| Losses and Loss Adjustment Expenses | Note 15 -- Losses and Loss Adjustment Expenses The Company establishes reserves for the estimated total unpaid costs of losses including LAE. Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to the Company (“IBNR”). Reserves established by management represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of the Company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, the Company gives careful consideration to all available data and actuarial analyses. When a claim is reported to the Company, the claims personnel establish a “case reserve” for the estimated amount of the ultimate amount payable to settle the claim. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the claims adjuster. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, location, and the policy provisions relating to the type of loss. Case reserves are adjusted as more information becomes available. It is the Company’s policy to settle each claim as expeditiously as possible. Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior years. As the Company continues to expand historical data regarding paid and incurred losses, the data is used to develop expected ultimate loss and LAE ratios, then these expected loss and LAE ratios are applied to earned premium to derive a reserve level for each line of business. In connection with the determination of these reserves, other specific factors such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability will also be considered. Therefore, the loss ratio method, among other methods, is used to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses. The Company maintains IBNR reserves to provide for claims that have been incurred but have not been reported and subsequent development on reported claims. The IBNR reserve is determined by estimating the Company’s ultimate net liability for both reported and unreported claims and then subtracting the case reserves and payments made to date for reported claims. Loss and LAE Reserve Estimation Methods. The Company applies the following general methods in projecting reserves for losses and LAE: • Reported loss development; • Paid loss development; • Paid Bornhuetter-Ferguson method; • Reported Experience-Modified Bornhuetter-Ferguson method; • Paid Experience-Modified Bornhuetter-Ferguson method; • Loss ratio method; • Several variations of the Frequency-Severity method, depending on exposure; and • A factor load to loss and allocated LAE reserves for the unallocated LAE. Selected reserves are based on a review of the indications from these methods as well as other considerations such as emergence since the most recent evaluation and number of open claims for a given accident period. Currently, the estimated ultimate liability is calculated using the principles and procedures described above, which are applied to the lines of business written. However, because the establishment of loss and LAE reserves is an inherently uncertain process, ultimate losses and LAE may exceed the established loss and LAE reserves and have a material, adverse effect on our results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. The Company’s reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine the net loss reserves. However, it is believed that a reasonably likely increase or decrease in the severity of claims could impact our net loss reserves. Activity in the liability for losses and LAE is summarized as follows:
Years Ended December 31,
2021 2020 2019
Net balance, beginning of year* $ 141,065 $ 98,174 $ 94,826
Incurred, net of reinsurance, related to:
Current year 199,888 158,236 96,955
Prior years 27,637 1,800 10,559
Total incurred, net of reinsurance 227,525 160,036 107,514
Paid, net of reinsurance, related to:
Current year ( 95,809 ) ( 71,772 ) ( 48,456 )
Prior years ( 100,371 ) ( 45,373 ) ( 55,710 )
Total paid, net of reinsurance ( 196,180 ) ( 117,145 ) ( 104,166 )
Net balance, end of year 172,410 141,065 98,174
Add: reinsurance recoverable before allowance for credit losses 64,755 71,104 116,523
