset by a rate decrease effective on new and renewalreduction in the number of policies beginning in January 2016.
Premiums Cededforce. Gross premiums earned from the United insurance policies assumed were $7,163,000 for the three months ended September 30, 2017March 31, 2023 compared with $30,079,000 for the three months ended March 31, 2022. HCPCI gross premiums earned were $92,456,000 for the three months ended March 31, 2023 compared with $118,303,000 for the three months ended March 31, 2022. TypTap’s gross premiums earned were $87,612,000 compared with $60,622,000 for the same comparative period in 2022.
Premiums Ceded for the three months ended March 31, 2023 and 20162022 were approximately $44,705,000$70,509,000 and $29,242,000,$53,162,000, respectively, representing 50.4%39.2% and 31.6%29.7%, respectively, of gross premiums earned. The $15,463,000$17,347,000 increase was primarily attributable to the adjustmenthigher reinsurance costs effective June 1, 2022 and an increased overall reinsurance coverage amount as a result of the previously accrued benefitspremium growth and deferred reinsuranceexpansion, offset by a net reduction in premiums relatedceded attributable to retrospective provisions under certainmulti-year reinsurance contracts due to increased losses caused by Hurricane Irma.contracts.
Our premiums ceded represent amounts paid to reinsurerscosts of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance treatiescontracts or to assume a proportional share of losses as defined byin a quota share arrangement. For the three months ended September 30, 2017, premiums ceded included a net increase of approximately $12,465,000 related to the adjustment under the provisions of certain reinsurance contracts. For the three months ended September 30, 2016, premiums ceded reflected a net reduction of approximately $3,428,000 attributable to these reinsurance contract provisions. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.
Net Premiums Written during Reinsurance costs can be decreased by a reduction in premiums ceded attributable to retrospective provisions under multi-year reinsurance contracts. For the three months ended September 30, 2017March 31, 2023, premiums ceded included a decrease of $6,993,000 related to retrospective provisions compared with a decrease of $1,484,000 for the three months ended March 31, 2022. See “Economic Impact of Reinsurance Contract with Retrospective Provisions” under “Critical Accounting Policies and 2016Estimates.”
Net Premiums Written for the three months ended March 31, 2023 and 2022 totaled approximately $50,168,000$129,345,000 and $64,022,000,$124,132,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The $13,854,000 decreaseincrease in 20172023 primarily resulted from the growth in TypTap’s business, offset by an increase in premiums ceded during the periodto reinsurers as described above. We had approximately 141,000216,300 policies in force at September 30, 2017March 31, 2023 (direct and assumed) as compared with approximately 145,000283,900 policies in force at September 30, 2016.March 31, 2022.
Net Premiums Earned for the three months ended September 30, 2017March 31, 2023 and 20162022 were approximately $43,964,000$109,559,000 and $63,300,000,$125,763,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.
49
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended September 30, 2017March 31, 2023 and 20162022 (amounts in thousands):
| Three Months Ended |
| Three Months Ended |
| |||||||||||||
| September 30, |
| March 31, |
| |||||||||||||
| 2017 | 2016 |
| 2023 |
|
| 2022 |
| |||||||||
Net Premiums Written | $ | 50,168 | $ | 64,022 |
| $ | 129,345 |
|
| $ | 124,132 |
| ||||
Increase in Unearned Premiums | (6,204 | ) | (722 | ) | ||||||||||||
|
| |||||||||||||||
(Increase) Decrease in Unearned Premiums |
|
| (19,786 | ) |
|
| 1,631 |
| ||||||||
Net Premiums Earned | $ | 43,964 | $ | 63,300 |
| $ | 109,559 |
|
| $ | 125,763 |
| ||||
|
| |||||||||||||||
42
Net Other-Than-Temporary Impairment LossesInvestment Income for the three months ended September 30, 2017March 31, 2023 and 2016 were2022 was approximately $474,000$17,715,000 and $224,000,$2,868,000, respectively. During the third quarterThe $14,847,000 increase was attributable to an $8,946,000 increase in income from real estate investments, a $3,587,000 increase in income from available-for-sale fixed-maturity securities and a $3,514,000 increase in interest income from cash and cash equivalents. See Net Investment Income under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of 2017, we recognized impairment losses specific to four equity securities. These equity securities were impaired because each security had been in an unrealized loss position for a length of time with no near-term prospect of recovery. During the quarter ended September 30, 2016, we recognized impairment losses specific to one fixed-maturity security and four equity securities.this Quarterly Report on Form 10-Q.
Expenses
OurNet Realized Investment Losses and Loss Adjustment Expensesamounted to approximately $89,231,000 and $25,909,000 for the three months ended September 30, 2017March 31, 2023 and 2016,2022 were approximately $1,149,000 and $314,000, respectively. DuringThe $835,000 increase was primarily attributable to net realized losses of approximately $1,153,000 from sales of fixed-maturity and equity securities during the third quarterthree months ended March 31, 2023 compared with net realized losses of 2017, ourapproximately $395,000 from sales of these securities during the corresponding period in 2022.
