UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
Form 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
001-34126
HCI Group, Inc.
(Exact name of registrant as specified in its charter)
Florida
20-5961396
(State of Incorporation)
(IRS EmployerIdentification No.)
3802 Coconut Palm DriveTampa, FL 33619(Address, including zip code, of principal executive offices)
(813) 849-9500(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate number of shares of the registrant’s common stock, no par value, outstanding on August 1, 2022 was 9,044,534.
HCI GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1
Financial Statements
Consolidated Balance Sheets:
June 30, 2022 (unaudited) and December 31, 2021
1-2
Consolidated Statements of Income:
Three and six months ended June 30, 2022 and 2021 (unaudited)
3
Consolidated Statements of Comprehensive Income:
4
Consolidated Statements of Equity:
5-8
Consolidated Statements of Cash Flows:
Six months ended June 30, 2022 and 2021 (unaudited)
9-11
Notes to Consolidated Financial Statements (unaudited)
12-47
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48-61
Item 3
Quantitative and Qualitative Disclosures About Market Risk
62-63
Item 4
Controls and Procedures
64
PART II – OTHER INFORMATION
Legal Proceedings
65
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
65-66
Defaults Upon Senior Securities
66
Mine Safety Disclosures
Item 5
Other Information
67
Item 6
Exhibits
68-75
Signatures
76
Certifications
Item 1 – Financial Statements
Consolidated Balance Sheets
(Dollar amounts in thousands)
June 30,
December 31,
2022
2021
(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $403,844 and $41,953, respectively and allowance for credit losses: $0 and $0, respectively)
$
398,571
42,583
Equity securities, at fair value (cost: $38,065 and $46,276, respectively)
35,719
51,740
Limited partnership investments
26,695
28,133
Investment in unconsolidated joint venture, at equity
858
363
Real estate investments
72,723
73,896
Total investments
534,566
196,715
Cash and cash equivalents
360,488
628,943
Restricted cash
2,600
2,400
Accrued interest and dividends receivable
1,421
353
Income taxes receivable
1,789
4,084
Premiums receivable, net (allowance: $3,935 and $1,750, respectively)
52,302
68,157
Prepaid reinsurance premiums
81,023
26,355
Reinsurance recoverable, net of allowance for credit losses:
Paid losses and loss adjustment expenses (allowance: $0 and $0, respectively)
11,134
11,985
Unpaid losses and loss adjustment expenses (allowance: $62 and $90, respectively)
42,348
64,665
Deferred policy acquisition costs
48,305
57,695
Property and equipment, net
17,244
14,232
Right-of-use assets - operating leases
1,861
2,204
Intangible assets, net
14,358
10,636
Funds withheld for assumed business
82,468
73,716
Other assets
28,796
14,717
Total assets
1,280,703
1,176,857
(continued)
1
Consolidated Balance Sheets – (Continued)
Liabilities and Equity
Losses and loss adjustment expenses
238,824
237,165
Unearned premiums
370,140
366,744
Advance premiums
25,428
13,771
Reinsurance payable on paid losses and loss adjustment expenses
4,302
4,017
Ceded reinsurance premiums payable
24,641
19,318
Accrued expenses
17,093
15,453
Deferred income taxes, net
6,168
11,739
Revolving credit facility
—
15,000
Long-term debt
211,648
45,504
Lease liabilities - operating leases
1,824
2,203
Other liabilities
48,737
31,485
Total liabilities
948,805
762,399
Commitments and contingencies (Note 20)
Redeemable noncontrolling interest (Note 17)
91,963
89,955
Equity:
Common stock (no par value, 40,000,000 shares authorized, 9,047,972 and 10,131,399 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively)
Additional paid-in capital
12,887
76,077
Retained income
229,621
246,790
Accumulated other comprehensive (loss) income, net of taxes
(3,760
)
498
Total stockholders’ equity
238,748
323,365
Noncontrolling interests
1,187
1,138
Total equity
239,935
324,503
Total liabilities, redeemable noncontrolling interest and equity
See accompanying Notes to Consolidated Financial Statements (unaudited).
2
Consolidated Statements of Income
(Dollar amounts in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Revenue
Gross premiums earned
181,124
139,440
360,049
270,382
Premiums ceded
(56,205
(46,436
(109,367
(89,535
Net premiums earned
124,919
93,004
250,682
180,847
Net investment income
3,684
2,635
6,552
7,229
Net realized investment (losses) gains
(6
2,607
(320
3,720
Net unrealized investment (losses) gains
(4,234
1,489
(7,810
1,220
Policy fee income
1,052
992
2,109
1,962
Other
511
777
1,753
1,400
Total revenue
125,926
101,504
252,966
196,378
Expenses
86,830
55,917
159,534
101,668
Policy acquisition and other underwriting expenses
26,863
23,169
56,271
46,234
General and administrative personnel expenses
15,301
10,546
29,335
20,196
Interest expense
1,515
2,000
2,116
4,079
Other operating expenses
6,977
4,775
13,269
9,002
Total expenses
137,486
96,407
260,525
181,179
(Loss) income before income taxes
(11,560
5,097
(7,559
15,199
Income tax (benefit) expense
(3,018
1,267
(1,808
4,524
Net (loss) income
(8,542
3,830
(5,751
10,675
Net income attributable to redeemable noncontrolling interest (Note 17)
(2,268
(2,179
(4,516
(2,973
Net loss attributable to noncontrolling interests
829
266
1,189
Net (loss) income after noncontrolling interests
(9,981
1,917
(9,078
8,065
Basic (loss) earnings per share
(1.04
0.25
(0.92
1.02
Diluted (loss) earnings per share
0.24
0.98
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Other comprehensive loss:
Change in unrealized loss on investments:
Net unrealized (losses) gains arising during the period
(2,174
99
(6,325
(83
Call and repayment gains charged to investment income
(2
Reclassification adjustment for net realized (gains) losses
(8
(576
421
(577
Net change in unrealized losses
(2,182
(477
(5,904
(662
Deferred income taxes on above change
553
117
1,491
162
Total other comprehensive loss, net of income taxes
(1,629
(360
(4,413
(500
Comprehensive (loss) income
(10,171
3,470
(10,164
10,175
Comprehensive loss attributable to noncontrolling interests
883
275
1,344
373
Comprehensive (loss) income after noncontrolling interests
(9,288
3,745
(8,820
10,548
Consolidated Statements of Equity
For the Three Months Ended June 30, 2022
(Dollar amounts in thousands, except per share amount)
Common Stock
AdditionalPaid-In
Retained
AccumulatedOtherComprehensiveLoss,
TotalStockholders’
Noncontrolling
Total
Shares
Amount
Capital
Income
Net of Tax
Equity
Interests
Balance at March 31, 2022
10,125,927
79,131
243,647
(2,185
320,593
1,435
322,028
Net loss
(7,885
(657
Net income attributable to redeemable noncontrolling interest
(2,096
(172
(1,575
(54
Issuance of restricted stock
3,000
Forfeiture of restricted stock
(700
Repurchase and retirement of common stock
(1,050,790
(67,705
Repurchase and retirement of common stock under share repurchase plan
(29,465
(1,884
Dilution from subsidiary stock-based compensation
635
Common stock dividends ($0.40 per share)
(4,045
Stock-based compensation
3,345
Balance at June 30, 2022
9,047,972
5
Consolidated Statements of Equity – (Continued)
For the Three Months Ended June 30, 2021
AccumulatedOtherComprehensiveIncome,
Balance at March 31, 2021
8,289,682
216,086
1,405
217,491
217,608
Net income (loss)
4,096
(266
(351
(9
(9,060
Cancellation of restricted stock
(1,160
(16,822
(1,288
1,541
(3,659
2,556
Additional paid-in capital shortfall adjustment allocated to retained income
(1,268
1,268
Balance at June 30, 2021
8,265,640
215,612
1,054
216,666
1,383
218,049
6
For the Six Months Ended June 30, 2022
AccumulatedOtherComprehensiveIncome (Loss),
Balance at December 31, 2021
10,131,399
(4,907
(844
(4,171
(345
(4,258
(155
7,000
(3,965
(1,056,997
(68,103
1,393
Common stock dividends ($0.80 per share)
(8,091
6,797
7
For the Six Months Ended June 30, 2021
Balance at December 31, 2020
7,785,617
199,592
1,544
201,136
11,038
(363
Cumulative effect of change in accounting principle
(490
(10
551,086
(11,110
(142,760
(17,193
(1,308
Issuance of common stock
100,000
5,410
1,756
Issuance of warrants, net of issuance costs (Note 17)
8,640
(6,452
4,683
(17,425
17,425
8
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income attributable to noncontrolling interests
3,327
2,610
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense
8,579
6,497
Net (accretion of discount) amortization of premiums on investments in fixed-maturity securities
(189
144
Depreciation and amortization
3,495
2,928
Deferred income tax benefit
(4,080
(3,732
Net realized investment losses (gains)
320
(3,720
Net unrealized investment losses (gains)
7,810
(1,220
Credit loss expense - reinsurance recoverable
(28
Net (income) loss from unconsolidated joint venture
(495
50
Net income from limited partnership interests
(1,799
(2,359
Distributions received from limited partnership interests
2,046
1,792
Foreign currency remeasurement loss
75
Other non-cash items
(405
21
Changes in operating assets and liabilities:
(1,068
258
Income taxes
2,295
7,106
Premiums receivable, net
15,855
(739
(54,668
35,614
Reinsurance recoverable
23,196
23,181
9,390
(569
(8,752
(43,395
(12,707
9,773
1,659
(8,384
3,396
40,443
11,657
9,855
285
7,398
5,323
9,206
Accrued expenses and other liabilities
16,215
(5,223
Net cash provided by operating activities
21,629
95,647
9
Consolidated Statements of Cash Flows – (Continued)
Cash flows from investing activities:
Investments in limited partnership interests
(1,144
2,335
2,653
Purchase of property and equipment
(4,229
(1,275
Purchase of real estate investments
(111
(331
Purchase of intangible assets
(3,800
Purchase of fixed-maturity securities
(377,638
(6,338
Purchase of equity securities
(16,383
(45,040
Purchase of short-term and other investments
(1,058
Proceeds from sales of real estate investments
667
Proceeds from sales of fixed-maturity securities
11,494
14,680
Proceeds from calls, repayments and maturities of fixed-maturity securities
4,020
16,677
Proceeds from sales of equity securities
24,427
56,511
Proceeds from sales, redemptions and maturities of short-term and other investments
267
2,026
Net cash (used in) provided by investing activities
(360,095
37,805
Cash flows from financing activities:
Cash dividends paid
(8,168
(6,605
Cash dividends received under share repurchase forward contract
77
153
Net repayment under revolving credit facility
(15,000
(23,750
Proceeds from issuance of redeemable noncontrolling interest and warrants
Issuance costs - redeemable noncontrolling interest
(6,262
Cash dividends paid to redeemable noncontrolling interest
(2,508
Proceeds from issuance of long-term debt
172,500
Repayment of long-term debt
(501
(480
Repurchases of common stock
Repurchases of common stock under share repurchase plan
Purchase of noncontrolling interests
(389
(58
Debt issuance costs
(5,757
(152
Net cash provided by financing activities
70,267
61,538
Effect of exchange rate changes on cash
(56
(45
Net (decrease) increase in cash, cash equivalents, and restricted cash
(268,255
194,945
Cash, cash equivalents, and restricted cash at beginning of period
631,343
433,741
Cash, cash equivalents, and restricted cash at end of period
363,088
628,686
10
Supplemental disclosure of cash flow information:
Cash paid for income taxes
55
1,150
Cash paid for interest
943
3,492
Non-cash investing and financing activities:
Unrealized loss on investments in available-for-sale securities, net of tax
Receivable from sales of equity securities
1,051
3,455
Payable on purchases of equity securities
1,050
32
Warrants issued in Centerbridge transaction
9,217
Acquisition of intangibles:
Common stock issued
Contingent consideration payable
1,069
2,419
11
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 1 -- Nature of Operations
HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). Both HCPCI and TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida and in other states. The operations of both insurance subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. The Company emphasizes the use of internally developed technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries. In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the business of owning and leasing real estate and operating marina facilities.
