HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(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 several 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.
Effective December 31, 2020, United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), ceded a portion of its personal lines insurance business in the states of Connecticut, New Jersey, Massachusetts, and Rhode Island to HCPCI. Under the reinsurance agreement, HCPCI provides 69.5% quota share reinsurance on all of United’s in-force, new and renewal policies in those states from December 31, 2020 through May 31, 2021. In exchange, HCPCI paid United an allowance of $4,400 towards already purchased catastrophe reinsurance and a provisional ceding commission of 25% of premium. That percentage could increase up to 31.5% depending on the direct loss ratio results from the reinsured business.
On January 18, 2021, the Company entered into a renewal rights agreement with United in connection with the assumed business. Under the agreement, the Company acquired all rights to renew and/or replace United’s homeowners insurance policies at the end of their respective policy periods in the states of Connecticut, Massachusetts, New Jersey and Rhode Island. The policy replacement date is June 1, 2021 or such other date as mutually agreed by both parties. The agreement also contains a non-compete clause that does not permit United to engage in marketing, selling, writing, renewing, or servicing any homeowners insurance contracts in these states until July 1, 2024. In return, United received 100,000 shares of HCI’s common stock and will receive a 6% commission on any replacement premium in excess of $80,000. The total commission will not exceed $3,100.
In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TypTap Insurance Group, Inc. (“TTIG”) with a separate workforce, board of directors and financial reporting structure. In February 2021, TTIG received a capital investment from a third party representing a minority interest as described in Note 18 -- “Redeemable Noncontrolling Interest.” 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’s reportable segments now include HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Real estate operations are conducted by Greenleaf Capital, LLC, the Company’s real estate subsidiary, which is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities.
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
10
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
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 March 31, 2021 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, 2021. 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, 2020 included in the Company’s Form 10-K, which was filed with the SEC on March 12, 2021.
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, warrants, redeemable noncontrolling interest, 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.
Adoption of New Accounting Standards
Accounting Standards Update No. 2020-06. In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-06 (“ASU 2020-06”) Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 removes certain bifurcation models for convertible debt instruments and convertible preferred stock. Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. The amendments also remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amend the derivative scope exception guidance for contracts in an entity’s own equity. In addition, the amendments expand disclosure requirements for convertible instruments and simplify areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments.
The Company elected to early adopt this update on January 1, 2021 using the modified retrospective method. The adoption of this update increased long-term debt by $4,000 and simultaneously decreased beginning retained income and deferred income tax liabilities by $3,018 and $982, respectively. The if-converted method will be the only permissible method for computing the dilutive effect of a convertible debt instrument. Interest expense no longer includes amortization of debt discount.
11
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents an economic interest in TTIG and is presented in the temporary equity (mezzanine) section of the consolidated balance sheet. The interest contains rights in dividends, voting, conversion, participation, liquidation preference and redemption. The redemption feature is not solely within the control of TTIG (See Note 18 -- “Redeemable Noncontrolling Interest”).
The redeemable noncontrolling interest is initially recorded at fair value and is decreased by related issuance costs. The fair value is estimated using a residual fair value approach. The effect of increasing dividend rates is accreted to the redeemable noncontrolling interest with a corresponding debit to retained income. The effective interest method is used for accretion over the period of the increasing dividend rates. The carrying value of the interest is also subsequently adjusted for accrued dividends and dividend payments. The Company has an option to pay the dividends in cash or make a payment in kind. The dividends are accrued monthly assuming that they will be settled in cash.
When the redemption is probable, the Company elects to recognize changes in the redemption value immediately as it occurs and adjust the carrying value of the interest to the maximum redemption value which is the higher of the redemption price or fair market value at the reporting date. Such changes in the redemption value are treated as dividends when calculating income available to common stockholders.
Noncontrolling Interests
The Company has noncontrolling interests attributable to TTIG. A noncontrolling interest arises when the Company has less than 100% of the voting rights and economic interests in a subsidiary. The noncontrolling interest is periodically adjusted for the expensing of TTIG’s restricted stock awards granted to its employees, the interest’s share of TTIG’s net income or loss to common stockholders and change in other comprehensive income or loss.