Net Unrealized Investment Gains for the three months ended March 31, 2023 were approximately $529,000 compared with approximately $3,576,000 of net unrealized investment losses for the three months ended March 31, 2022. The increase was primarily attributable to an overall improvement in the equity market compared with the three months ended March 31, 2022.
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $60,565,000 and $72,704,000 for the three months ended March 31, 2023 and 2022, respectively. The losses and loss adjustment expenses included $54,000,000 of net estimated lossesHCPCI Insurance Operations were $28,782,000 and $43,995,000 for the three months ended March 31, 2023 and 2022, respectively. The decrease was primarily attributable to the lower number of Florida and non-Florida policies as well as fewer claims and less litigation related to Hurricane Irma and approximately $2,500,000Florida policies as compared with the first quarter of additional losses related to Hurricane Matthew. In addition, we continued to strengthen our loss reserves in response to trends involving assignment of insurance benefits and related litigation. Our 2016 losses2022. Losses and loss adjustment expenses reflected initially estimated lossesfor TypTap were $33,056,000 compared with $28,988,000 for the same comparative period. The increase was attributable to an increase in the number of non-Florida policies, offset by a positive effect resulting from Hurricane Herminea decrease in the amount of approximately $2,500,000.claims and litigation related to Florida policies when compared with the first quarter of 2022. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”
Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2017March 31, 2023 and 2016 of2022 were approximately $9,926,000$22,720,000 and $10,536,000,$29,408,000 on a consolidated basis, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, catastrophe allowance paid to United, and premium taxes. Policy acquisition expenses for HCPCI Insurance Operations were $10,276,000 for the three months ended March 31, 2023 compared with $19,765,000 for the three months ended March 31, 2022. The decrease in amortized costs was primarily due to a reduction of policies in force. TypTap Group policy acquisition expenses were $12,474,000 compared with $9,705,000 for the same comparative period, with the increase in amortized costs attributable to the growth of TypTap’s non-Florida policies, offset by lower policy acquisition costs in Florida resulting from lower commissions and premiuma higher mix of renewal versus new business in Florida.
43
General and Administrative Personnel Expenses for the three months ended March 31, 2023 and 2022 were approximately $13,502,000 and $14,034,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-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 projects to develop software for internal use and the policies that have renewed.payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The $610,000period-over-period decrease from the corresponding period in 2016of $532,000 was primarily attributable to a decrease in commissionsstock-based compensation expense, offset by an increase in the headcount of temporary and premium taxes resulting from policy attritionfull-time employees and the effect of the rate decrease.merit increases for non-executive employees effective in late February 2023.
Salaries and WagesInterest Expense for the three months ended September 30, 2017March 31, 2023 and 2016 were2022 was approximately $4,605,000$2,801,000 and $5,945,000,$601,000, respectively. The decreaseincrease primarily resulted from the corresponding period in 2016 was primarily attributable to the capitalization of approximately $418,000 of payroll costsinterest expense related to a software development project for internal use and lower bonuses for senior management. As of September 30, 2017, we had approximately 250 employees located at our offices4.75% Convertible Senior Notes issued in Florida compared with 243 employees as of September 30, 2016. We also had 81 employees located in Noida, India at September 30, 2017 versus 80 at September 30, 2016.May 2022.
InterestIncome Tax Expensefor the three months ended September 30, 2017March 31, 2023 and 20162022 was approximately $4,408,000$5,343,000 and $2,672,000, respectively. The increase was primarily attributable to the net increase in long-term debt resulting from the issuance of 4.25% Convertible Senior Notes in March 2017 and the redemption of 8% Senior Notes in April 2017.
Income Tax Benefit for the three months ended September 30, 2017 was approximately $25,472,000$1,210,000, respectively, for state, federal, and foreign income taxes resulting in aneffective tax rates of 23.1% and 30.2%, respectively. The decrease in the effective tax rate was primarily attributable to the release of 38.6%. This compared with approximately $8,696,000valuation allowance established in 2022 during the first quarter of income tax expense for2023 and the three months ended September 30, 2016, resultingdecrease in an effective tax rate of 43.4%.
Ratios:
50
Ratios:
The loss ratio applicable to the three months ended September 30, 2017March 31, 2023 (losses and loss adjustment expenses incurred related to net premiums earned) was 203.0%55.3% compared with 40.9%57.8% for the three months ended September 30, 2016.March 31, 2022. The increase in 2017decrease was primarily attributable to the decrease in losses and loss adjustment expenses due to fewer claims and less litigation related to Hurricane Irma and decreased net premiums earned.Florida policies as compared to the first quarter of 2022.
The expense ratio applicable to the three months ended September 30, 2017March 31, 2023 (defined as underwritingtotal expenses salariesexcluding losses and wages, interest and other operatingloss adjustment expenses related to net premiums earned) was 55.2%41.4% compared with 37.7%40.0% for the three months ended September 30, 2016.March 31, 2022. The increase in our expense ratio was primarily attributable to the increase in reinsurance costs and the increase in interest expense, offset in part by the decrease in policy acquisition and other underwriting expenses.