Assumed Business
Northeast Region
In 2021, the Company began providing quota share reinsurance on all in-force, new and renewal 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”). Through its insurance subsidiaries, the Company began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.
Southeast Region
In February 2022, HCPCI entered into another reinsurance agreement with United where HCPCI provides 85% quota share reinsurance on all of United’s personal lines insurance business in the states of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”) from December 31, 2021 through May 31, 2022. Under this agreement, HCPCI paid United a catastrophe allowance of 9% of premium and a provisional ceding commission of 25% of premium. That percentage could increase up to 32% depending on the direct loss ratio results from the reinsured business.
The Company also entered into a renewal rights agreement with United in connection with the Southeast Region assumed business. Under the renewal rights agreement, the Company has the right to renew and/or replace United’s insurance policies at the end of their respective policy periods. The ability to replace policies is subject to regulatory approvals in the three states. The policy replacement date was set for June 1, 2022 or such other date as mutually agreed by both parties. In connection with the transaction, United agreed to not compete with the Company for the issuance of personal lines homeowners business in these three states until July 1, 2025. As part of the transaction, United will receive a renewal rights ceding commission of 6%, with a portion of the ceding commission paid up-front, and the aggregate ceding commission amount will not exceed $6,000. See Note 7 -- “Intangible Assets, Net” for additional information.
The Company began renewing United’s policies in South Carolina on June 1, 2022. The policy replacement date for Georgia and North Carolina policies has yet to be determined and the Company, through TypTap, entered into a new quota share reinsurance agreement in June 2022 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in the Southeast Region from June 1, 2022 through May 31, 2023. In exchange, TypTap pays United a ceding commission of 16% of premium.
12
Note 2 -- Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements for HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the “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 June 30, 2022 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, 2022. 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, 2021 included in the Company’s Form 10-K, which was filed with the SEC on March 10, 2022.
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 specific to reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments, intangible assets acquired from United, 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.
Long-Term Debt
Long-term debt includes debt instruments and finance lease obligations. A debt instrument is generally classified as a liability and carried at amortized cost, net of any issuance costs. Debt issuance costs are capitalized and amortized to interest expense over the expected life of the debt instrument using the effective interest method. 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. Any embedded feature other than the conversion option is evaluated at issuance to determine if it is probable that such embedded feature will be exercised. If the Company concludes that the exercisability of that embedded feature is not probable, the embedded feature is considered to be non-substantive and would not impact the initial measurement and expected life of the debt instrument.
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 and six months ended June 30, 2022, revenues from claims processing services were
13
$372 and $1,379, respectively. Revenues from claims processing services were $207 for the three and six months ended June 30, 2021. At June 30, 2022 and December 31, 2021, other assets included $321 and $314, respectively, of amounts receivable attributable to this service.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation. Ceded reinsurance premiums payable were reclassified out of other liabilities and funds withheld for assumed business were reclassified out of other assets for the six months ended June 30, 2021 within the consolidated statement of cash flows to conform with the current year presentation.
Note 3 -- Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.
Restricted cash represents funds in the Company’s sole ownership held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements and not available for immediate business use. Funds withheld in an account for which the Company is a co-owner but not the named beneficiary are not considered restricted cash.
14
Note 4 -- Investments
a) Available-for-Sale Fixed-Maturity Securities
The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At June 30, 2022 and December 31, 2021, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:
Cost orAmortized
Allowance for Credit
GrossUnrealized
EstimatedFair
Cost
Loss
Gain
Value
As of June 30, 2022
U.S. Treasury and U.S. government agencies
372,323
(4,762
367,563
Corporate bonds
28,953
27
(556
28,424
States, municipalities, and political subdivisions
1,761
1,767
Exchange-traded debt
700
(1
713
Redeemable preferred stock
107
(3
104
403,844
51
(5,324
As of December 31, 2021
17,046
(86
17,024
21,913
632
(53
22,492
1,759
49
1,808
767
44
811
468
(20
448
41,953
789
(159
Expected maturities may 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 June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022
December 31, 2021
Cost or
Estimated
Amortized Cost
Fair Value
Available-for-sale
Due in one year or less
167,143
167,002
10,734
10,826
Due after one year through five years
232,353
227,637
19,222
19,820
Due after five years through ten years
3,854
3,427
11,503
11,403
Due after ten years
494
505
534
15
Sales of Available-for-Sale Fixed-Maturity Securities
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the three and six months ended June 30, 2022 and 2021 were as follows:
GrossRealized
Proceeds
Gains
Losses
Three months ended June 30, 2022
2,436
Three months ended June 30, 2021
14,644
576
Six months ended June 30, 2022
(434
Six months ended June 30, 2021
577
Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities
Securities with gross unrealized loss positions at June 30, 2022 and December 31, 2021, 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
Gross
Unrealized
Fair
(4,664
348,459
(98
2,048
350,507
23,828
387
23
Total available-for-sale securities
(5,226
372,801
374,849
(73
9,809
(13
616
10,425
4,452
442
(146
14,703
15,319
At June 30, 2022 and December 31, 2021, there were 68 and 23 securities, respectively, in an unrealized loss position.
16
Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities
The Company regularly reviews its individual investment securities for credit impairment. The Company considers various factors in determining whether a credit loss exists for each individual security, including-
The table below summarizes the activity in the allowance for credit losses of available-for-sale securities for the three and six months ended June 30, 2022 and 2021:
Balance at January 1
588
Reductions for securities sold
Balance at March 31
579
Reductions for securities exchanged
(579
Balance at June 30
b) Equity Securities
The Company holds investments in equity securities measured at fair values which are readily determinable. At June 30, 2022 and December 31, 2021, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:
38,065
2,073
(4,419
46,276
6,335
(871
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.
Net (losses) gains recognized
(4,323
3,069
(7,865
3,536
Exclude: Net realized (losses) gains recognized for securities sold
(89
1,580
(55
2,316
Net unrealized (losses) gains recognized
17
Sales of Equity Securities
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and six months ended June 30, 2022 and 2021 were as follows:
6,058
433
(522
22,133
1,983
(403
1,853
(1,908
3,125
(809
c) Limited Partnership Investments
The Company has interests in limited partnerships that are not registered or readily tradeable on a securities exchange. These partnerships are private equity funds managed by general partners who make decisions with regard to financial policies and operations. As such, the Company is not the primary beneficiary and does not consolidate these partnerships. The following table provides information related to the Company’s investments in limited partnerships:
Carrying
Unfunded
Investment Strategy
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)
4,613
15.37
6,076
2,085
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)
3,347
1.67
3,423
1.69
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g)
5,723
0.18
6,270
1,401
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)
3,940
0.56
4,437
0.57
Value-oriented investments in mature real estate private equity funds and portfolios globally. (b)(j)
6,417
3,881
1.34
5,977
4,537
1.36
Risk-adjusted returns on credit and equity investments, primarily in private equity-owned companies. (b)(k)
2,655
2,584
0.39
1,950
3,050
0.47
6,465
11,073
18
The following is the summary of aggregated 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. The financial statements of these limited partnerships are audited annually.
Operating results:
Total income
179,117
384,629
515,945
373,681
(23,023
(25,208
(72,340
(80,720
Net income
156,094
359,421
443,605
292,961
Balance sheet:
5,899,813
5,855,616
408,725
564,732
For the three and six months ended June 30, 2022, the Company recognized net investment income of $19 and $1,799, respectively. Included in the net investment income for the three and six months ended June 30, 2022 was an estimated unfavorable change in net asset value of $516. During the three and six months ended June 30, 2022, the Company received total cash distributions of $2,785 and $4,381, respectively, including returns on investment of $1,235 and $2,046, respectively.
For the three and six months ended June 30, 2021, the Company recognized net investment income of $1,572 and $2,359, respectively. During the three and six months ended June 30, 2021, the Company received
19
total cash distributions of $2,421 and $4,445, respectively, including returns on investment of $1,314 and $1,792, respectively.
At June 30, 2022 and December 31, 2021, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $27,180 and $28,371, respectively, and the Company’s maximum exposure to loss aggregated $26,695 and $28,133, respectively.
d) Investment in Unconsolidated Joint Venture
Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At June 30, 2022 and December 31, 2021, the Company’s maximum exposure to loss relating to the variable interest entity was $858 and $363, respectively, representing the carrying value of the investment. In June 2022, the joint venture sold its last outparcel and recognized a gain of $572. There were no cash distributions during the six months ended June 30, 2022 and 2021. At June 30, 2022, there was undistributed income of $488 as opposed to none at December 31, 2021 from this equity method investment. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:
Total revenues
572
(22
564
550
The Company’s share of net income (loss)*
508
(25
495
(50
*Included in net investment income in the Company’s consolidated statements of income.