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is defined as the period during which a recipient is required to provide service in exchange for an award. Forfeitures of the Company’s stock-based awards are accounted for as they occur. The Company uses a straight-line attribution method for all grants that include only a service condition. Restricted stock grants with market conditions are expensed over the derived service period. Expensing market-based awards may be expedited if the conditions are met sooner than anticipated. The Company’s outstanding stock-based awards include stock options and restricted stock awards with service and market conditions. Compensation expense related to all awards is included in general and administrative personnel expenses. The Company receives a windfall tax benefit for certain stock option exercises and for restricted stock awards if these awards vest at a higher value than the value used to recognize compensation expense. In the event the restricted stock awards vest at a lower value than the value used to recognize compensation expense, the Company experiences a tax shortfall. The Company recognizes tax windfalls and shortfalls in the consolidated statements of income.
12
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Reclassification
In response to the new reporting segment described in Note 1 -- “Nature of Operations,” the prior period segment information has been reclassified to conform with the current period presentation. TypTap and TypTap Management Company were removed from the segment previously referred to as Insurance Operations to form the new TypTap Group segment. The information technology companies which had previously been presented in the Corporate and Other segment were also added to the TypTap Group segment.
Note 3 -- Recent Accounting Pronouncements
Accounting Standards Update No. 2021-01. In January 2021, the FASB issued Accounting Standards Update No. 2021-01 (“ASU 2021-01”) Reference Rate Reform (Topic 848). This update refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities. ASU 2021-01 permits entities to apply certain optional expedients to modifications of interest rate indexes used for margining, discounting or contract price alignment of certain derivatives in connection with reference rate reform activities under way in global financial markets. It also extends optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. ASU 2021-01 is effective immediately and does not have any material impact on the Company’s consolidated financial statements.
Note 4 -- Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash and cash equivalents
|
|
$
|
553,397
|
|
|
$
|
431,341
|
|
Restricted cash
|
|
|
2,400
|
|
|
|
2,400
|
|
Total
|
|
$
|
555,797
|
|
|
$
|
433,741
|
|
Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements.
13
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 5 -- Investments
a) Available-for-Sale Fixed-Maturity Securities
The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At March 31, 2021 and December 31, 2020, 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 or
Amortized
|
|
|
Allowance
for
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
Cost
|
|
|
Credit Loss
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
As of March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
10,662
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
(15
|
)
|
|
$
|
10,803
|
|
Corporate bonds
|
|
|
42,346
|
|
|
|
(579
|
)
|
|
|
1,581
|
|
|
|
(52
|
)
|
|
|
43,296
|
|
States, municipalities, and political subdivisions
|
|
|
2,759
|
|
|
|
—
|
|
|
|
85
|
|
|
|
—
|
|
|
|
2,844
|
|
Exchange-traded debt
|
|
|
3,119
|
|
|
|
—
|
|
|
|
126
|
|
|
|
(21
|
)
|
|
|
3,224
|
|
Redeemable preferred stock
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Total
|
|
$
|
58,921
|
|
|
$
|
(579
|
)
|
|
$
|
1,948
|
|
|
$
|
(88
|
)
|
|
$
|
60,202
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
13,759
|
|
|
$
|
—
|
|
|
$
|
210
|
|
|
$
|
(1
|
)
|
|
$
|
13,968
|
|
Corporate bonds
|
|
|
49,957
|
|
|
|
(579
|
)
|
|
|
1,570
|
|
|
|
(17
|
)
|
|
|
50,931
|
|
States, municipalities, and political subdivisions
|
|
|
3,023
|
|
|
|
—
|
|
|
|
60
|
|
|
|
(2
|
)
|
|
|
3,081
|
|
Exchange-traded debt
|
|
|
3,491
|
|
|
|
(9
|
)
|
|
|
230
|
|
|
|
(5
|
)
|
|
|
3,707
|
|
Redeemable preferred stock
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Total
|
|
$
|
70,265
|
|
|
$
|
(588
|
)
|
|
$
|
2,070
|
|
|
$
|
(25
|
)
|
|
$
|
71,722
|
|
Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of March 31, 2021 and December 31, 2020 are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Cost or
|
|
|
Estimated
|
|
|
Cost or
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