The combined ratio (total of all expenses in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the three months ended September 30, 2017March 31, 2023 was 258.2%96.7% compared with 78.6%97.8% for the three months ended September 30, 2016.March 31, 2022. The decrease in 2023 was attributable to the factors described above.
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the three months ended September 30, 2017March 31, 2023 was 128.0%58.8% compared with 53.8%68.8% for the three months ended September 30, 2016.March 31, 2022. The increasedecrease in 2023 was primarily attributable to the combined impact of decreased gross premiums earned, increased operating expenses and losses from Hurricane Irma.
Comparison of the Nine Months ended September 30, 2017 with the Nine Months ended September 30, 2016
Our results of operations for the nine months ended September 30, 2017 reflect net losses allocable to common stockholders of approximately $18,984,000, or $2.05 loss per share, compared with net income of approximately $24,413,000, or $2.41 earnings per diluted share, for the nine months ended September 30, 2016. The period-over-period decrease was primarily due to net estimated losses of approximately $54,000,000 resulting from Hurricane Irma.
Revenue
Gross Premiums Earned for the nine months ended September 30, 2017 and 2016 were approximately $270,376,000 and $286,273,000, respectively. The decrease in 2017 was attributable to policy attrition as well as a rate decrease effective on new and renewal policies beginning in January 2016.
Premiums Ceded for the nine months ended September 30, 2017 and 2016 were approximately $101,529,000 and $105,998,000, respectively, representing 37.6% and 37.0%, respectively, of gross premiums earned. The percentage increase from the corresponding period in 2016 was primarily attributable to the adjustments related to the retrospective provisions under certain reinsurance contracts offset in part by lower reinsurance costs as described earlier. For the nine months ended September 30, 2017, premiums ceded included a net increase of approximately $5,509,000 related to these provisions. For the nine months ended September 30, 2016, premiums ceded reflected a net reduction of approximately $9,250,000. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”
51
Net Premiums Written for the nine months ended September 30, 2017 and 2016 totaled approximately $199,218,000 and $202,307,000, respectively. The decrease in 2017 resulted from a decrease of approximately $7,600,000 in gross premiums written combined with a decrease of approximately $4,500,000 in premiums ceded during the year.
Net Premiums Earned for the nine months ended September 30, 2017 and 2016 were approximately $168,847,000 and $180,275,000, respectively, and reflected gross premiums earned less reinsurance costs as described above.
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months ended September 30, 2017 and 2016 (amounts in thousands):
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
Net Premiums Written | $ | 199,218 | $ | 202,307 | ||||
Increase in Unearned Premiums | (30,371 | ) | (22,032 | ) | ||||
|
|
|
| |||||
Net Premiums Earned | $ | 168,847 | $ | 180,275 | ||||
|
|
|
| |||||
Net Investment Income for the nine months ended September 30, 2017 and 2016 was approximately $8,522,000 and $6,000,000, respectively. The increase in 2017 was primarily due to $1,724,000 of income from limited partnership investments compared with $54,000 of income during the corresponding period in 2016. See Note 4 — “Investments” underNet Investment Income to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q.
Net Other-Than-Temporary Impairment Losses for the nine months ended September 30, 2017 and 2016 were approximately $864,000 and $1,441,000, respectively. During the nine months ended September 30, 2017, we recognized impairment losses specific to two fixed-maturity securities and five equity securities. The fixed-maturity securities were subject to impairment resulting from our intention to sell these securities before their recovery. Five equity securities were impaired as a result of the length of time each security had been in an unrealized loss position with no near-term prospect of recovery. During the nine months ended September 30, 2016, we recognized impairment losses specific to two fixed-maturity securities and 16 equity securities.
Gain on Repurchases of Convertible Senior Notes for the nine months ended September 30, 2016 was approximately $153,000. The gain was attributable to the repurchase of $13,010,000 in principal of our 3.875% Convertible Senior Notes during the first quarter of 2016.
Gain on bargain purchasefor the nine months ended September 30, 2016 was approximately $2,071,000, resulting from the August 2016 acquisition of one real estate business.
Expenses
OurLosses and Loss Adjustment Expensesamounted to approximately $142,425,000 and $79,261,000, respectively, for the nine months ended September 30, 2017 and 2016. Our 2017 losses and loss adjustment expenses included a net initial estimate of $54,000,000 of losses related to Hurricane Irma and additional losses of approximately $2,500,000 related to Hurricane Matthew. In addition, our losses and loss adjustment expenses reflected the continuation of reserve strengthening
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in response to trends involving assignment of insurance benefits and related litigation. Compared with the corresponding period in 2016, our losses and loss adjustment expenses were impacted by weather-related events including Hurricane Hermine. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”
Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2017 and 2016 were approximately $29,645,000 and $32,525,000, respectively. The $2,880,000 decrease from the corresponding period in 2016 was primarily attributable to decreased commissions and premium taxes resulting from policy attrition and the effect of the rate decrease.
Salaries and Wages for the nine months ended September 30, 2017 and 2016 were approximately $15,051,000 and $17,009,000, respectively. The $1,958,000 decrease from the corresponding period in 2016 was primarily attributable to the capitalization of approximately $1,360,000 of payroll costs related to a software development project for internal use and lower bonuses for senior management.