357
Cash
953
29
971
404
Members’ capital
954
Total liabilities and members’ capital
Investment in unconsolidated joint venture, at equity**
**Includes the 90% share of FMKT Mel JV’s operating results.
20
e) Real Estate Investments
Real estate investments consist of the following as of June 30, 2022 and December 31, 2021:
Land
39,425
39,720
Land improvements
11,933
11,917
Buildings and building improvements
29,410
29,405
Tenant and leasehold improvements
1,548
1,511
1,318
1,265
Total, at cost
83,634
83,818
Less: accumulated depreciation and amortization
(10,911
(9,922
In May 2022, the Company sold one outparcel in Sorrento, Florida for net proceeds of $667. See additional information under f) Net Investment Income (Loss) below. Depreciation and amortization expense related to real estate investments was $483 and $479 for the three months ended June 30, 2022 and 2021, respectively, and $989 and $970 for the six months ended June 30, 2022 and 2021, respectively.
f) Net Investment Income (Loss)
Net investment income (loss), by source, is summarized as follows:
Available-for-sale fixed-maturity securities
1,137
384
1,585
825
Equity securities
300
340
587
691
Investment expense
(116
(129
(250
(254
1,572
1,799
2,359
1,538
344
1,885
3,341
Net income (loss) from unconsolidated joint venture
298
149
451
317
For the three and six months ended June 30, 2022, income from real estate investments included a net gain of $376 resulting from the sale of the outparcel described in e) Real Estate Investments and $451 of income from selling the liquor license previously owned by the Company’s restaurant business which was discontinued in 2020. For the six months ended June 30, 2021, income from real estate investments included a net gain of $2,790 resulting from a legal settlement with The Kroger Co. in a lawsuit filed by a real estate subsidiary of the Company to enforce a guaranty of a commercial lease.
g) Other Investments
From time to time, the Company may invest in financial assets other than stocks, mutual funds and bonds. For the three months ended June 30, 2022 and 2021, net realized gains related to other investments were $75 and $452, respectively, and $156 and $827 for the six months ended June 30, 2022 and 2021, respectively.
Note 5 -- Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and other comprehensive income or loss, which for the Company includes changes in unrealized gains or losses of investments carried at fair value and changes to the 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:
June 30, 2021
Before
Net of
Tax
Tax Effect
Net unrealized (losses) gains
(551
(1,623
25
74
Reclassification adjustment for realized gains
(141
(435
Total other comprehensive loss
(553
(117
Net unrealized losses
(1,598
(4,727
(63
Reclassification adjustment for realized losses (gains)
314
(436
(1,491
(162
Note 6 -- Fair Value Measurements
The Company records and discloses certain financial assets at their estimated fair 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 assets.
Level 2
Other inputs that are observable for the asset, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.
Level 3
Inputs that are unobservable.
22
Valuation Methodology
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.
Restricted Cash
Restricted cash represents cash held by state authorities and the carrying value approximates fair value.
Fixed-Maturity and Equity Securities
Estimated fair values of the Company’s fixed-maturity and equity 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 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.
Revolving Credit Facility
From time to time, the Company has an amount outstanding under a revolving credit facility. The interest rate is variable and is periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, carrying value, when outstanding, approximates fair value.
The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:
Maturity
Date
4.75% Convertible Senior Notes
2042
Quoted price
4.25% Convertible Senior Notes
2037
3.90% Promissory Note
2032
Discounted cash flow method/Level 3 inputs
3.75% Callable Promissory Note
2036
4.55% Promissory Note
Assets Measured at Estimated Fair Value on a Recurring Basis
The following tables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The tables indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of June 30, 2022 and December 31, 2021:
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Financial Assets:
Fixed-maturity securities:
366,134
1,429
State, municipalities, and political subdivisions
395,375
3,196
15,536
1,488
39,287
3,296
24
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 June 30, 2022 and December 31, 2021:
Financial Liabilities:
Long-term debt:
166,596
178,522
23,916
27,143
9,117
8,711
6,973
6,604
5,025
4,959
Total long-term debt
211,627
205,665
20,274
225,939
23,885
33,248
9,287
10,488
7,153
7,852
5,148
6,051
45,473
24,391
57,639
Note 7 -- Intangible Assets, Net
The Company’s intangible assets, net consist of the following:
Anchor tenant relationships (a)
In-place leases
4,215
Policy renewal rights - United
12,384
7,634
Non-compete agreements - United (b)
195
18,674
13,805
Less: accumulated amortization
(4,316
(3,169
The remaining weighted-average amortization periods for the intangible assets at June 30, 2022 are summarized in the table below:
Anchor tenant relationships
11.9 years
9.8 years
3.7 years
In connection with the Southeast Region assumed business as described in Note 1 -- “Nature of Operations” the Company recorded intangible assets of $4,869 representing the renewal rights and non-compete agreement in exchange for consideration consisting of a 6% commission on any replacement premium which includes $3,800 of commission prepaid up-front. The consideration was estimated at $4,869 with a $1,069 contingent liability. At June 30, 2022 and December 31, 2021, contingent liabilities related to renewal rights intangible assets were $3,488 and $2,419, respectively, with the contingent liabilities included in other liabilities on the consolidated balance sheets.
The renewal rights and non-compete intangible assets acquired do not meet the definition of a business as substantially all of the fair value of the intangible assets acquired are concentrated in a group of similar assets. Therefore, the Company accounted for the purchase of the renewal rights and non-compete intangible assets as an asset acquisition.
Note 8 -- Other Assets
The following table summarizes the Company’s other assets:
Benefits receivable related to retrospective reinsurance contracts
10,938
3,064
Reimbursement receivable under TPA service
1,519
3,525
Prepaid expenses
4,560
2,853
Deposits
2,577
406
Lease acquisition costs, net
570
8,632
4,364
Total other assets
Note 9 -- Revolving Credit Facility
In May 2022, the Company repaid the entire credit facility balance of $15,000. For the three months ended June 30, 2022 and 2021, interest expense was $62 and $25, respectively, including $24 and $24 of amortization of issuance costs, respectively. For the six months ended June 30, 2022 and 2021, interest expense was $151 and $129, respectively, including $49 and $49 of amortization of issuance costs, respectively. At June 30, 2022, the Company was in compliance with all required covenants with no borrowings outstanding. The borrowing capacity of the facility is now $65,000.
26
Note 10 -- Long-Term Debt
The following table summarizes the Company’s long-term debt:
4.75% Convertible Senior Notes, due June 1, 2042
4.25% Convertible Senior Notes, due March 1, 2037
3.90% Promissory Note, due through April 1, 2032
9,253
9,431
3.75% Callable Promissory Note, due through September 1, 2036
7,060
7,246
4.55% Promissory Note, due through August 1, 2036
5,098
5,225
Finance lease liabilities, due through October 15, 2024
31
Total principal amount
217,848
45,849
Less: unamortized issuance costs
(6,200
The following table summarizes future maturities of long-term debt as of June 30, 2022, 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 June 30,
1,026
2023
1,057
2024
1,096
2025
1,140
2026
197,603
Thereafter
15,926
Information with respect to interest expense related to long-term debt is as follows:
Interest Expense:
Contractual interest
1,334
1,704
1,806
3,411
Non-cash expense (a)
119
271
159
539
1,453
1,975
1,965
3,950
In May 2022, the Company issued 4.75% Convertible Senior Notes in a private offering for an aggregate principal amount of $172,500. The net proceeds of the 4.75% Convertible Senior Notes were $166,486 after $6,014 in related issuance and transaction costs. These notes mature June 1, 2042 and the cash interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022.
The 4.75% Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. The 4.75% 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 4.75% Convertible Senior Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in the indenture. The 4.75% Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. In conjunction with the issuance of the 4.75% Convertible Senior Notes, the Company entered into a share repurchase agreement providing for the repurchase of shares of the Company’s common stock. See Note 18 -- “Equity” under Share Repurchase Agreement for additional information.
Embedded Conversion Feature
The conversion feature of the 4.75% 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.
The conversion rate of the 4.75% Convertible Senior Notes is currently 12.4166 shares of common stock for each $1 in principal amount, which is the equivalent of approximately $80.54 per share.
The holders of the 4.75% Convertible Senior Notes may convert all or a portion of their convertible senior notes during specified periods prior to the maturity date as follows: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2022, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten consecutive trading-day period in which the trading price per $1 principal amount of the 4.75% Convertible Senior Notes is less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; (4) if any or all of the 4.75% Convertible Senior Notes are called for redemption, at any time prior to the close of business on the business day prior to the redemption date; or (5) during either the period beginning on, and including, March 1, 2027 and ending at the close of business on the business day immediately preceding June 7, 2027, or the period beginning on, and including, March 1, 2042 and ending at the close of business on the business day immediately preceding the maturity date.
The note holders who elect to convert their convertible senior notes in connection with a fundamental change as described in the indenture will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has the option to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of June 30, 2022, none of the conditions allowing the holders of the 4.75% Convertible Senior Notes to convert had been met.
The Company determined that the 4.75% Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument and does not require bifurcation.
Embedded Redemption Feature – Fundamental Change
The note holders have the right to require the Company to repurchase for cash all or any portion of the 4.75% Convertible Senior Notes at par prior to the maturity date should any of the fundamental change events described in the indenture occur. The Company concluded that this embedded redemption feature is not a derivative financial instrument, does not require bifurcation, and that it is not probable at issuance that any of the
28
specified fundamental change events will occur. Therefore, this embedded redemption feature is not substantive and will not affect the expected life of the liability.
Embedded Redemption Feature – Put Option of the Note Holder
At the option of the holders of the 4.75% Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the 4.75% Convertible Senior Notes at par on June 1, 2027, June 1, 2032 or June 1, 2037. The Company concluded that this embedded feature is not a derivative financial instrument and does not require bifurcation. Due to this provision, the Company determined that it is appropriate to amortize the debt issuance costs from the date the debt is issued to the earliest date at which the holders of the 4.75% Convertible Senior Notes can demand payment. Thus, the Company amortizes the issuance costs associated with the 4.75% Convertible Senior Notes over the period from May 23, 2022 to June 1, 2027.