Gross balance, end of year $ 237,165 $ 212,169 $ 214,697 * 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 adjustments are adjusted. During the year ended December 31, 2021, the Company recognized losses related to prior years of $ 27,637 primarily to increase the reserve for the 2020 loss year resulting from increased litigation with regards to Hurricane Sally and Tropical Storm Eta. Losses and LAE for the 2021 loss year included estimated losses of $ 45,578 , net of reinsurance, related to policies assumed from United, approximately $ 14,135 of which pertained to TypTap. The following is information about incurred and paid claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2015 to 2012 is presented as supplementary information and is unaudited. Homeowners Multi-peril and Dwelling Fire Insurance (a)
As of December 31, 2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Cumulative
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Claims (b)
2012 $ 66,425 $ 62,742 $ 64,083 $ 66,505 $ 67,058 $ 66,465 $ 67,220 $ 67,469 $ 67,869 $ 67,869 $ 161 6,620
2013 — 67,579 69,932 69,906 72,015 71,604 73,763 74,043 74,543 74,543 116 7,009
2014 — — 75,810 81,773 84,917 88,053 90,084 92,454 92,945 93,181 — 7,661
2015 — — — 78,017 90,902 96,173 101,272 102,149 102,587 103,135 — 7,665
2016 — — — — 81,446 90,879 92,684 92,986 92,752 92,333 9 6,935
2017 — — — — — 91,443 88,937 89,652 90,958 90,877 3,353 5,771
2018 — — — — — — 79,436 83,976 83,123 83,234 5,594 4,769
2019 — — — — — — — 95,467 94,018 96,821 11,951 5,391
2020 — — — — — — — — 126,086 133,349 15,467 8,157
2021 — — — — — — — — — 187,164 84,138 7,919
Total $ 1,022,506
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2012 $ 36,914 $ 53,225 $ 59,041 $ 62,836 $ 64,667 $ 65,903 $ 67,059 $ 67,203 $ 67,430 $ 67,688
2013 — 40,240 57,374 64,257 68,106 70,224 72,492 73,420 73,986 74,260
2014 — — 47,650 68,897 77,712 82,463 87,125 90,707 92,264 92,924
2015 — — — 50,939 76,042 87,784 95,179 99,200 101,424 102,486
2016 — — — — 51,663 73,037 83,311 89,144 90,989 92,001
2017 — — — — — 43,039 66,996 78,808 83,383 86,364
2018 — — — — — — 41,014 63,958 71,809 76,311
2019 — — — — — — — 47,471 70,182 81,941
2020 — — — — — — — — 56,173 108,388
2021 — — — — — — — — — 85,895
Total $ 868,258
All outstanding liabilities before 2012, net of reinsurance 899
Liabilities for loss and LAE, net of reinsurance $ 155,147
(a) Excludes losses from Wind-only insurance (2012 through 2021) and any hurricane and storm events prior to 2021.
(b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. Homeowners Wind-only Insurance (a) *
As of December 31, 2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Cumulative
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Claims (b)
2015 $ — $ — $ — $ 308 $ 401 $ 569 $ 692 $ 605 $ 582 $ 582 $ — 100
2016 — — — — 1,005 1,314 1,814 1,853 1,837 2,255 406 228
2017 — — — — — 1,529 1,119 815 792 923 132 156
2018 — — — — — — 798 708 1,061 1,109 194 136
2019 — — — — — — — 1,132 1,501 1,833 324 152
2020 — — — — — — — — 1,621 1,970 347 248
2021 — — — — — — — — — 682 119 1,057
Total $ 9,354
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2015 $ — $ — $ — $ 156 $ 332 $ 465 $ 582 $ 582 $ 582 $ 582
2016 — — — — 689 1,155 1,405 1,772 1,821 1,843
2017 — — — — — 484 786 789 792 792
2018 — — — — — — 216 607 745 899
2019 — — — — — — — 828 1,290 1,451
2020 — — — — — — — — 567 1,461
2021 — — — — — — — — — 415
Total $ 7,443
Liabilities for loss and LAE, net of reinsurance $ 1,911
* The Company began writing Homeowners Wind-only insurance in 2015.
(a) Excludes losses from multi-peril and dwelling fire insurance (2012 through 2021) and any hurricane and storm events prior to 2021.
(b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. Losses Specific to Any Hurricane and Storm Events prior to 2021
As of December 31, 2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Cumulative
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Claims (b)
2016 $ — $ — $ — $ — $ 21,414 $ 24,126 $ 26,211 $ 28,133 $ 27,634 $ 27,634 $ 727 2,420
2017 — — — — — 53,602 54,080 53,557 53,624 53,628 412 21,772
2018 — — — — — — 16,543 16,532 16,532 16,532 55 1,717
2019 — — — — — — — — — — — 144
2020 — — — — — — — — 30,264 46,284 — 3,199
2021 — — — — — — — — — 52 — 64
Total $ 144,130
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2016 $ — $ — $ — $ — $ 12,227 $ 20,025 $ 23,316 $ 25,849 $ 26,098 $ 26,807
2017 — — — — — 43,905 47,514 47,524 49,425 53,216
2018 — — — — — — 13,391 15,992 16,436 16,477
2019 — — — — — — — — — —
2020 — — — — — — — — 14,964 34,771
2021 — — — — — — — — — 50