Loss on repurchases of Senior Notes for the nine months ended September 30, 2017 was approximately $743,000, resulting from the early extinguishment of our 8% Senior Notes. See Note 8 — “Long-Term Debt” under 8% Senior Notes to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q.
Income Tax Benefitfor the nine months ended September 30, 2017 was $13,587,000 for state, federal, and foreign income taxes compared with income tax expense of $16,542,000 for the nine months ended September 30, 2016, resulting in an effective tax rate of 41.7% for 2017 and 40.4% for 2016.
Ratios:
The loss ratio applicable to the nine months ended September 30, 2017 was 84.3% compared with 44.0% for the nine months ended June 30, 2016. The increase was primarily due to the increase in losses and loss adjustment expenses described above combined withand the decrease in net premiums earned which was driven in large partpolicy acquisition and other underwriting expenses, offset by the increase in ceded premiums due to the aforementioned adjustments.interest expense.
The expense ratio applicable to the nine months ended September 30, 2017 was 43.2% compared with 39.8% for the nine months ended September 30, 2016. The increase in our expense ratio is primarily attributable to the decrease in net premiums earned as described above.
The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the nine months ended September 30, 2017 was 127.5% compared with 83.8% for the nine months ended September 30, 2016.
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 nine months ended September 30, 2017 was 79.7% compared with 52.8% for the nine months ended September 30, 2016.
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Seasonality of Our Business
Our insurance business is seasonal as hurricanes and tropical storms affecting Florida, our primary market, and other southeastern states typically occur during the period from June 1st through November 30th of each year.
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Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. Also, with our reinsurance treaty year typically effective on June 1st of each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates, coverage levels or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning on June 1st of each year.
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 our insurance subsidiaries from premiums written and investment income. We may consider raising additional capital through debt andand/or equity offerings to support our growth and future investment opportunities.
Our insurance subsidiary requiressubsidiaries 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. SubstantiallyWith the exception of litigated claims, substantially all of our losses and loss adjustment expenses are fully settled and paid within 100approximately 90 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. In addition, we intend to continue investing inexpenses and real estate to maximize returns and diversify our sources of income, pursue acquisition opportunities, or consider other strategic opportunities.acquisitions.
Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and Promissory NoteFinance Leases
The following table summarizes our long-term debt’sthe principal and interest payment obligations of our indebtedness at September 30, 2017:March 31, 2023:
Maturity Date |
| |||
4.75% Convertible Senior | June 2042 | June 1 and | ||
4.25% Convertible Senior | March 2037 | March 1 and September 1 | ||
4.55% Promissory Note | Through August 2036 | 1st day of each month | ||
Finance leases | Through October 2024 | Various | ||
Revolving credit facility | Through December 2023 | January 1, April 1, July 1, October 1 |
* | At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on June 1, 2027, June 1, 2032 or June 1, 2037. |
** | At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on March 1, 2027 or March 1, 2032. |
See Note 8 —11 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q for additional information.
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Limited Partnership Investments
Our limited partnership investments consist of foursix private equity funds managed by their general partners. TheseTwo 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 four remaining funds have expired, the general partners may request additional funds under certain circumstances. At September 30, 2017,March 31, 2023, there was an aggregate unfunded capital balance of $15,931,000.$5,501,000. SeeLimited Partnership Investments under Note 4 —5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q 10-Q.
Real Estate Investment
Real estate has long been a significant component of our overall investment portfolio. It diversifies our portfolio and helps offset the volatility of other higher-risk assets. Thus, we may consider expanding our real estate investment portfolio should an opportunity arise.
We had a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for additional information.
Share Repurchase Plan
In December 2016, our Board of Directors approved aone-year plan to repurchase up to $20,000,000 of common shares under which we may purchase shareswere not the primary beneficiary. Following the sale of common stockits last remaining outparcel in open market purchases, block transactionsJune 2022, FMKT Mel JV distributed its earnings during the third quarter of 2022 and privately negotiated transactionsthe subsidiary was liquidated in accordance with applicable federal securities laws. At September 30, 2017, there was approximately $13,818,000 available underDecember 2022. In January 2023, we received the plan. See Note 14 — “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1final distribution of this Quarterly Report on Form10-Q.$18,000 from FMKT Mel JV.
Real Estate Development and Acquisition
We may contemplate the acquisition of land for future development through one of our existing joint ventures. Although we have no outstanding commitment to fund any future project and we expect to finance future development projects with cash from real estate operations and through property financings, we may be required to make additional capital contributions when warranted.
In October 2017, we used approximately $9,215,000, including acquisition-related costs, to purchase commercial real estate in Tampa, Florida. In addition, we completed our development project in Riverview, Florida in July 2017. We have the option to acquire the joint venture partner’s interest in this project.