The effective interest rate for the 4.75% Convertible Senior Notes, taking into account both cash and non-cash components, approximates 5.6%. Had a 20-year term been used for the amortization of the issuance costs of the 4.75% Convertible Senior Notes, the annual effective interest rate charged to earnings would have decreased to approximately 5.0%. As of June 30, 2022, the remaining amortization period of the debt issuance costs was expected to be 4.9 years for the 4.75% Convertible Senior Notes.
On March 1, 2022, none of the holders of the 4.25% Convertible Senior Notes exercised the put option, which would have required the Company to repurchase for cash all or any portion of the notes at par. The Company’s recent cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Senior Notes. Accordingly, as of June 30, 2022, the conversion rate of the Company’s 4.25% Convertible Senior Notes was 16.4976 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.61 per share.
The debt issuance costs for the 4.25% Convertible Senior Notes had been fully amortized as of February 2022.
Note 11 -- Reinsurance
Reinsurance obtained from other insurance companies
The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts 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, the Company is entitled to a 30% ceding commission on ceded premiums written and a profit commission equal to 10% of net profit.
The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.
The impact of the reinsurance contracts on premiums written and earned is as follows:
Premiums Written:
Direct
187,792
143,224
359,773
253,355
Assumed
(1,640
41,754
3,673
57,471
Gross written
186,152
184,978
363,446
310,826
Ceded
Net premiums written
129,947
138,542
254,079
221,291
Premiums Earned:
164,887
115,733
313,733
226,025
16,237
23,707
46,316
44,357
Gross earned
During the three and six months ended June 30, 2022, the Company recognized ceded losses of $2,517 and $3,387, respectively, as reductions in losses and loss adjustment expenses. During the three and six months ended June 30, 2021, the Company recognized ceded losses of $487 and $594, respectively, as reductions in losses and loss adjustment expenses. At June 30, 2022 and December 31, 2021, there were 45 and 55 reinsurers, respectively, participating in the Company’s reinsurance program. Total net amounts recoverable and receivable from reinsurers at June 30, 2022 and December 31, 2021 were $53,482 and $76,650, respectively. Approximately 54.9% of the reinsurance recoverable balance at June 30, 2022 was receivable from three reinsurers, one of which was the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on all available information considered in the rating-based method, the Company recognized decreases in credit loss expense of $17 and $28 for the three and six months ended June 30, 2022, respectively. For the three and six months ended June 30, 2021, the Company derecognized credit loss expenses of $16 and $28, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $62 and $90 at June 30, 2022 and December 31, 2021, respectively.
One of the existing reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. Prior to June 1, 2022, there were two reinsurance contracts with retrospective provisions. For the three and six months ended June 30, 2022, the Company recognized reductions in premiums ceded of $6,390 and $7,874, respectively, related to these adjustments in the consolidated statements of income. For the three and six months ended June 30, 2021, the Company recognized reductions in premiums ceded of $3,575 and $8,255, respectively. See Note 20 -- “Commitments and Contingencies” for additional information.
30
Amounts receivable pursuant to retrospective provisions are reflected in other assets. At June 30, 2022 and December 31, 2021, other assets included $10,938 and $3,064, respectively. Management believes the credit risk associated with the collectability of accrued benefits is minimal as the amount receivable is concentrated with reinsurers with good credit ratings and the Company monitors the creditworthiness of these reinsurers based on available information about each reinsurer’s financial condition.
Reinsurance provided to other insurance companies
For the three and six months ended June 30, 2022, $20,639 and $27,488, respectively, 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 Massachusetts. For the three and six months ended June 30, 2021, assumed premiums written were $41,754 and $57,471, respectively. At June 30, 2022, the Company had a net balance of $1,772 due to United related to the Northeast Region, consisting of payable on paid losses and loss adjustment expenses of $1,522 and premiums payable of $329, offset by ceding commission receivable of $79. At December 31, 2021, the Company had a net balance of $4,486 due to United related to the Northeast Region, consisting of ceding commission payable of $535 and payable on paid losses and loss adjustment expenses of $4,017, offset by premiums receivable of $66.
Effective December 31, 2021, the Company entered into a separate agreement to provide 85% quota share reinsurance on United’s personal lines insurance policies in the states of Georgia, South Carolina and North Carolina through May 31, 2022. Effective June 1, 2022, the Company entered into a new agreement to provide 100% quota share reinsurance on United’s personal lines insurance policies in the Southeast Region. For the three and six months ended June 30, 2022, assumed premiums written related to the Southeast Region’s insurance policies were $18,999 and $31,161, respectively. At June 30, 2022, the Company had a net balance of $9,329 due to United, consisting of premiums payable of $14,027 and payable on paid losses and loss adjustment expenses of $2,780, offset by ceding commission receivable of $4,861 and a catastrophe cost allowance receivable of $2,617. At December 31, 2021, there was an amount receivable from United of $23,325, net of a ceding commission of $8,835 and a catastrophe cost allowance of $3,181.
At June 30, 2022 and December 31, 2021, the balance of funds withheld for assumed business related to the Company’s quota share reinsurance agreements with United was $82,468 and $73,716, respectively.
Note 12 -- 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 claim development and losses incurred but not reported.
The Company primarily writes insurance in 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 losses and LAE is summarized as follows:
Net balance, beginning of period*
179,837
144,630
172,410
141,065
Incurred, net of reinsurance, related to:
Current period
78,448
51,310
148,524
93,230
Prior period
8,382
4,607
11,010
8,438
Total incurred, net of reinsurance
Paid, net of reinsurance, related to:
(37,627
(20,006
(56,423
(27,602
(32,626
(25,640
(79,107
(60,230
Total paid, net of reinsurance
(70,253
(45,646
(135,530
(87,832
Net balance, end of period
196,414
154,901
Add: reinsurance recoverable before allowance for credit losses
42,410
48,884
Gross balance, end of period
203,785
* 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 six months ended June 30, 2022, the Company recognized losses related to prior periods of $8,382 and $11,010, respectively, primarily to increase the reserve resulting from increased litigation. Loss and LAE expenses for the three and six months ended June 30, 2022 included estimated losses, net of reinsurance, of approximately $10,438 and $23,399, respectively, related to policies assumed from United. In addition, the Company recognized $5,811 and $11,932, respectively, of losses related to weather events in Florida during the three and six months ended June 30, 2022.
Note 13 -- Segment Information
The Company identifies its operating divisions or segments 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 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 three months ended June 30, 2022 and 2021, revenues from the HCPCI insurance operations segment before intracompany elimination represented 69.8% and 77.6%, respectively, and revenues from the TypTap Group segment represented 27.9% and 20.3%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2022 and 2021, revenues from the HCPCI insurance operations segment before intracompany elimination represented 69.8% and 77.8%, respectively, and revenues from the TypTap Group segment represented 28.1% and 18.9%, respectively, of total revenues of all operating segments. At June 30, 2022 and December 31, 2021, HCPCI insurance operations’ total assets represented 55.2% and 58.7%, respectively, and TypTap Group’s total assets represented 33.1% and 29.3%, respectively, of the combined assets of all operating segments.
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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.
HCPCI
Insurance
TypTap
Real
Corporate/
Reclassification/
For Three Months Ended June 30, 2022
Operations
Group
Estate (a)
Other (b)
Elimination
Consolidated
Revenue:
Gross premiums earned (c)
115,636
67,443
(1,955
(36,979
(20,629
1,403
78,657
46,814
(552
Net (loss) income from investment portfolio
(1,446
283
(1,228
1,835
628
424
414
532
2,765
1,472
(4,672
78,253
48,053
244
(3,389
Expenses:
48,692
38,692
(554
Amortization of deferred policy acquisition costs
15,904
7,167
23,071
Other policy acquisition expenses
679
3,135
3,814
897
2,158
4,242
211
224
1,291
(211
774
606
302
(600
1,235
Personnel and other operating expenses
7,738
8,526
626
1,913
(2,024
16,779
74,353
59,402
1,456
5,664
Income (loss) before income taxes
3,900
(11,349
1,309
(5,420
Total revenue from non-affiliates (d)
76,276
49,009
2,427
(359
Gross premiums written
113,139
73,013
34
For Three Months Ended June 30, 2021
102,850
39,000
(2,410
(36,101
(12,585
2,250
66,749
26,415
(160
Net income from investment portfolio
3,550
2,392
294
6,731
701
291
812
475
2,379
(3,156
71,812
27,676
2,659
(3,022
39,641
16,440
(164
20,540
5,553
26,093
(5,070
2,021
125
(2,924
937
1,600
1,618
4,155
259
1,766
312
574
364
(605
663
4,665
6,233
1,317
641
(2,353
10,503
60,731
32,159
2,150
4,389
11,081
(4,483
229
(1,730
70,914
27,813
2,041
2,715
124,222
60,725
35
For Six Months Ended June 30, 2022
234,941
128,065
(2,957
(73,932
(37,562
2,127
161,009
90,503
(830
(2,903
(912
1,970
(1,578
1,282
827
1,661
1,001
5,168
2,308
(8,385
161,049
92,598
1,396
(7,245
92,687
67,680
(833
35,006
16,589
51,595
1,342
3,418
4,760
2,331
1,782
4,466
411
1,665
(411
1,335
1,211
474
(1,223
2,064
15,056
16,019
1,933
3,647
(4,778
31,877
146,689
107,234
3,595
10,252
14,360
(14,636
1,573
(8,856
158,009
93,832
4,491
90
204,280
159,166
36
For Six Months Ended June 30, 2021
207,371
67,811
(4,800
(72,081
(22,094
4,640
135,290
45,717
4,430
831
3,887
3,021
12,169
1,413
549
1,333
650
7,513
(8,923
142,466
47,747
4,714
(6,062
73,080
28,752
33,287
10,190
43,477
(246
3,062
(59
2,757
1,698
1,967
2,832
741
3,518
(270
38
600
1,161
540
(1,238
1,101
9,723
11,355
2,518
(4,331
21,600
117,580
56,016
4,420
9,225
24,886
(8,269
3,093
(4,511
141,114
48,192
6,836
4,239
205,210
105,615
The following table presents segment assets reconciled to the Company’s total assets on the consolidated balance sheets:
Segments:
HCPCI Insurance Operations
635,564
676,509
TypTap Group
431,610
369,600
Real Estate Operations
127,953
127,651
Corporate and Other
176,474
65,349
Consolidation and Elimination
(90,898
(62,252
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Note 14 -- Leases
The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases:
Operating leases:
ROU assets
Liabilities
Finance leases:
80
86
The Company’s lease of office space in India for its information technology operations expired in January 2022 and a new lease agreement was entered into effective February 2022 with an initial term of nine years.