Total $ 131,321
Liabilities for loss and LAE, net of reinsurance $ 12,809
(b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. Losses Specific to Hurricane and Storm Events during 2021
As of December 31, 2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Cumulative
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Claims Amounts)(b)
2021 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ 11,636 $ 1,535 1,269
Total $ 11,636
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2021 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ 9,273
Total $ 9,273
Liabilities for loss and LAE, net of reinsurance $ 2,363
(b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. The reconciliation of the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses is as follows:
December 31,
2021 2020
Net outstanding liabilities
Homeowners multi-peril and dwelling fire insurance $ 155,147 $ 123,738
Homeowners Wind-only insurance 1,911 2,086
Losses specific to any hurricane and storm events prior to 2021 12,809 14,261
Losses specific to hurricane and storm events during 2021 2,363 —
Other short-duration insurance lines 180 980
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance 172,410 141,065
Reinsurance recoverables 64,755 71,104
Total gross liability for unpaid losses and loss adjustment $ 237,165 $ 212,169 The following is supplementary and unaudited information about average historical claims duration as of December 31, 2021:
Average Annual Percentage Payout of Incurred Losses by Age,
Net of Reinsurance
Years 1 2 3 4 5 6 7 8 9 10
Homeowners multi-peril and dwelling fire 49.0 % 21.8 % 7.3 % 0.5 % 1.7 % 1.0 % 0.1 % 0.0 % 0.0 % 0.0 %
Homeowners Wind-only insurance 35.9 % 28.8 % 7.3 % 6.9 % 0.5 % 0.2 % 0.0 % * * *
Other short-duration insurance lines 59.0 % 30.3 % 2.5 % 0.0 % 0.0 % 0.0 % — — — —
Losses specific to any hurricane and storm 58.1 % 24.0 % 2.6 % 3.1 % 2.8 % 0.5 % — — — —
Losses specific to hurricane and storm 79.7 % — — — — — — — — —
* The Company began writing Homeowners Wind-only insurance in 2015. Note 16 -- Segment Information The Company identifies its operating divisions based on managerial emphasis, organizational structure and revenue source. In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TTIG with a separate workforce, board of directors and financial reporting structure. Companies under TTIG include TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company, Inc., the parent company of an India company, Exzeo Software Private Limited. TTIG and its subsidiaries are considered a new reporting segment known as TypTap Group. The Company now 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 operations, 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 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 performance based on revenue and operating income. For the years ended December 31, 2021, 2020 and 2019, revenues from the HCPCI insurance operations segment before intracompany elimination represent ed 74.6 %, 73.4 % and 89.4 %, respectively, and revenues from the TypTap Group segment represented 22.7 %, 15.5 %, and 6.3 %, respectively, of total revenues of all operating seg ments. At December 31, 2021 and 2020, HCPCI insurance operations’ total assets represented 58.7 % an d 68.9 %, respectively, and TypTap Group's total assets repre sented 29.3 % an d 16.7 %, respectively, of the combined assets of all operating segments. See Note 1 -- “Nature of Operations” for a description of the Company’s operations. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.
For the Year Ended December 31, 2021 HCPCI TypTap Real Corporate/ Reclassification/ Consolidated
Revenue:
Gross premiums earned (c) $ 404,362 $ 175,907 $ — $ — $ ( 3,225 ) $ 577,044
Premiums ceded ( 140,902 ) ( 61,534 ) — — 2,695 ( 199,741 )
Net premiums earned 263,460 114,373 — — ( 530 ) 377,303
Net income from investment portfolio 8,130 1,306 — 6,613 4,121 20,170
Policy fee income 2,794 1,201 — — — 3,995
Other 6,356 1,606 12,226 1,794 ( 15,535 ) 6,447
Total revenue 280,740 118,486 12,226 8,407 ( 11,944 ) 407,915
Expenses:
Losses and loss adjustment expenses 147,198 80,863 — — ( 536 ) 227,525
Amortization of deferred policy acquisition costs 56,470 30,493 — — — 86,963
Other policy acquisition expenses 2,851 4,100 — — — 6,951
Interest expense — 113 1,202 5,467 ( 382 ) 6,400