Sources and Uses of Cash
Cash Flows for the Nine months ended September 30, 2017Three Months Ended March 31, 2023
Net cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2023 was approximately $51,393,000,$99,109,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $94,412,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $90,959,000$17,757,000 was primarily due to the purchases ofavailable-for-sale fixed-maturity and tradingequity securities of $141,277,000, the limited partnership investments$166,624,000 and purchases of $2,623,000,property and the real estate investmentsequipment of $2,095,000,$1,469,000, offset by the proceeds from salescalls, repayments and maturities ofavailable-for-sale fixed-maturity securities of $35,367,000,$112,497,000, the proceeds from sales of real estate investments of $21,746,000, the proceeds from sales of fixed-maturity and equity securities of $14,814,000, and distributions of $11,758,000received from limited partnership investments and the redemptions and repayments of fixed-maturity securities of $8,786,000.$1,602,000. Net cash provided byused in financing activities totaled $51,442,000,$14,100,000, which was primarily due to the proceeds from issuanceredemption of 4.25% Convertible Senior Noteslong-term debt of $143,750,000, offset by $40,250,000 used in the repurchases$6,895,000, $3,432,000 of our 8% senior notes, $4,975,000cash dividend payments, cash dividends paid to redeemable noncontrolling interest of related underwriting and issuance costs, $36,825,000 used in our$3,012,000, $305,000 of share repurchases, and $9,724,000repayments of net cash dividend payments.
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Cash Flows for the Nine months ended September 30, 2016Three Months Ended March 31, 2022
Net cash provided by operating activities for the ninethree months ended September 30, 2016March 31, 2022 was approximately $91,893,000,$57,349,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $7,936,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $46,875,000$109,899,000 was primarily due to the purchases ofavailable-for-sale fixed-maturity and equity securities of $92,491,000,$134,043,000, the purchase of intangible assets from United of $3,800,000, and the limited partnership investmentspurchases of $4,670,000,property and equipment of $1,861,000, offset by the proceeds from sales ofavailable-for-sale fixed-maturity and equity securities of $51,570,000.$27,427,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $1,250,000, and distributions received from limited partnership investments of $785,000. Net cash used in financing activities totaled $20,868,000,$7,328,000, which was primarily due to $11,347,000 used in the repurchases of our convertible senior notes, $18,023,000 used in our share repurchase plan and $8,807,000$4,046,000 of net cash dividend
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payments, offset by $18,200,000 in aggregate proceeds from the issuancecash dividends paid to redeemable noncontrolling interest of two promissory notes.$2,508,000, $398,000 of share repurchases, and repayments of long-term debt of $249,000.
Investments
The main objective of our investment policy is to maximize ourafter-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 investments that are classified as available for sale or trading.fixed-maturity and equity securities.
At September 30, 2017,March 31, 2023, we had $320,128,000$562,171,000 ofavailable-for-sale fixed-maturity and tradingequity 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.
With the exception of large national banks, it is our current policy not to maintain cash deposits of more than an aggregate of $10,000,000 in any one bank at any time. From time to time, we may have in excess of $10,000,000 of cash designated for investment and on deposit at a single national brokerage firm. In the future, we may alter our investment policy aswith regard 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2017,March 31, 2023, we had unexpired capital commitments for four limited partnerships in which we hold interests. Such commitments are not recognized in the consolidated financial statements but are required to be disclosed in the notes to the consolidated financial statements. See Note 16 —21 -- “Commitments and Contingencies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q and Contractual Obligations and Commitment below for additional information.
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes our material contractual obligations and commitments as of September 30, 2017 (amounts in thousands):
| Payment Due by Period | ||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||
Operating lease (1) | $ | 614 | 147 | 279 | 188 | — | ||||||||||||||
Service agreement (1) | 107 | 23 | 50 | 34 | — | |||||||||||||||
Reinsurance contracts (2) | 26,471 | 21,971 | 2,571 | 1,929 | — | |||||||||||||||
Unfunded capital commitments (3) | 15,931 | 15,931 | — | — | — | |||||||||||||||
Long-term debt obligations (4) | 300,645 | 12,163 | 116,816 | 155,828 | 15,838 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 343,768 | 50,235 | 119,716 | 157,979 | 15,838 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). The preparation of these consolidated financial statements and related disclosures requires us to make judgments, assumptionsestimates and estimatesjudgments to develop amounts reflected and disclosed in our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. Actual results may differ from these estimates and such differences may be material.
We believe our critical accounting policies and estimates are those related to losses and loss adjustment expenses, amounts receivable with respect to reinsurers, reinsurance with retrospective provisions, deferred income taxes, and stock-based compensation expense. These policies are critical to the portrayal of our financial condition and operating results. They require management to make judgments and estimates about inherently uncertain matters. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss adjustment expense reserves,expenses, which include amounts estimated for claims incurred but not yet reported,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, balance and reinsurance contracts with retrospective provisions.provisions, deferred income taxes, stock-based compensation expense, limited partnership investments, acquired intangible assets, warrants, and redeemable noncontrolling interest involve our most significant judgments and estimates material to our consolidated financial statements.