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 51 months
Yes
(a), (b)
Office space
3 to 9 years
(b), (c)
Finance lease:
3 to 5 years
Not applicable
(d)
As of June 30, 2022, maturities of lease liabilities were as follows:
Leases
Operating
Finance
1,090
177
98
103
109
434
Total lease payments
2,011
Less: interest
187
Total lease obligations
The following table provides quantitative information with regards to the Company’s operating and finance leases:
Lease costs:
Finance lease costs:
Amortization – ROU assets*
Operating lease costs*
282
391
656
845
Short-term lease costs*
91
113
201
150
Total lease costs
378
509
867
1,005
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases
Operating cash flows – operating leases
648
848
Financing cash flows – finance leases
Weighted-average remaining lease term:
Finance leases (in years)
1.5
Operating leases (in years)
4.2
Weighted-average discount rate:
Finance leases (%)
3.4
%
Operating leases (%)
3.9
* 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:
1 to 3 years
(e)
Retail space
3 to 20 years
Boat docks/wet slips
1 to 12 months
Note 15 -- Income Taxes
During the three months ended June 30, 2022, the Company recorded approximately $3,018 of income tax benefit, which resulted in an effective tax rate of 26.1%. During the three months ended June 30, 2021, the Company recorded approximately $1,267 of income taxes, which resulted in an effective tax rate of 24.9%. The increase in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to an increase in non-deductible compensation expense related to restricted stock granted to certain executives and the increased Florida corporate tax rate effective January 1, 2022. During the six months ended June 30, 2022, the Company recorded approximately $1,808 of income tax benefit, which resulted in an effective tax rate of 23.9%. During the six months ended June 30, 2021, the Company recorded approximately $4,524 of income taxes, which resulted in an effective tax rate of 29.8%. The decrease in the effective tax rate in 2022 as
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compared with the corresponding period in the prior year was primarily attributable to the recognition of tax benefits attributable to restricted stock that vested in February and May 2022. 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 and tax-exempt items.
Note 16 -- 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 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:
Shares (a)
Per Share
(Numerator)
(Denominator)
Less: Net income attributable to redeemable noncontrolling interest
Less: TypTap Group’s net loss attributable to non-HCI common stockholders and TypTap Group’s participating securities
429
Net (loss) income attributable to HCI
2,080
Less: Loss (income) attributable to participating securities
(168
Basic (Loss) Earnings Per Share:
(Loss) income allocated to common stockholders
(9,346
9,022
1,912
7,526
Effect of Dilutive Securities: *
Stock options
175
Warrants
247
Diluted (Loss) Earnings Per Share:
(Loss) income available to common stockholders and assumed conversions
7,948
(a)
Shares in thousands.
*
For the three months ended June 30, 2022, convertible senior notes, stock options, and warrants were excluded due to anti-dilutive effect. For the three months ended June 30, 2021, convertible senior notes were excluded due to anti-dilutive effect.
40
501
8,203
590
(8,488
9,249
7,500
141
161
7,802
For the six months ended June 30, 2022, convertible senior notes, stock options, and warrants were excluded due to anti-dilutive effect. For the six months ended June 30, 2021, convertible senior notes were excluded due to anti-dilutive effect.
Note 17 -- Redeemable Noncontrolling Interest
The following table summarizes the activity of redeemable noncontrolling interest during the six months ended June 30, 2022 and 2021:
Initial proceeds from Centerbridge
Increase (decrease):
Proceeds allocated to warrants*
(9,217
Issuance costs
Issuance costs allocated to warrants*
Accrued cash dividends
458
Accretion - increasing dividend rates
906
336
Dividends paid
89,695
85,892
1,500
1,250
768
929
88,071
*Net decrease related to warrants of $8,640.
41
For the three months ended June 30, 2022 and 2021, net income attributable to redeemable noncontrolling interest was $2,268 and $2,179, respectively, consisting of accrued cash dividends of $1,500 and $1,250, respectively, and accretion related to increasing dividend rates of $768 and $929, respectively. For the six months ended June 30, 2022 and 2021, net income attributable to redeemable noncontrolling interest was $4,516 and $2,973, respectively, consisting of accrued cash dividends of $2,842 and $1,708, respectively, and accretion related to increasing dividend rates of $1,674 and $1,265, respectively.
Note 18 -- Equity
Stockholders’ Equity
In March 2022, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees during 2022. During the three and six months ended June 30, 2022, the Company repurchased and retired a total of 29,465 shares at a weighted average price per share of $63.92 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three and six months ended June 30, 2022 was $1,884 or $63.95 per share.
On April 26, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on June 17, 2022 to stockholders of record on May 17, 2022.
At June 30, 2022, 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.
Share Repurchase Agreement
In conjunction with the issuance of the 4.75% Convertible Senior Notes as described in Note 10 -- “Long-Term Debt” under 4.75% Convertible Senior Notes, the Company used $66,853 of the net proceeds to repurchase and retire an aggregate of 1,037,600 shares of its common stock at a price of $64.43 per share from institutional investors.
Prepaid Share Repurchase Forward Contract
In March 2022, the Company’s share repurchase forward contract with Societe Generale, entered into in conjunction with the 2017 issuance of the 4.25% Convertible Senior Notes, was physically settled with the delivery from Societe Generale of 191,100 shares of HCI’s common stock to the Company.
Noncontrolling Interests
At June 30, 2022, there were 81,138,380 shares of TTIG’s common stock outstanding, of which 6,138,380 shares were not owned by HCI.
During the three and six months ended June 30, 2022, TTIG repurchased and retired a total of 45,239 and 66,983 shares, respectively, of its common stock surrendered by its employees to satisfy payroll tax liabilities
42
associated with the vesting of restricted shares. The total cost of purchasing noncontrolling interests during the three and six months ended June 30, 2022 was $262 and $389, respectively.
Note 19 -- Stock-Based Compensation
2012 Omnibus Incentive Plan
The Company currently has outstanding stock-based awards granted under the Plan which is currently active and available for future grants. At June 30, 2022, there were 1,108,940 shares available for grant.
Stock Options
Stock options granted and outstanding under the incentive plan vest over a period of four years and are exercisable over the contractual term of ten years.
A summary of the stock option activity for the three and six months ended June 30, 2022 and 2021 is as follows (option amounts not in thousands):
Weighted
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Term
Outstanding at January 1, 2022
440,000
45.25
6.6 years
18,119
Outstanding at March 31, 2022
6.3 years
10,494
Outstanding at June 30, 2022
6.1 years
9,354
Exercisable at June 30, 2022
357,500
44.23
5.8 years
7,965
Outstanding at January 1, 2021
7.6 years
3,113
Outstanding at March 31, 2021
7.3 years
13,464
Outstanding at June 30, 2021
7.1 years
23,883
Exercisable at June 30, 2021
275,000
43.40
15,436
There were no options exercised during the three and six months ended June 30, 2022 and 2021. For the three months ended June 30, 2022 and 2021, the Company recognized $161 and $219, respectively, of compensation expense which was included in general and administrative personnel expenses. For the six months ended June 30, 2022 and 2021, the Company recognized $345 and $442, respectively, of compensation expense. Deferred tax benefits related to stock options were $0 and $0 for the three months ended June 30, 2022 and 2021, respectively, and $0 and $1 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022 and December 31, 2021, there was $660 and $1,005, 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 1.3 years.
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Restricted Stock Awards
From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, 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.
Information with respect to the activity of unvested restricted stock awards during the three and six months ended June 30, 2022 and 2021 is as follows:
Restricted
Stock
Grant Date
Awards
Nonvested at January 1, 2022
679,997
39.72
Granted
4,000
70.58
Vested
(50,667
50.68
Forfeited
(3,265
45.85
Nonvested at March 31, 2022
630,065
39.00
67.30
(51,125
45.04
45.61
Nonvested at June 30, 2022
581,240
38.61
Nonvested at January 1, 2021
423,787
43.79
548,086
36.95
(41,250
42.18
Cancelled
(141,600
43.76
(2,050
45.67
Nonvested at March 31, 2021
786,973
39.11
76.00
(68,541
43.80
45.96
46.44
Nonvested at June 30, 2021
711,212
38.71
The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $3,184 and $2,336 for the three months ended June 30, 2022 and 2021, respectively, and $6,452 and $4,241 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022 and December 31, 2021, there was approximately $12,845 and $18,995, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.1 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 six months ended June 30, 2022 and 2021.
Deferred tax benefits recognized
639
459
Tax benefits realized for restricted stock and paid dividends
902
1,357
1,304
1,412
Fair value of vested restricted stock
2,303
3,002
4,871
4,742
In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to TypTap Group. In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.
45
Subsidiary Equity Plan
For the three months ended June 30, 2022 and 2021, TypTap Group recognized compensation expense related to its stock-based awards of $897 and $1,599, respectively. For the six months ended June 30, 2022 and 2021, TypTap Group recognized compensation expense related to its stock-based awards of $1,782 and $1,814, respectively. At June 30, 2022 and December 31, 2021, there was $9,558 and $11,230, respectively, of unrecognized compensation expense related to nonvested restricted stock and stock options.
Note 20 -- Commitments and Contingencies
Agreement with Florida Department of Transportation
In May 2022, the Company entered into an agreement to sell 1.5 acres of land in Tampa, Florida for net proceeds of $14,500 to the Florida Department of Transportation (“FDOT”) in connection with an eminent domain proceeding for a planned road improvement project. Upon the sale closing in July 2022, the Company will retain from its investment property an office building on approximately six acres of land. See Note 21 -- “Subsequent Events” for additional information.
Obligations under Multi-Year Reinsurance Contracts
As of June 30, 2022, the Company has a contractual obligation related to one multi-year reinsurance contract. The contract was entered into effective June 1, 2022 and the Company’s previous two multi-year reinsurance contracts were commuted effective May 31, 2022. The contract may be cancelled only with the other party’s consent or when its respective experience account is positive at the end of each contract year. The table below represents the future minimum aggregate premium amounts payable to the reinsurer.