Depreciation and amortization 86 1,336 2,319 884 ( 2,441 ) 2,184
Debt conversion expense — — — 1,754 — 1,754
Personnel and other operating expenses 24,200 31,737 4,424 13,129 ( 8,585 ) 64,905
Total expenses 230,805 148,642 7,945 21,234 ( 11,944 ) 396,682
Income (loss) before income taxes $ 49,935 $ ( 30,156 ) $ 4,281 $ ( 12,827 ) $ — $ 11,233
Total revenue from non-affiliates (d) $ 277,333 $ 119,703 $ 10,872 $ 7,406
Gross premiums written $ 426,910 $ 247,479 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from marina business. (c) Gross premiums earned consist of $ 401,137 from HCPCI and $ 3,225 from a reinsurance company. (d) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
For the Year Ended December 31, 2020 HCPCI TypTap Real Corporate/ Reclassification/ Consolidated
Revenue:
Gross premiums earned (c) $ 342,764 $ 78,836 $ — $ — $ ( 5,682 ) $ 415,918
Premiums ceded ( 130,318 ) ( 28,822 ) — — 5,682 ( 153,458 )
Net premiums earned 212,446 50,014 — — — 262,460
Net income from investment portfolio 6,423 793 3 15 ( 1,602 ) 5,632
Policy fee income 2,702 820 — — — 3,522
Gain on involuntary conversion — — 36,969 — — 36,969
Other 1,768 100 9,502 1,948 ( 11,464 ) 1,854
Total revenue 223,339 51,727 46,474 1,963 ( 13,066 ) 310,437
Expenses:
Losses and loss adjustment expenses 125,977 34,059 — — — 160,036
Amortization of deferred policy acquisition costs 35,410 13,715 — — — 49,125
Other policy acquisition expenses 3,496 1,865 — — — 5,361
Interest expense — 2 1,947 10,709 ( 924 ) 11,734
Depreciation and amortization 85 1,102 2,526 634 ( 2,494 ) 1,853
Loss on repurchases of convertible senior notes — — — 150 — 150
Loss on extinguishment of debt — — 98 — — 98
Personnel and other operating expenses 19,423 17,445 5,388 12,544 ( 9,648 ) 45,152
Total expenses 184,391 68,188 9,959 24,037 ( 13,066 ) 273,509
Income (loss) before income taxes $ 38,948 $ ( 16,461 ) $ 36,515 $ ( 22,074 ) $ — $ 36,928
Total revenue from non-affiliates (d) $ 221,633 $ 52,807 $ 44,709 $ 640
Gross premiums written $ 399,299 $ 104,855 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses. (c) Gross premiums earned consist of $ 337,082 from HCPCI and $ 5,682 from a reinsurance company. (d) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
For the Year Ended December 31, 2019 HCPCI TypTap Real Corporate/ Reclassification/ Consolidated
Revenue:
Gross premiums earned $ 311,175 $ 30,904 $ — $ — $ — $ 342,079
Premiums ceded ( 114,689 ) ( 11,076 ) — — — ( 125,765 )
Net premiums earned 196,486 19,828 — — — 216,314
Net income from investment portfolio 17,336 1,537 1 3,112 ( 937 ) 21,049
Policy fee income 2,805 424 — — — 3,229
Other 1,549 40 9,366 4,829 ( 13,902 ) 1,882
Total revenue 218,176 21,829 9,367 7,941 ( 14,839 ) 242,474
Expenses:
Losses and loss adjustment expenses 99,009 8,505 — — — 107,514
Amortization of deferred policy acquisition costs 31,871 5,275 — — — 37,146
Other policy acquisition expenses 4,363 1,621 — — — 5,984
Interest expense — 2 1,653 12,043 ( 643 ) 13,055
Depreciation and amortization 90 676 2,542 633 ( 2,391 ) 1,550
Personnel and other operating expenses 18,884 14,241 5,168 14,644 ( 11,805 ) 41,132
Total expenses 154,217 30,320 9,363 27,320 ( 14,839 ) 206,381
Income (loss) before income taxes $ 63,959 $ ( 8,491 ) $ 4 $ ( 19,379 ) $ — $ 36,093
Total revenue from non-affiliates (c) $ 217,543 $ 21,829 $ 7,738 $ 6,901
Gross premiums written $ 304,683 $ 60,272 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses. (c) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation. The following table presents segment assets reconciled to the Company’s total assets on the consolidated balance sheets:
December 31,
2021 2020
Segments:
HCPCI Insurance Operations $ 676,509 $ 648,600
TypTap Group 369,600 157,581
Real Estate Operations 127,651 128,383
Corporate and Other 65,349 29,022
Consolidation and Elimination ( 62,252 ) ( 22,273 )
Total assets $ 1,176,857 $ 941,313 Note 17 -- Leases The table below summarizes the Company’s ROU assets and corresponding liabilities for operating and finance leases:
December 31
2021 2020
Operating leases:
ROU assets $ 2,204 $ 4,002
Liabilities $ 2,203 $ 4,014
Finance leases:
ROU assets $ 86 $ 79
Liabilities $ 31 $ 43 The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:
Renewal Other Terms and
Class of Assets Initial Term Option Conditions