18,660
|
|
|
$
|
18,888
|
|
|
$
|
21,122
|
|
|
$
|
21,258
|
|
Due after one year through five years
|
|
|
34,153
|
|
|
|
34,844
|
|
|
|
43,561
|
|
|
|
44,339
|
|
Due after five years through ten years
|
|
|
3,108
|
|
|
|
3,378
|
|
|
|
2,731
|
|
|
|
3,060
|
|
Due after ten years
|
|
|
3,000
|
|
|
|
3,092
|
|
|
|
2,851
|
|
|
|
3,065
|
|
|
|
$
|
58,921
|
|
|
$
|
60,202
|
|
|
$
|
70,265
|
|
|
$
|
71,722
|
|
14
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Sales of Available-for-Sale Fixed-Maturity Securities
Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
Gross
Realized
|
|
|
Gross
Realized
|
|
|
|
Proceeds
|
|
|
Gains
|
|
|
Losses
|
|
Three months ended March 31, 2021
|
|
$
|
36
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Three months ended March 31, 2020
|
|
$
|
4,049
|
|
|
$
|
77
|
|
|
$
|
(350
|
)
|
Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities
Securities with gross unrealized loss positions at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Longer
|
|
|
Total
|
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
As of March 31, 2021
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
(15
|
)
|
|
$
|
2,947
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
2,947
|
|
Corporate bonds
|
|
|
(52
|
)
|
|
|
3,240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
3,240
|
|
Exchange-traded debt
|
|
|
(21
|
)
|
|
|
349
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
349
|
|
Total available-for-sale securities
|
|
$
|
(88
|
)
|
|
$
|
6,536
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(88
|
)
|
|
$
|
6,536
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Longer
|
|
|
Total
|
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
As of December 31, 2020
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
(1
|
)
|
|
$
|
1,337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
1,337
|
|
Corporate bonds
|
|
|
(17
|
)
|
|
|
3,085
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
3,085
|
|
States, municipalities, and political subdivisions
|
|
|
(2
|
)
|
|
|
1,268
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
1,268
|
|
Exchange-traded debt
|
|
|
(5
|
)
|
|
|
336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
336
|
|
Total available-for-sale securities
|
|
$
|
(25
|
)
|
|
$
|
6,026
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(25
|
)
|
|
$
|
6,026
|
|
At March 31, 2021 and December 31, 2020, there were 17 and 12 securities, respectively, in an unrealized loss position.
15
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
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 financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings;
|
|
•
|
the extent to which the market value of the security has been below its cost or amortized cost;
|
|
•
|
general market conditions and industry or sector specific factors and other qualitative factors;
|
|
•
|
nonpayment by the issuer of its contractually obligated interest and principal payments; and
|
|
•
|
the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
|
The table below summarized the activity in the allowance for credit losses of available-for-sale securities for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Balance at January 1
|
|
$
|
588
|
|
|
$
|
—
|
|
Credit loss expense
|
|
|
—
|
|
|
|
439
|
|
Reductions for securities sold
|
|
|
(9
|
)
|
|
|
—
|
|
Balance at March 31
|
|
$
|
579
|
|
|
$
|
439
|
|
b) Equity Securities
The Company holds investments in equity securities measured at fair values which are readily determinable. At March 31, 2021 and December 31, 2020, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:
|
|
|
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
March 31, 2021
|
|
$
|
45,968
|
|
|
$
|
4,304
|
|
|
$
|
(472
|
)
|
|
$
|
49,800
|
|
December 31, 2020
|
|
$
|
47,029
|
|
|
$
|
4,649
|
|
|
$
|
(548
|
)
|
|
$
|
51,130
|
|
16
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The table below presents the portion of unrealized gains and losses in the Company’s consolidated statements of income for the periods related to equity securities still held.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net gains (losses) recognized
|
|
$
|
467
|
|
|
$
|
(6,776
|
)
|
Exclude: Net realized gains (losses) recognized for
securities sold
|
|
|
736
|
|
|
|
(1,971
|
)
|
Net unrealized losses recognized
|
|
$
|
(269
|
)
|
|
$
|
(4,805
|
)
|
Sales of Equity Securities
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
Gross
Realized
|
|
|
Gross
Realized
|
|
|
|
Proceeds
|
|
|
Gains
|
|
|
Losses
|
|
Three months ended March 31, 2021
|
|
$
|
34,378
|
|
|
$
|
1,142
|
|
|
$
|
(406
|
)
|
Three months ended March 31, 2020
|
|
$
|
9,007
|
|
|
$
|
785
|
|
|
$
|
(2,756
|
)