91,350
182,700
Capital Commitments
As described in Note 4 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At June 30, 2022, there was an aggregate unfunded balance of $6,465.
FIGA Assessments
In October 2021, the Florida Office of Insurance Regulation approved a 2022 assessment for the Florida Insurance Guaranty Association (“FIGA”) which is necessary to secure funds for the payment of covered claims of insolvent insurance companies. The 2022 FIGA assessment is levied at 0.70% 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 January 1, 2022 through December 31, 2022.
In March 2022, the Florida Office of Insurance Regulation approved an assessment for FIGA which is necessary to secure funds for the payment of covered claims relating to the liquidation of one insurance company.
46
The FIGA assessment is levied at 1.3% 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 July 1, 2022 through June 30, 2023.
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 June 30, 2022, the FIGA assessments payable by the Company were $954.
Note 21 -- Subsequent Events
On July 1, 2022, the Company closed on its agreement to sell 1.5 acres of land in Tampa, Florida for net proceeds of $14,500 to the FDOT in connection with the eminent domain proceeding for the planned road improvement project. This sale results in a net realized gain of $13,402 recognized in July 2022 which will be reflected in net investment income. Upon the close of the sale, the Company is retaining from its investment property an office building on approximately six acres of land.
On July 14, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on September 16, 2022 to stockholders of record on August 19, 2022.
47
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2022. Unless the context requires otherwise, as used in this Form 10-Q, the terms “HCI,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. All dollar amounts 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 with operations in property and casualty insurance, reinsurance, real estate and information technology. After the reorganization of our business in the first quarter of 2021, we now manage our operations in the following organizational segments, based on managerial emphasis and evaluation of financial and operating performances:
For the three months ended June 30, 2022 and 2021, revenues from HCPCI insurance operations before intracompany elimination represented 69.8% and 77.6%, respectively, and revenues from TypTap Group represented 27.9% and 20.3%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2022 and 2021, revenues from HCPCI insurance operations before intracompany elimination represented
48
69.8% and 77.8%, respectively, and revenues from TypTap Group represented 28.1% and 18.9%, respectively, of total revenues of all operating segments. At June 30, 2022 and December 31, 2021, HCPCI insurance operations’ total assets represented 55.2% and 58.7%, respectively, and TypTap Group’s total assets represented 33.1% and 29.3%, respectively, of the combined assets of all operating segments. See Note 13 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.
Property and Casualty Insurance
HCPCI provides various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. HCPCI is authorized 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.
In 2021, HCPCI began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. HCPCI began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.
Reinsurance and other auxiliary operations
We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services.
TypTap 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.
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 75,421 at June 30, 2022. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently. As of August 2, 2022, TypTap has been approved to offer homeowners coverage in 18
states outside of Florida. TypTap is currently operating in twelve states. In addition to the expansion in TypTap business, we also expect continued growth from the United policies assigned to TypTap through the renewal rights agreements acquired by HCI.
In 2021, TypTap began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. TypTap began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.
In June 2022, TypTap entered into a new reinsurance agreement with United where TypTap provides 100% quota share reinsurance on all of United’s personal lines insurance business in the Southeast Region from June 1, 2022 through May 31, 2023. In exchange, TypTap pays United a ceding commission of 16% of premium.
Information Technology
Our information technology operations include a team of experienced software developers with extensive knowledge in developing web-based products and applications for mobile devices. The operations, which are 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.
Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes. Properties used in operations consist of one Tampa office building and an insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.
Other Operations
Holding company operations
Activities of our holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a reportable segment comprise the operations of this segment.
Recent Events
On July 1, 2022, we closed on our agreement to sell 1.5 acres of land in Tampa, Florida for net proceeds of $14,500,000 to the Florida Department of Transportation in connection with the eminent domain proceeding for the planned road improvement project. This sale results in a net realized gain of $13,402,000.
On July 14, 2022, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on September 16, 2022 to stockholders of record on August 19, 2022.
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three and six months ended June 30, 2022 and 2021 (dollar amounts in thousands, except per share amounts):
Other income
(1,439
(1,913
(3,327
(2,610
Ratios to Net Premiums Earned:
Loss Ratio
69.51
60.12
63.64
56.22
Expense Ratio
40.55
43.54
40.29
43.97
Combined Ratio
110.06
103.66
103.93
100.19
Ratios to Gross Premiums Earned:
47.94
40.10
44.31
37.60
27.97
29.04
28.05
29.41
75.91
69.14
72.36
67.01
(Loss) Earnings Per Share Data:
Basic
Diluted
Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021
Our results of operations for the three months ended June 30, 2022 reflect net loss of approximately $8,542,000 or $1.04 loss per share, compared with net income of approximately $3,830,000 or $0.24 diluted earnings per share, for the three months ended June 30, 2021. The quarter-over-quarter decrease was due to a $30,913,000 increase in losses and loss adjustment expenses, a net decrease in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses) of $7,287,000, a $4,755,000 increase in general and administrative personnel expenses, and a $3,694,000 increase in policy acquisition and other underwriting expenses, offset by an increase in net premiums earned of $31,915,000 and a $485,000 decrease in interest expense.
Gross Premiums Earned on a consolidated basis for the three months ended June 30, 2022 and 2021 were approximately $181,124,000 and $139,440,000, respectively. HCPCI gross premiums earned were $113,681,000 for the three months ended June 30, 2022 compared to $100,440,000 for the three months ended June 30, 2021. Gross premiums earned from the United insurance policies assumed were $16,237,000 for the three months ended June 30, 2022 compared to $23,707,000 for the three months ended June 30, 2021. TypTap’s gross premiums earned were $67,443,000 versus $39,000,000 for the same comparative period with the increase due to a greater number of policies in force from the organic growth in TypTap’s business and from the business assumed from United beginning June 1, 2021.
Premiums Ceded for the three months ended June 30, 2022 and 2021 were approximately $56,205,000 and $46,436,000, respectively, representing 31.0% and 33.3%, respectively, of gross premiums earned. The $9,769,000 increase was primarily attributable to higher reinsurance costs for the 2022 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion.
Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses as defined in a quota share agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. 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 June 30, 2022, premiums ceded included a decrease of $6,390,000 related to retrospective provisions compared with a decrease of $3,575,000 for the three months ended June 30, 2021. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”
Net Premiums Written for the three months ended June 30, 2022 and 2021 totaled approximately $129,947,000 and $138,542,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The decrease in 2022 resulted from an increase in premiums ceded to reinsurers as described above. We had approximately 220,600 policies in force at June 30, 2022 (excluding policies assumed from United) as compared with approximately 150,000 policies in force at June 30, 2021.
Net Premiums Earned for the three months ended June 30, 2022 and 2021 were approximately $124,919,000 and $93,004,000, respectively, and reflect the 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 three months ended June 30, 2022 and 2021 (amounts in thousands):
Net Premiums Written
Increase in Unearned Premiums
(5,028
(45,538
Net Premiums Earned
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Net Investment Income for the three months ended June 30, 2022 and 2021 was approximately $3,684,000 and $2,635,000, respectively. The $1,049,000 increase was primarily attributable to a $1,194,000 increase in income from real estate investments and a $753,000 increase in income from available-for-sale fixed-maturity securities, offset by a $1,553,000 decrease in income from limited partnership investments. See Net Investment Income (Loss) under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.
Net Realized Investment Losses for the three months ended June 30, 2022 were approximately $6,000 versus $2,607,000 of net realized investment gains for the three months ended June 30, 2021. The $2,613,000 decrease was primarily attributable to net gains from selling equity securities and other investments during 2021.
Net Unrealized Investment Losses for the three months ended June 30, 2022 were approximately $4,234,000 versus $1,489,000 of net unrealized investment gains for the three months ended June 30, 2021. The net unrealized investment loss for the three months ended June 30, 2022 was primarily attributable to an overall decline in the equity market compared with the three months ended June 30, 2021.
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $86,830,000 and $55,917,000 for the three months ended June 30, 2022 and 2021, respectively. HCPCI losses and loss adjustment expenses were $48,692,000 for the three months ended June 30, 2022 compared to $39,641,000 for the three months ended June 30, 2021. The increase was primarily attributable to a $7,902,000 net increase in losses attributable to the United policies assumed due to an increase in the number of policies assumed from United and $1,074,000 of additional losses reported during the second quarter of 2022 from Tropical Storm Eta. Losses and loss adjustment expenses for TypTap were $38,692,000 versus $16,440,000 for the same comparative period. The increase was attributable to $16,500,000 of losses attributable to the greater number of TypTap policies in force, $2,507,000 of additional losses from policies renewed or assumed from United, and $3,445,000 of prior period loss development. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”
Policy Acquisition and Other Underwriting Expenses for the three months ended June 30, 2022 and 2021 were approximately $26,863,000 and $23,169,000 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 payable to United, and premium taxes. An increase in policy acquisition costs primarily results from premium growth. Policy acquisition expenses for HCPCI insurance operations were $16,583,000 for the three months ended June 30, 2022 compared to $15,470,000 for the three months ended June 30, 2021. The increase was due to amortization of increased costs associated with the increase in the number of policies assumed from United. TypTap Group policy acquisition expenses were $10,302,000 versus $7,574,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months and the policies assumed from United.
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General and Administrative Personnel Expenses for the three months ended June 30, 2022 and 2021 were approximately $15,301,000 and $10,546,000, 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 a project to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The period-over-period increase of $4,755,000 was primarily attributable to an increase in the headcount of temporary and full-time employees and merit increases for non-executive employees effective in late February 2022.
Interest Expense for the three months ended June 30, 2022 and 2021 was approximately $1,515,000 and $2,000,000, respectively. The decrease primarily resulted from conversions of our 4.25% convertible senior notes during the second half of 2021, offset by interest expense related to our 4.75% convertible senior notes issued in May 2022.
Income Tax Benefit for the three months ended June 30, 2022 was approximately $3,018,000 for state, federal, and foreign income taxes resulting in an effective tax rate of 26.1% for 2022. This compared with approximately $1,267,000 of income tax expense for the three months ended June 30, 2021, resulting in an effective tax rate of 24.9% for 2021. The increase in the effective tax rate was primarily attributable to an increase in non-deductible compensation expense related to certain executive compensation and the increased Florida corporate tax rate effective January 1, 2022.