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Reserves for Losses and Loss Adjustment Expenses
Our gross liability for losses and loss adjustment expense (“Reserves”) is specific to property insurance, which is our insurance division’ssubsidiaries’ only line of business. The Reserves include both case reserves on reported claims and our reserves for incurred but not reported (“IBNR”) losses. At each
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period end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are adjusted.
The IBNR represents our estimate of the ultimate cost of all claims that have occurred but have not been reported to us, and in some cases may not yet be known to the insured, and future development of reported claims. Estimating the IBNR component of our Reserves involves considerable judgment on the part of management. At September 30, 2017, $213,825,000March 31, 2023, $728,148,000 of the total $344,672,000$806,308,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $130,847,000$78,160,000 relates to known cases which have been reported but not yet fully settled in which case we have established a reserve based on currently available information and our best estimate of the cost to settle each claim. At September 30, 2017, $16,688,000March 31, 2023, $71,832,000 of the $130,847,000$78,160,000 in reserves for known cases relates to claims incurred during prior years.
Our Reserves increaseddecreased from $70,492,000$863,765,000 at December 31, 20162022 to $344,672,000$806,308,000 at September 30, 2017.March 31, 2023. The $274,180,000 increase in our Reserves$57,457,000 decrease is comprised of $297,047,000 in reserves related to claims occurring in the 2017 loss year offset by reductions in our Reserves of $13,765,000$57,247,000 primarily specific to Hurricane Ian and Hurricane Irma, and reductions in our non-catastrophe Reserves of $34,781,000 for 20162022 and $9,102,000$11,018,000 for 20152021 and prior loss years.years, offset by $45,589,000 in reserves established for the 2023 loss year. The $297,047,000 in Reserves established for 20172023 claims isare primarily driven by losses from Hurricane Irma, an allowance for subsequent development of claims reported for the accident year, and an allowance for those claims that have been incurred but not reported to the company as of September 30, 2017.March 31, 2023. The decrease of $22,867,000$103,046,000 specific to our 20162022 and prior loss-yearloss-years reserves is primarily due to settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at September 30, 2017March 31, 2023 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us. However, these estimates are continually reviewed by management as they are subject to significant variability and may be impacted by trends in claim severity and frequency or unusual exposures that have not yet been identified. As part of the process, we review historical data and consider 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 loss adjustment expenses. 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.
Reinsurance Recoverable Balance
Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss adjustment expenses that is recoverable from reinsurers. These estimates are 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 estimates may vary significantly from the eventual outcome.
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Economic Impact of Reinsurance ContractsContract with Retrospective Provisions
Certain ofFrom time to time, our reinsurance contracts may include retrospective provisions that adjust premiums increase the amount of future coverage, or result in a profit commission in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience gives rise to an increase in future coverage or 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.
As described in Note 9 — “Reinsurance” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form10-Q, we adjusted the balances of accrued benefits and deferred reinsurance premiums during the third quarter of 2017 due to the impact of Hurricane Irma. For the three months ended September 30, 2017, we derecognized $9,300,000 of net accrued benefits. For the three months ended September 30, 2017, we recognized $3,163,000 in ceded premiums, including the reversal of the majority of reinsurance costs deferred in prior periods. In contrast, for the three months ended September 30, 2016,March 31, 2023 and 2022, we accrued benefits of $2,490,000. For the three months ended September 30, 2016, we deferred recognition$6,993,000 and $1,484,000, respectively. The accrual of $937,000benefits was recognized as a reduction in ceded premiums. In combination, for the three months ended September 30, 2017, we recognized a net increase in ceded premiums of $12,464,000 as opposed to a net reduction in ceded premiums of $3,428,000 for the three months ended September 30, 2016.
For the nine months ended September 30, 2017, we derecognized $3,841,000 of net accrued benefits. For the nine months ended September 30, 2017, we recognized ceded premiums of $1,667,000, including the reversal of the majority of previously deferred reinsurance costs. By comparison, we accrued benefits of $11,120,000 for the nine months ended September 30, 2016. For the nine months ended September 30, 2016, we recognized net ceded premiums of $1,871,000, representing amortization of $3,085,000 of previously deferred reinsurance costs for increased coverage offset by $1,214,000 of ceded premiums deferred for the period. In combination, for the nine months ended September 30, 2017, we recognized a net increase in ceded premiums of $5,508,000 as opposed to a net reduction in ceded premiums of $9,250,000 for the nine months ended September 30, 2016. In June 2016, we received cash totaling $37,800,000 in connection with the benefits accrued for two retrospective reinsurance contracts that were terminated effective May 31, 2016. In September 2016, we received a cash payment of $5,716,000 under the terms of one retrospective reinsurance contract which terminated May 31, 2016.48
As of September 30, 2017,March 31, 2023, we had $1,969,000$23,310,000 of accrued benefits, and $484,000 of ceded premiums deferred, amountsthe amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limitslimit provided under such agreements and in the period that the increased coverage is applicable. At December 31, 2016, we had $5,810,000 of accrued benefits and $2,152,000 of ceded premiums deferred related to these agreements.agreement.
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 and payment history.the reinsurer’s demonstrated ability to comply with contract terms.