|
17
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
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:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Carrying
|
|
|
Unfunded
|
|
|
|
|
|
|
Carrying
|
|
|
Unfunded
|
|
|
|
|
|
Investment Strategy
|
|
Value
|
|
|
Balance
|
|
|
(%)(a)
|
|
|
Value
|
|
|
Balance
|
|
|
(%)(a)
|
|
Primarily in senior secured loans and, to a
limited extent, in other debt and equity
securities of private U.S. lower-middle-market
companies. (b)(c)(e)
|
|
$
|
7,084
|
|
|
$
|
2,085
|
|
|
|
15.37
|
|
|
$
|
8,131
|
|
|
$
|
2,085
|
|
|
|
15.37
|
|
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)
|
|
|
5,311
|
|
|
|
—
|
|
|
|
1.76
|
|
|
|
5,512
|
|
|
|
—
|
|
|
|
1.76
|
|
High returns and long-term capital appreciation
through investments in the power, utility and
energy industries, and in the infrastructure
sector. (b)(f)(g)
|
|
|
6,232
|
|
|
|
1,401
|
|
|
|
0.18
|
|
|
|
6,513
|
|
|
|
1,401
|
|
|
|
0.18
|
|
Value-oriented investments in less liquid and
mispriced senior and junior debts of private
equity-backed companies. (b)(h)(i)
|
|
|
4,330
|
|
|
|
—
|
|
|
|
0.47
|
|
|
|
4,262
|
|
|
|
—
|
|
|
|
0.47
|
|
Value-oriented investments in mature real
estate private equity funds and portfolio
globally. (b)(j)
|
|
|
3,769
|
|
|
|
6,375
|
|
|
|
2.24
|
|
|
|
3,273
|
|
|
|
6,818
|
|
|
|
2.24
|
|
Total
|
|
$
|
26,726
|
|
|
$
|
9,861
|
|
|
|
|
|
|
$
|
27,691
|
|
|
$
|
10,304
|
|
|
|
|
|
|
(a)
|
Represents the Company’s percentage investment in the fund at each balance sheet date.
|
|
(b)
|
Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated.
|
|
(c)
|
Expected to have a ten-year term. Although the capital commitment period has expired, there are still follow-on investments and pending commitments that require additional fundings.
|
|
(d)
|
Expected to have a three-year term from June 30, 2018. Although the capital commitment period has ended, the general partner could still request an additional funding of approximately $843 under certain circumstances.
|
|
(e)
|
At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.
|
|
(f)
|
Expected to have a ten-year term. The capital commitment period has expired but the general partner may request additional funding for follow-on investment.
|
|
(g)
|
With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods.
|
|
(h)
|
Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.
|
|
(i)
|
The capital commitment period has ended but an additional funding may be requested.
|
|
(j)
|
Expected to have an eight-year term from November 27, 2019.
|
18
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following 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.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating results:
|
|
|
|
|
|
|
|
|
Total income
|
|
$
|
(10,948
|
)
|
|
$
|
(450,892
|
)
|
Total expenses
|
|
|
(55,512
|
)
|
|
|
(54,812
|
)
|
Net (loss) income
|
|
$
|
(66,460
|
)
|
|
$
|
(505,704
|
)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Balance sheet:
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,439,035
|
|
|
$
|
5,529,199
|
|
Total liabilities
|
|
$
|
642,594
|
|
|
$
|
612,048
|
|
For the three months ended March 31, 2021, the Company recognized net investment income of $787 versus net investment loss of $2,935 for the three months ended March 31, 2020. Included in the net investment loss for the three months ended March 31, 2020 was $2,968 of an estimated unfavorable change in net asset value due to the impact of COVID-19. During the three months ended March 31, 2021 and 2020, the Company received total cash distributions of $2,024 and $696, respectively, including returns on investment of $478 and $382, respectively.
At March 31, 2021 and December 31, 2020, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $27,998 and $29,272, respectively, and the Company’s maximum exposure to loss aggregated $26,726 and $27,691, 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 March 31, 2021 and December 31, 2020, the Company’s maximum exposure to loss relating to the variable interest entity was $680 and $705, respectively, representing the carrying value of the investment. There were no cash distributions during the three months ended March 31, 2021 and 2020. At March 31, 2021 and December 31, 2020, there was no undistributed income from this equity method investment. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating results:
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
Total expenses
|
|
|
28
|
|
|
|
(19
|
)
|
Net income (loss)
|
|
$
|
28
|
|
|
$
|
(19
|
)
|
The Company’s share of net loss*
|
|
$
|
(25
|
)
|
|
$
|
(16
|
)
|
|
*
|
Included in net investment income in the Company’s consolidated statements of income.