Ratios:
The loss ratio applicable to the three months ended June 30, 2022 (losses and loss adjustment expenses incurred related to net premiums earned) was 69.5% compared with 60.1% for the three months ended June 30, 2021. The increase was primarily due to the increase in losses and loss adjustment expenses as further described above, offset in part by the increase in net premiums earned.
The expense ratio applicable to the three months ended June 30, 2022 (defined as total expenses excluding losses and loss adjustment expenses related to net premiums earned) was 40.6% compared with 43.6% for the three months ended June 30, 2021. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in interest expense, offset in part by the increase in general and administrative personnel 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 June 30, 2022 was 110.1% compared with 103.7% for the three months ended June 30, 2021. The increase in 2022 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 June 30, 2022 was 75.9% compared with 69.1% for the three months ended June 30, 2021. The increase in 2022 was primarily attributable to the increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.
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Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021
Our results of operations for the six months ended June 30, 2022 reflect net loss of approximately $5,751,000 or $0.92 loss per share, compared with net income of approximately $10,675,000 or $0.98 diluted earnings per share, for the six months ended June 30, 2021. The period-over-period decrease was primarily due to a $57,866,000 increase in losses and loss adjustment expenses, a net decrease in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $13,747,000, a $10,037,000 increase in policy acquisition and other underwriting expenses, and a $9,139,000 increase in general and administrative personnel expenses, offset by an increase in net premiums earned of $69,835,000 and a $1,963,000 decrease in interest expense.
Gross Premiums Earned on a consolidated basis for the six months ended June 30, 2022 and 2021 were approximately $360,049,000 and $270,382,000, respectively. HCPCI gross premiums earned were $231,984,000 for the six months ended June 30, 2022 compared to $202,571,000 for the six months ended June 30, 2021. Gross premiums earned from the United insurance policies assumed were $46,316,000 for the six months ended June 30, 2022 compared to $44,357,000 for the six months ended June 30, 2021. TypTap’s gross premiums earned were $128,065,000 versus $67,811,000 for the same comparative period with the increase due to a greater number of policies in force from the organic growth in TypTap’s business and from the business assumed from United beginning June 1, 2021.
Premiums Ceded for the six months ended June 30, 2022 and 2021 were approximately $109,367,000 and $89,535,000, respectively, representing 30.4% and 33.1%, respectively, of gross premiums earned. The $19,832,000 increase was primarily attributable to higher reinsurance costs for the 2022 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion.
For the six months ended June 30, 2022, premiums ceded included a decrease of $7,874,000 related to retrospective provisions compared with a net reduction of $8,255,000 for the six months ended June 30, 2021. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”
Net Premiums Written for the six months ended June 30, 2022 and 2021 totaled approximately $254,079,000 and $221,291,000, respectively. The $32,788,000 increase in 2022 resulted primarily from the factors described earlier.
Net Premiums Earned for the six months ended June 30, 2022 and 2021 were approximately $250,682,000 and $180,847,000, respectively, and reflect the 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 six months ended June 30, 2022 and 2021 (amounts in thousands):
(3,397
(40,444
Net Investment Income for the six months ended June 30, 2022 and 2021 was approximately $6,552,000 and $7,229,000, respectively. The $677,000 decrease was primarily attributable to a $1,456,000 decrease in
income from real estate investments and a $560,000 decrease in income from limited partnership investments, offset by a $760,000 increase in income from available-for-sale fixed-maturity securities. See Net Investment Income (Loss) under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.
Net Unrealized Investment Losses for the six months ended June 30, 2022 were approximately $7,810,000 versus $1,220,000 of net unrealized investment gains for the six months ended June 30, 2021. The net unrealized investment loss for the six months ended June 30, 2022 was primarily attributable to an overall decline in the equity market compared with the six months ended June 30, 2021.
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $159,534,000 and $101,668,000 for the six months ended June 30, 2022 and 2021, respectively. HCPCI losses and loss adjustment expenses were $92,687,000 for the six months ended June 30, 2022 compared to $73,080,000 for the six months ended June 30, 2021. The increase was primarily attributable to $3,000,000 of losses associated with growth in HCPCI’s Florida portfolio, a $13,972,000 net increase in losses attributable to the United policies assumed due to an increase in the number of policies assumed from United and $1,241,000 of additional losses reported during the first half of 2022 from Tropical Storm Eta. Losses and loss adjustment expenses for TypTap were $67,680,000 versus $28,752,000 for the same comparative period. The increase was attributable to $29,750,000 of losses attributable to the greater number of TypTap policies in force, $4,951,000 of additional losses from policies assumed or renewed from United, and $3,990,000 of prior period losses. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”
Policy Acquisition and Other Underwriting Expenses for the six months ended June 30, 2022 and 2021 were approximately $56,271,000 and $46,234,000 on a consolidated basis, respectively. Policy acquisition expenses for HCPCI insurance operations were $36,348,000 for the six months ended June 30, 2022 compared to $33,041,000 for the six months ended June 30, 2021. The increase was due to amortization of increased costs associated with the increase in the number of policies assumed from United. TypTap Group policy acquisition expenses were $20,007,000 versus $13,252,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months and the policies assumed from United.
General and Administrative Personnel Expenses for the six months ended June 30, 2022 and 2021 were approximately $29,335,000 and $20,196,000, respectively. The period-over-period increase of $9,139,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2022, and higher stock-based compensation expense.
Interest Expense for the six months ended June 30, 2022 and 2021 was approximately $2,116,000 and $4,079,000, respectively. The decrease primarily resulted from conversions of our 4.25% convertible senior notes during the second half of 2021, offset by interest expense related to our 4.75% convertible senior notes issued in May 2022.
Income Tax Benefit for the six months ended June 30, 2022 was approximately $1,808,000 for state, federal, and foreign income taxes resulting in an effective tax rate of 23.9% for 2022. This compared with approximately $4,524,000 of income tax expense for the six months ended June 30, 2021, resulting in an effective tax rate of 29.8% for 2021. The decrease in the effective tax rate was primarily attributable to the recognition of tax benefits attributable to restricted stock that vested in February and May 2022.
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The loss ratio applicable to the six months ended June 30, 2022 (losses and loss adjustment expenses incurred related to net premiums earned) was 63.6% compared with 56.2% for the six months ended June 30, 2021. The increase was primarily due to the increase in losses and loss adjustment expenses as further described above, offset in part by the increase in net premiums earned.
The expense ratio applicable to the six months ended June 30, 2022 was 40.3% compared with 44.0% for the six months ended June 30, 2021. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in interest expense, offset in part by the increase in policy acquisition, underwriting and personnel expenses.
The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the six months ended June 30, 2022 was 103.9% compared with 100.2% for the six months ended June 30, 2021. The increase in 2022 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 six months ended June 30, 2022 was 72.4% compared with 67.0% for the six months ended June 30, 2021. The increase in 2022 was primarily attributable to the increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.
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. 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 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 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 and equity offerings to support our growth and future investment opportunities.
Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. With the exception of litigated claims, substantially all of our losses and loss adjustment expenses are fully settled and paid within 100 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.
We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.
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In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions.
Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and Finance Leases
The following table summarizes the principal and interest payment obligations of our indebtedness at June 30, 2022:
Maturity Date
Payment Due Date
4.75% Convertible Senior Notes*
June 2042
June 1 and December 1**
March 2037
March 1 and September 1
Through September 2036
1st day of each month
Through August 2036
Through April 2032
Finance leases
Through October 2024
Various
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.
**
The cash interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022.
See Note 10 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.
Share Repurchase Plan
In March 2022, the Board approved a plan to repurchase up to $20,000,000 of common shares during 2022 under which we may purchase shares of common stock in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. At June 30, 2022, there was approximately $18,117,000 available under the plan. See Note 18 -- “Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for more information.
Limited Partnership Investments
Our limited partnership investments consist of six private equity funds managed by their general partners. Two 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 four of the remaining funds have expired, the general partners may request additional funds under certain circumstances. At June 30, 2022, there was an aggregate unfunded capital balance of $6,465,000. See Limited Partnership Investments under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.
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 investments. Thus, we may consider increasing our real estate investment portfolio should an opportunity arise.
We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. In June 2022, FMKT Mel JV sold its last outparcel and recognized a net gain of $572,000. We anticipate that the liquidation of FMKT Mel JV and the distribution of its earnings will take place during the third quarter of 2022.
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Sources and Uses of Cash
Cash Flows for the Six Months Ended June 30, 2022
Net cash provided by operating activities for the six months ended June 30, 2022 was approximately $21,629,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $26,584,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $360,095,000 was primarily due to the purchases of fixed-maturity and equity securities of $394,021,000, the purchases of property and equipment of $4,229,000, and the purchase of intangible assets from United of $3,800,000, offset by the proceeds from sales of fixed-maturity and equity securities of $35,921,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $4,020,000, and distributions received from limited partnership investments of $2,335,000. Net cash provided by financing activities totaled $70,267,000, which was primarily due to the proceeds from issuance of 4.75% Convertible Senior Notes of $172,500,000, offset by $69,987,000 of share repurchases, net repayment of our revolving credit facility of $15,000,000, $8,091,000 of net cash dividend payments, debt issuance costs paid of $5,757,000, cash dividends paid to redeemable noncontrolling interest of $2,508,000, and repayments of long-term debt of $501,000.
Cash Flows for the Six Months Ended June 30, 2021
Net cash provided by operating activities for the six months ended June 30, 2021 was approximately $95,647,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $23,775,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $37,805,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $71,191,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $16,677,000, and distributions received from limited partnership investments of $2,653,000, offset by the purchases of fixed-maturity and equity securities of $51,378,000, and the purchases of property and equipment of $1,275,000. Net cash provided by financing activities totaled $61,538,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $6,452,000 of net cash dividend payments, net repayment of our revolving credit facility of $23,750,000, and $1,308,000 used in share repurchases.
Investments
The main objective of our investment policy is to maximize our after-tax investment income with a reasonable level of risk given the current financial market. Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities.
At June 30, 2022, we had $434,290,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.
In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations.