The above and other accounting estimates and their related risks that we consider to be our critical accounting estimates are more fully described in our Annual Report on Form10-K, which we filed with the SEC on February 22, 2017.March 10, 2023. For the ninethree months ended September 30, 2017,March 31, 2023, there have been no other material changes with respect to any of our critical accounting policies.
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RECENT ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our unaudited consolidated financial statements, see Note 3 -- “Recent Accounting Pronouncements” to our Notes to Consolidated Financial Statements.
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ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio at September 30, 2017March 31, 2023 included fixed-maturity and equity securities, the primary purposes of which are not for value preservation.speculation. Our main objective is to maximizeafter-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 boardBoard of directors.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 areportfolio is 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.portfolio.
We classify our fixed-maturity securities and the majority of equity securities asavailable-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 or 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.
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 September 30, 2017March 31, 2023 (amounts in thousands):
Hypothetical Change in Interest Rates | Estimated Fair Value | Change in Estimated Fair Value | Percentage Increase (Decrease) in Estimated Fair Value |
| Estimated |
|
| Change in |
|
| Percentage |
| ||||||||||||
300 basis point increase | $ | 232,088 | $ | (24,014 | ) | (9.38 | )% |
| $ | 509,109 |
|
| $ | (15,647 | ) |
|
| -2.98 | % | |||||
200 basis point increase | 240,087 | (16,015 | ) | (6.25 | )% |
|
| 514,325 |
|
|
| (10,431 | ) |
|
| -1.99 | % | |||||||
100 basis point increase | 248,092 | (8,010 | ) | (3.13 | )% |
|
| 519,540 |
|
|
| (5,216 | ) |
|
| -0.99 | % | |||||||
100 basis point decrease | 264,115 | 8,013 | 3.13 | % |
|
| 529,972 |
|
|
| 5,216 |
|
|
| 0.99 | % | ||||||||
200 basis point decrease | 271,506 | 15,404 | 6.02 | % |
|
| 535,188 |
|
|
| 10,432 |
|
|
| 1.99 | % | ||||||||
300 basis point decrease | 275,881 | 19,779 | 7.72 | % |
|
| 540,404 |
|
|
| 15,648 |
|
|
| 2.98 | % | ||||||||
Credit Risk
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.
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The following table presents the composition of our fixed-maturity securities, by rating, at September 30, 2017March 31, 2023 (amounts in thousands):
|
| Cost or |
|
| % of Total |
|
|
|
|
| % of Total |
| ||||||||||||||||||||
| Amortized |
|
| Amortized |
|
| Estimated |
|
| Estimated |
| |||||||||||||||||||||
Comparable Rating | Amortized Cost | % of Total Amortized Cost | Estimated Fair Value | % of Total Estimated Fair Value |
| Cost |
|
| Cost |
|
| Fair Value |
|
| Fair Value |
| ||||||||||||||||
AAA | $ | 2,521 | 1 | $ | 2,527 | 1 |
| $ | 157,981 |
|
|
| 30 |
|
| $ | 158,007 |
|
|
| 30 |
| ||||||||||
AA+, AA, AA- | 70,830 | 28 | 71,256 | 28 |
|
| 346,475 |
|
|
| 65 |
|
|
| 340,322 |
|
|
| 65 |
| ||||||||||||
A+, A, A- | 93,220 | 37 | 93,630 | 37 |
|
| 14,158 |
|
|
| 3 |
|
|
| 13,698 |
|
|
| 3 |
| ||||||||||||
BBB+, BBB, BBB- | 57,523 | 23 | 59,024 | 23 |
|
| 11,291 |
|
|
| 2 |
|
|
| 11,001 |
|
|
| 2 |
| ||||||||||||
BB+, BB, BB- | 9,446 | 4 | 9,647 | 4 |
|
| 1,994 |
|
|
| — |
|
|
| 1,728 |
|
|
| — |
| ||||||||||||
B+, B, B- | 6,133 | 2 | 6,130 | 2 | ||||||||||||||||||||||||||||
CCC+, CC and Not rated | 13,489 | 5 | 13,888 | 5 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | $ | 253,162 | 100 | $ | 256,102 | 100 |
| $ | 531,899 |
|
|
| 100 |
|
| $ | 524,756 |
|
|
| 100 |
| ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Equity Price Risk
Our equity investment portfolio at September 30, 2017March 31, 2023 included common stocks, perpetual preferred stocks, mutual funds and exchange tradedexchange-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.