Operating lease:
Office equipment 1 to 63 months Yes (a), (b)
Office space 3 to 10 years Yes (b), (c)
Finance lease:
Office equipment 3 to 5 years Not applicable (d) (a) At the end of the lease term, the Company can purchase the equipment at fair market value. (b) There are no variable lease payments. (c) Rent escalation provisions exist. (d) There is a bargain purchase option. As of December 31, 2021, maturities of lease liabilities were as follows:
Leases
Operating Finance
Due in Year
2022 $ 1,422 $ 19
2023 821 11
2024 — 2
Total lease payments 2,243 32
Less: interest and foreign taxes 40 1
Total lease obligations $ 2,203 $ 31 The following table provides quantitative information with regards to the Company’s operating and finance leases:
Years Ended December 31,
2021 2020
Lease costs:
Finance lease costs:
Amortization – ROU assets* $ 19 $ 18
Interest expense 1 2
Operating lease costs* 1,622 1,123
Short-term lease costs* 348 167
Total lease costs $ 1,990 $ 1,310
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases $ 1 $ 2
Operating cash flows – operating leases $ 1,626 $ 1,132
Financing cash flows – finance leases $ 19 $ 17
December 31, 2021
Weighted-average remaining lease term:
Finance leases (in years) 2.9
Operating leases (in years) 2.5
Weighted-average discount rate:
Finance leases (%) 3.5 %
Operating leases (%) 2.8 % * Included in other operating expenses on the consolidated statements of income. The following table summarizes the Company’s operating leases in which the Company is a lessor:
Renewal Other Terms
Class of Assets Initial Term Option and Conditions
Operating lease:
Office space 1 to 3 years Yes (e)
Retail space 3 to 20 years Yes (e)
Boat docks/wet slips 1 to 12 months Yes (e) (e) There are no purchase options. Note 18 -- Income Taxes A summary of income tax expense is as follows:
Years Ended December 31,
2021 2020 2019
Current:
Federal $ 2,332 $ 1,089 $ 6,177
State 415 30 1,362
Foreign 102 106 107
Total current taxes 2,849 1,225 7,646
Deferred:
Federal 489 6,694 1,586
State 653 1,436 287
Foreign — ( 7 ) ( 2 )
Total deferred taxes 1,142 8,123 1,871
Income tax expense $ 3,991 $ 9,348 $ 9,517 The reasons for the differences between the statutory federal income tax rate and the effective tax rate are summarized as follows:
Years Ended December 31,
2021 2020 2019
Amount % Amount % Amount %
Income taxes at statutory rate $ 2,359 21.0 $ 7,755 21.0 $ 7,579 21.0
Increase (decrease) in income taxes
State income taxes, net of federal 402 3.6 1,364 3.7 1,362 3.8
Effects of tax rate changes 437 3.9 — — ( 37 ) —
Stock-based compensation ( 298 ) ( 2.7 ) ( 296 ) ( 0.8 ) ( 159 ) ( 0.4 )
Non-deductible executive compensation 1,008 9.0 757 2.0 685 1.9
Other 83 0.7 ( 232 ) ( 0.6 ) 87 0.1
Income tax expense $ 3,991 35.5 $ 9,348 25.3 $ 9,517 26.4 The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rates for the years ended December 31, 2021, 2020, and 2019. The tax returns filed for the years ending December 31, 2020, 2019, and 2018 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify interest and penalties, if any, arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There have been no material amounts of interest or penalties for the years ended December 31, 2021, 2020 and 2019. For the years ended December 31, 2021, 2020 and 2019, the Company recorded income taxes of $ 3,991 , $ 9,348 and $ 9,517 , respectively, resulting in effective tax rates of 35.5 %, 25.3 % and 26.4 %, respectively. The increase in the effective tax rate in 2021 as compared with 2020 was primarily attributable to an increase in non-deductible compensation expense related to restricted stock and stock options granted to certain executives and an increase in deferred tax expense due to the increased Florida corporate tax rate effective January 1, 2022. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax liabilities are as follows:
December 31,
2021 2020
Deferred tax assets:
Unearned premiums $ 14,174 $ 9,687
Losses and loss adjustment expenses 2,591 2,902
Stock-based compensation 1,660 1,084
Prepaid expenses 658 —
Unearned revenue 237 335
Basis difference related to convertible senior notes 169 —
Accrued expenses 110 146
Credit losses 151 120
Organizational costs 102 76
Bad debt reserve 56 52
Total deferred tax assets 19,908 14,402
Deferred tax liabilities:
Gain on involuntary conversion ( 9,202 ) ( 9,066 )
Deferred policy acquisition costs ( 15,089 ) ( 9,459 )
Intangible assets ( 2,450 ) ( 2,226 )
Basis difference related to partnership investments ( 1,313 ) ( 1,578 )
Prepaid expenses — ( 454 )
Net unrealized investment gains ( 1,539 ) ( 1,507 )
Property and equipment ( 1,511 ) ( 1,262 )
Basis difference related to convertible senior notes — ( 242 )
Other ( 543 ) ( 533 )
Total deferred tax liabilities ( 31,647 ) ( 26,327 )
Net deferred tax liabilities $ ( 11,739 ) $ ( 11,925 ) A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. Thus, the Company did not have a valuation allowance established as of December 31, 2021 or 2020. Note 19 -- Earnings Per Share U.S. GAAP requires the Company to use the two-class method in computing basic earnings (loss) per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings (loss) per share during periods of net income (loss). For a majority-owned subsidiary, its basic and diluted earnings 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 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:
Income Shares (a) Per Share
Year Ended December 31, 2021
Net income $ 7,242
Less: Net income attributable to redeemable ( 7,399 )
Less: TypTap Group's net loss attributable to 2,013
Net income attributable to HCI 1,856
Less: Income attributable to participating securities ( 24 )
Basic Earnings Per Share:
Income allocated to common stockholders 1,832 8,092 $ 0.23
Effect of Dilutive Securities:*
Stock options — 207
Warrants — 281
Diluted Earnings Per Share:
Income available to common stockholders and $ 1,832 8,580 $ 0.21
(a) Shares in thousands.
(b) See Adoption of New Accounting Standards under Note 2 -- “Summary of Significant Accounting Policies” for additional information.
* Convertible senior notes were excluded due to antidilutive effect.
Income Shares (a) Per Share
Year Ended December 31, 2020
Net income $ 27,580
Less: Income attributable to participating securities ( 1,462 )
Basic Earnings Per Share:
Income allocated to common stockholders 26,118 7,351 $ 3.55
Effect of Dilutive Securities:
Stock options — 23
Convertible senior notes 7,705 2,320
Diluted Earnings Per Share:
Income available to common stockholders and $ 33,823 9,694 $ 3.49
(a) Shares in thousands.
Income Shares (a) Per Share
Year Ended December 31, 2019
Net income $ 26,576
Less: Income attributable to participating securities ( 1,448 )
Basic Earnings Per Share:
Income allocated to common stockholders 25,128 7,580 $ 3.32
Effect of Dilutive Securities:
Stock options — 12
Convertible senior notes 8,748 2,646
Diluted Earnings Per Share:
Income available to common stockholders and $ 33,876 10,238 $ 3.31
(a) Shares in thousands. Note 20 -- Redeemable Noncontrolling Interest On February 26, 2021, TTIG completed a capital investment transaction with a fund associated with Centerbridge Partners, L.P. (collectively, the “Lead Investor”), a private investment management fund. Under the investment agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $ 0.001 par value, at a price of $ 10 per share for total proceeds of $ 100,000 . The proceeds will be used for TypTap’s operations and continued expansion. The Company incurred $ 6,262 of related issuance costs. In connection with the transaction, the Lead Investor was granted by HCI warrants to purchase 750,000 shares of HCI’s common stock with an exercise price of $ 54.40 per share. The warrants valued at $ 9,217 or $ 12.29 per warrant were immediately exercisable and will expire on the fourth anniversary of the date of issuance. Dividends Dividends accrue and accumulate from the date of issuance. Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option. Cash dividend rates are $ 0.50 per share in Year 1, $ 0.60 per share in Year 2, $ 0.75 per share in Year 3, and $ 0.95 per share in Year 4 and thereafter. The rates for paid-in-kind dividends are $ 0.60 per share in Year 1 and $ 0.70 per share in Year 2. In addition, the Series A Preferred Stock will be paid dividends on an as-converted basis when and if TTIG declares common stock dividends. Conversion Rights The holders of TTIG’s Series A Preferred Stock have the right to convert the stock at any time into shares of TTIG’s common stock with an initial conversion rate of 1 to 1 . The conversion rate will be adjusted under |