|
19
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Balance sheet:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
696
|
|
|
$
|
705
|
|
Cash
|
|
|
70
|
|
|
|
70
|
|
Other
|
|
|
17
|
|
|
|
13
|
|
Total assets
|
|
$
|
783
|
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
27
|
|
|
$
|
5
|
|
Members’ capital
|
|
|
756
|
|
|
|
783
|
|
Total liabilities and members’ capital
|
|
$
|
783
|
|
|
$
|
788
|
|
Investment in unconsolidated joint venture, at equity**
|
|
$
|
680
|
|
|
$
|
705
|
|
|
**
|
Includes the 90% share of FMKT Mel JV’s operating results.
|
e) Real Estate Investments
Real estate investments consist of the following as of March 31, 2021 and December 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Land
|
|
$
|
39,069
|
|
|
$
|
39,069
|
|
Land improvements
|
|
|
11,917
|
|
|
|
11,917
|
|
Buildings
|
|
|
29,085
|
|
|
|
29,115
|
|
Tenant and leasehold improvements
|
|
|
1,406
|
|
|
|
1,487
|
|
Other
|
|
|
1,029
|
|
|
|
1,465
|
|
Total, at cost
|
|
|
82,506
|
|
|
|
83,053
|
|
Less: accumulated depreciation and amortization
|
|
|
(8,491
|
)
|
|
|
(8,581
|
)
|
Real estate investments
|
|
$
|
74,015
|
|
|
$
|
74,472
|
|
For the three months ended March 31, 2021, the Company incurred a $21 loss on disposal of assets related to a closure of a restaurant. Depreciation and amortization expense related to real estate investments was $491 and $455 for the three months ended March 31, 2021 and 2020, respectively.
20
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
g) Net Investment Income (Loss)
Net investment income (loss), by source, is summarized as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Available-for-sale fixed-maturity securities
|
|
$
|
441
|
|
|
$
|
1,515
|
|
Equity securities
|
|
|
352
|
|
|
|
335
|
|
Investment expense
|
|
|
(126
|
)
|
|
|
(118
|
)
|
Limited partnership investments
|
|
|
787
|
|
|
|
(2,935
|
)
|
Real estate investments
|
|
|
2,997
|
|
|
|
81
|
|
Loss from unconsolidated joint venture
|
|
|
(25
|
)
|
|
|
(16
|
)
|
Cash and cash equivalents
|
|
|
168
|
|
|
|
939
|
|
Short-term investments
|
|
|
—
|
|
|
|
7
|
|
Net investment income (loss)
|
|
$
|
4,594
|
|
|
$
|
(192
|
)
|
For the three months ended March 31, 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.
Note 6 -- 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 in the allowance for credit losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
Before
|
|
|
Income Tax
|
|
|
Net of
|
|
|
Before
|
|
|
Income Tax
|
|
|
Net of
|
|
|
|
Tax
|
|
|
Effect
|
|
|
Tax
|
|
|
Tax
|
|
|
Effect
|
|
|
Tax
|
|
Unrealized losses arising during the period
|
|
$
|
(182
|
)
|
|
$
|
(45
|
)
|
|
$
|
(137
|
)
|
|
$
|
(3,471
|
)
|
|
$
|
(851
|
)
|
|
$
|
(2,620
|
)
|
Credit losses on investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
439
|
|
|
|
107
|
|
|
|
332
|
|
Call and repayment gains charged to
investment income
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(66
|
)
|
|
|
(16
|
)
|
|
|
(50
|
)
|
Reclassification adjustment for realized
(gains) losses
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
273
|
|
|
|
67
|
|
|
|
206
|
|
Total other comprehensive loss
|
|
$
|
(185
|
)
|
|
$
|
(45
|
)
|
|
$
|
(140
|
)
|
|
$
|
(2,825
|
)
|
|
$
|
(693
|
)
|
|
$
|
(2,132
|
)
|
21
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 7 -- 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.
|
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.
22
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Revolving Credit Facility
The Company’s revolving credit facility is a variable-rate loan. The interest rate is periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, its carrying value approximates fair value.