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OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2022, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 20 -- “Commitments and Contingencies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments to develop amounts reflected and disclosed in our financial statements. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. We base our estimates on various assumptions and actuarial data we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates.
We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective provisions, deferred income taxes, 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.
Reserves for Losses and Loss Adjustment Expenses
Our liability for losses and loss adjustment expense (“Reserves”) is specific to property insurance, which is our insurance subsidiaries’ 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 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 June 30, 2022, $177,320,000 of the total $238,824,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $61,504,000 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 June 30, 2022, $42,941,000 of the $61,504,000 in reserves for known cases relates to claims incurred during prior years.
Our Reserves increased from $237,165,000 at December 31, 2021 to $238,824,000 at June 30, 2022. The $1,659,000 increase is comprised of $92,101,000 in reserves established for the 2022 loss year, offset by reductions in our Reserves of $21,777,000 specific to Hurricane Irma, Hurricane Michael, Hurricane Sally and Tropical Storm Eta, and reductions in our non-catastrophe Reserves of $49,711,000 for 2021 and $18,954,000 for 2020 and prior loss years. The Reserves established for 2022 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of June 30, 2022. The decrease of $68,665,000 specific to our 2021 and prior loss-year reserves is due to settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at June 30, 2022 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
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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.
Economic Impact of Reinsurance Contracts with Retrospective Provisions
From time to time, our reinsurance contracts may include retrospective provisions that adjust premiums 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 obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.
For the three months ended June 30, 2022 and 2021, we accrued benefits of $6,390,000 and $3,575,000, respectively. For the six months ended June 30, 2022 and 2021, we accrued benefits of $7,874,000 and $8,255,000, respectively. The accrual of benefits was recognized as a reduction in ceded premiums.
As of June 30, 2022, we had $10,938,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.
We believe the credit risk associated with the collectability of accrued benefits is minimal based on available information about each reinsurer’s financial position and each 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 Form 10-K, which we filed with the SEC on March 10, 2022. For the six months ended June 30, 2022, there have been no other material changes with respect to any of our critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in recent accounting pronouncements during the six months ended June 30, 2022, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that are of significance, or potential significance, to the Company.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolios at June 30, 2022 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our Board of Directors. From time to time, our investment committee may decide to invest in low risk assets such as U.S. government bonds.
Our investment portfolios are exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios.
We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. In addition, we recognize any unrealized gains 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 June 30, 2022 (amounts in thousands):
Hypothetical Change in Interest Rates
EstimatedFair Value
Change inEstimatedFair Value
PercentageIncrease(Decrease)in EstimatedFair Value
300 basis point increase
380,227
(18,344
-4.60
200 basis point increase
386,341
(12,230
-3.07
100 basis point increase
392,455
(6,116
-1.53
100 basis point decrease
404,685
6,114
1.53
200 basis point decrease
410,758
12,187
3.06
300 basis point decrease
416,417
17,846
4.48
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 June 30, 2022 (amounts in thousands):
% of Total
Amortized
Comparable Rating
AAA
93,368
93,273
AA+, AA, AA-
281,539
70
276,805
69
A+, A, A-
12,791
12,569
BBB+, BBB, BBB-
14,335
14,115
CCC+, CC and Not rated
1,811
1,809
100
Equity Price Risk
Our equity investment portfolio at June 30, 2022 included common stocks, perpetual preferred stocks, mutual funds and exchange-traded funds. We may incur 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 June 30, 2022 (amounts in thousands):
Stocks by sector:
Consumer
7,360
Financial
5,747
Technology
1,903
Other (1)
2,570
17,580
Mutual funds and exchange-traded funds by type:
Debt
15,087
3,052
Foreign Currency Exchange Risk
At June 30, 2022, we did not have any material exposure to foreign currency related risk.
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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 June 30, 2022 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.
ITEM 1 – LEGAL PROCEEDINGS
The Company is 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.
ITEM 1A – RISK FACTORS
There have been no material changes in the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 10, 2022.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
All information related to sales of unregistered securities have been reported in Current Report on Form 8-K filings.
The table below summarizes the number of common shares repurchased under the share repurchase agreement and the 2022 repurchase plan approved by our Board of Directors, and also the number of common shares surrendered by employees to satisfy payroll tax liabilities associated with the vesting of restricted shares (dollar amounts in thousands, except share and per share amounts):
TotalNumberof Shares
AveragePricePaid
TotalNumber ofSharesPurchasedas Part ofPubliclyAnnounced Plans
MaximumDollarValue of SharesThat May YetBe PurchasedUnderThe Plans
For the Month Ended
Purchased
or Programs (a)
or Programs (b)
April 30, 2022
6,264
64.89
19,594
May 31, 2022 (c)
1,060,074
64.43
9,284
18,996
13,917
63.18
18,117
1,080,255
64.42
29,465
Working Capital Restrictions and Other Limitations on 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.
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholder 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 stockholder without prior approval of the Florida Office of Insurance Regulation 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 Regulation (1) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (2) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (3) the insurer files a notice of the dividend or distribution with the Florida Office of Insurance Regulation 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 Regulation or (2) 30 days after the Florida Office of Insurance Regulation has received notice of such dividend or distribution and has not disapproved it within such time.
During the six months ended June 30, 2022, our insurance subsidiaries paid dividends of $12,000,000 to HCI.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
ITEM 5 – OTHER INFORMATION
ITEM 6 – EXHIBITS
The following documents are filed as part of this report:
EXHIBIT
NUMBER
DESCRIPTION
3.1
Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.
3.1.1
Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed October 18, 2013.
3.1.2
Articles of Amendment to Articles of Incorporation cancelling the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed May 15, 2020.
3.2
Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed September 13, 2019.
4.1
Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed November 7, 2013.
Common Stock Purchase Warrant, dated February 26, 2021, issued by HCI Group, Inc. to CB Snowbird Holdings, L.P. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 1, 2021.
4.3
Indenture, dated May 23, 2022, by and between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A.
4.6
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 12, 2021.
4.9
See Exhibits 3.1, 3.1.1, 3.1.2 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining certain rights of security holders.
4.10
Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.
4.11
Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.
10.1
Preferred Stock Purchase Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., HCI Group, Inc., and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.
10.2
Amended and Restated Articles of Incorporation of TypTap Insurance Group, Inc. filed February 26, 2021. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.
10.3
Shareholders Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., CB Snowbird Holdings, L.P., HCI Group, Inc., and the other shareholders party thereto. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.
68
10.4
Parent Guaranty Agreement, dated February 26, 2021, between HCI Group, Inc. and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.
10.5**
HCI Group, Inc. 2012 Omnibus Incentive Plan as revised April 26, 2022. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed May 6, 2022.
10.6**
HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 29, 2008.
10.7**
Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.
10.31
Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.32
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.33
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.34
Joinder, Second Amendment to Credit Agreement and Modification of Other Loan Documents. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed January 28, 2021.
10.40
Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.41
10.42
Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.43
Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.44
7th Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.45
Flood Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.48**
TypTap Insurance Group, Inc. 2021 Equity Incentive Plan. Incorporated by reference to Exhibit 10.5 of our Form 8-K filed March 1, 2021.
10.49**
Form of Restricted Stock Award Agreement of TypTap Insurance Group, Inc. Incorporated by reference to Exhibit 10.6 of our Form 8-K filed March 1, 2021.
10.50
Exchange Agreement, dated August 26, 2021, by and between HCI Group, Inc. and Citadel Equity Fund Ltd. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 9, 2021.
10.51**
Stock Option Agreement between Paresh Patel and TypTap Insurance Group, Inc. dated October 1, 2021. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed October 7, 2021.
10.52**
TypTap Insurance Group, Inc. 2021 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.2 of our Form 8-K filed October 7, 2021.
10.53
Purchase Agreement, dated May 18, 2022, by and among HCI Group, Inc., JMP Securities LLC and Truist Securities, Inc., as representatives of the several purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed May 23, 2022.
10.57
Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 to our Form 10-Q filed May 1, 2014.
10.58
Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc., as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed February 28, 2017.
10.59
Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed March 3, 2017.
10.60
Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank. Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018.
10.88**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 11, 2017.
10.99**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 11, 2017.
10.101**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed February 14, 2018.
10.102**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed February 14, 2018.
10.103**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 22, 2019.
10.104**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 22, 2019.
10.105**
Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 23, 2020.
10.106**
Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 23, 2020.
10.107
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.108
Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.109
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.110
Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.111
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021, issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.112
Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
71
10.113
10.114
10.115
10.116
10.117
10.118
Non-Florida Property Catastrophe $6MXS$4M Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.119
Non-Florida Reinstatement Premium Protection Reinsurance Contract (For $6MXS$4M Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.120
Reimbursement Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.121
Reimbursement Contract effective June 1, 2021 issued to TypTap Insurance Company by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.122
Multi-Year Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
72
10.123
Multi-Year Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.
10.124
Property Quota Share Reinsurance Contract effective December 31, 2020 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.
10.125
Renewal Rights Agreement effective January 18, 2021 by and among United Property and Casualty Insurance Company, Inc., United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.
10.126
Property Quota Share Reinsurance Contract effective June 1, 2021 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.
10.127
Renewal Rights Agreement effective December 30, 2021 by and among United Property and Casualty Insurance Company, Inc., United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.
10.128
Property Quota Share Reinsurance Contract effective December 31, 2021 issued to United Property and Casualty Insurance Company, by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.
10.129
Property Quota Share Reinsurance Contract effective June 1, 2022 issued to United Property and Casualty Insurance Company by TypTap Insurance Company.
10.131
Multi-Year Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.132
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.133
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.134
Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.135
73
10.136
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.137
10.138
Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.139
10.140
Sixth Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.141
Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.142
10.143
Flood Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.144
Property Catastrophe Shared Multi-Region Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.145
Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv).
10.146
Reimbursement Contract effective June 1, 2022 between TypTap Insurance Company and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund.
10.147
Reimbursement Contract effective June 1, 2022 between Homeowners Choice Property & Casualty Insurance Company, Inc. and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund.
31.1
Certification of the Chief Executive Officer
31.2
Certification of the Chief Financial Officer
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
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** Management contract or compensatory plan.
SIGNATURES
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 has signed this report on behalf of the Company.
HCI GROUP, INC.
August 9, 2022
By:
/s/ Paresh Patel
Paresh Patel
Chief Executive Officer
(Principal Executive Officer)
/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.