The following table illustrates the composition of our equity securities at September 30, 2017March 31, 2023 (amounts in thousands):
|
|
|
|
| % of Total |
| ||||||||||
| Estimated |
|
| Estimated |
| |||||||||||
| Estimated Fair Value | % of Total Estimated Fair Value |
| Fair Value |
|
| Fair Value |
| |||||||||
Stocks by sector: |
|
|
|
|
|
| ||||||||||
Consumer |
| $ | 7,605 |
|
|
| 20 |
| ||||||||
Financial | $ | 26,121 | 41 |
|
| 4,481 |
|
|
| 12 |
| |||||
Industrial | 5,378 | 8 | ||||||||||||||
Consumer | 4,996 | 8 | ||||||||||||||
Energy | 3,281 | 5 | ||||||||||||||
Technology |
|
| 1,901 |
|
|
| 5 |
| ||||||||
Communications |
|
| 1,706 |
|
|
| 5 |
| ||||||||
Other (1) | 6,467 | 10 |
|
| 998 |
|
|
| 3 |
| ||||||
|
|
|
| 16,691 |
|
|
| 45 |
| |||||||
| 46,243 | 72 | |||||||||||||||
|
| |||||||||||||||
Mutual funds and Exchange traded funds by type: | ||||||||||||||||
Mutual funds and exchange-traded funds by type: |
|
|
|
|
|
| ||||||||||
Debt | 16,840 | 27 |
|
| 16,799 |
|
|
| 45 |
| ||||||
Equity | 943 | 1 |
|
| 3,749 |
|
|
| 10 |
| ||||||
|
| |||||||||||||||
| 17,783 | 28 | |||||||||||||||
Alternative |
|
| 176 |
|
|
| — |
| ||||||||
|
|
|
| 20,724 |
|
|
| 55 |
| |||||||
Total | $ | 64,026 | 100 |
| $ | 37,415 |
|
|
| 100 |
| |||||
|
| |||||||||||||||
Foreign Currency Exchange Risk
At September 30, 2017,March 31, 2023, we did not have any material exposure to foreign currency related risk.
51
62
ITEM 4 –CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, our chief executive officer and our chief financial officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2017March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, implementation of possible controls and procedures depends on management’s judgment in evaluating their benefits relative to costs.
PART II – OTHER INFORMATION
The Company isWe 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 and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
There have been no material changes fromin the risk factors previously disclosed in the section entitled “Risk Factors” in our Form10-K, which was filed with the SEC on February 22, 2017.
63
ITEM 2 –UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
All information related to sales of unregistered securities had been reported in a current report on Form8-K.
The table below summarizes the number of common shares repurchased duringsurrendered by employees to satisfy payroll tax liabilities associated with the three months ended September 30, 2017 under a share repurchase planvesting of restricted shares (dollar amounts in thousands, except share and per share amounts):
For the Month Ended | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (b) | ||||||||||||
July 31, 2017 | 895 | $ | 44.53 | 895 | $ | 18,371 | ||||||||||
August 31, 2017 | 38,530 | $ | 40.31 | 38,530 | $ | 16,818 | ||||||||||
September 30, 2017 | 85,424 | $ | 35.12 | 85,424 | $ | 13,818 | ||||||||||
|
|
|
| |||||||||||||
| 124,849 | $ | 36.79 | 124,849 | |||||||||||||
|
|
|
| |||||||||||||
|
| Total |
|
| Average |
|
| Total |
|
| Maximum |
| ||||
For the Month Ended |
| Purchased |
|
| Per Share |
|
| or Programs |
|
| or Programs |
| ||||
January 31, 2023 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
February 28, 2023 |
|
| 5,884 |
|
| $ | 51.76 |
|
|
| — |
|
| $ | — |
|
March 31, 2023 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
|
|
| 5,884 |
|
| $ | 51.76 |
|
|
| — |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Working Capital Restrictions and Other Limitations on the Payment of Dividends
We are not subject to working capital restrictions or other limitations on the payment of dividends. Our insurance subsidiaries, however, are subject to restrictions on the dividends they may pay. Those restrictions could impact HCI’s ability to pay future dividends.
53
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholderstockholders 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. Additionally, a Florida domestic insurer may not make dividend payments or distributions to its stockholderstockholders without prior approval of the Florida Office of Insurance Regulation (“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 Florida Office of Insurance RegulationFLOIR if (1) if 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
64
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 Florida Office of Insurance RegulationFLOIR 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 Florida Office of Insurance RegulationFLOIR or (2) 30 days after the Florida Office of Insurance RegulationFLOIR has received notice of such dividend or distribution and has not disapproved it within such time.
During the ninethree months ended September 30, 2017, HCPCIMarch 31, 2023, our insurance subsidiaries paid a $18,000,000 dividenddividends of $10,000,000 to HCI.
None.ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
ITEM 5 –OTHER INFORMATION
None.
54
65ITEM 6 – EXHIBITS
The following documents are filed as part of this report:
66
55
10.4 | ||
10.5** |
67
68
56
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.34 |
57
69
70
71
72
10.106** | ||
10.124 | ||
10.125 | ||
58
10.126 | ||
10.127 | ||
10.128 | ||
10.129 | ||
31.1 | ||
31.2 | ||
32.1 | Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 | |
32.2 | Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 | |
101.INS | Inline XBRL Instance | |
101.SCH | Inline XBRL Taxonomy Extension Schema. | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | Inline XBRL Definition Linkbase. | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
** Management contract or compensatory plan.
7359
Pursuant to the requirements 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, who hashave signed this report on behalf of the Company.
HCI GROUP, INC. | ||||||
| ||||||
May 10, 2023 | By: | /s/ Paresh Patel | ||||
Paresh Patel | ||||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
May 10, 2023 |
| By: | /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.
74
60