Long-Term Debt
The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:
|
Maturity
Date
|
Valuation Methodology
|
4.25% Convertible senior notes
|
2037
|
Quoted price
|
3.90% Promissory note
|
2032
|
Discounted cash flow method/Level 3 inputs
|
3.75% Callable promissory note
|
2036
|
Discounted cash flow method/Level 3 inputs
|
4.55% Promissory note
|
2036
|
Discounted cash flow method/Level 3 inputs
|
Assets Measured at Estimated Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of March 31, 2021 and December 31, 2020:
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
As of March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
553,397
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
553,397
|
|
Restricted cash
|
|
$
|
2,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,400
|
|
Fixed-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
8,090
|
|
|
$
|
2,713
|
|
|
$
|
—
|
|
|
$
|
10,803
|
|
Corporate bonds
|
|
|
43,296
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,296
|
|
State, municipalities, and political subdivisions
|
|
|
—
|
|
|
|
2,844
|
|
|
|
—
|
|
|
|
2,844
|
|
Exchange-traded debt
|
|
|
3,224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,224
|
|
Redeemable preferred stock
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Total available-for-sale securities
|
|
$
|
54,645
|
|
|
$
|
5,557
|
|
|
$
|
—
|
|
|
$
|
60,202
|
|
Equity securities
|
|
$
|
49,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,800
|
|
23
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
431,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
431,341
|
|
Restricted cash
|
|
$
|
2,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,400
|
|
Fixed-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government agencies
|
|
$
|
11,236
|
|
|
$
|
2,732
|
|
|
$
|
—
|
|
|
$
|
13,968
|
|
Corporate bonds
|
|
|
50,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,931
|
|
State, municipalities, and political subdivisions
|
|
|
—
|
|
|
|
3,081
|
|
|
|
—
|
|
|
|
3,081
|
|
Exchange-traded debt
|
|
|
3,707
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,707
|
|
Redeemable preferred stock
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
Total available-for-sale securities
|
|
$
|
65,909
|
|
|
$
|
5,813
|
|
|
$
|
—
|
|
|
$
|
71,722
|
|
Equity securities
|
|
$
|
51,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,130
|
|
Assets and Liabilities Carried at Other Than Estimated Fair Value
The following tables present fair value information for assets and liabilities that are carried on the consolidated balance sheets at amounts other than fair value as of March 31, 2021 and December 31, 2020:
|
|
Carrying
|
|
|
Fair Value Measurements Using
|
|
|
Estimated
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
As of March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25% Convertible senior notes
|
|
$
|
138,222
|
|
|
$
|
—
|
|
|
$
|
180,851
|
|
|
$
|
—
|
|
|
$
|
180,851
|
|
3.90% Promissory note
|
|
|
9,536
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,698
|
|
|
|
10,698
|
|
3.75% Callable promissory note
|
|
|
7,415
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,044
|
|
|
|
8,044
|
|
4.55% Promissory note
|
|
|
5,327
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,256
|
|
|
|
6,256
|
|
Total long-term debt
|
|
$
|
160,500
|
|
|
$
|
—
|
|
|
$
|
180,851
|
|
|
$
|
24,998
|
|
|
$
|
205,849
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using
|
|
|
Estimated
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
23,750
|
|
|
$
|
—
|
|
|
$
|
23,750
|
|
|
$
|
—
|
|
|
$
|
23,750
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25% Convertible senior notes
|
|
$
|
133,964
|
|
|
$
|
—
|
|
|
$
|
147,236
|
|
|
$
|
—
|
|
|
$
|
147,236
|
|
3.90% Promissory note
|
|
|
9,617
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,044
|
|
|
|
10,044
|
|
3.75% Callable promissory note
|
|
|
7,502
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,747
|
|
|
|
7,747
|
|
4.55% Promissory note
|
|
|
5,385
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,809
|
|
|
|
5,809
|
|
Total long-term debt
|
|
$
|
156,468
|
|
|
$
|
—
|
|
|
$
|
147,236
|
|
|
$
|
23,600
|
|
|
$
|
170,836
|
|
24
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 8 -- Intangible Assets
The Company’s intangible assets, net consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Anchor tenant relationships*
|
|
$
|
1,761
|
|
|
$
|
1,761
|
|
In-place leases
|
|
|
4,215
|
|
|
|
4,215
|
|
Policy renewal rights - United
|
|
|
7,634
|
|
|
|
—
|
|
Non-compete agreement - United
|
|
|
195
|
|
|
|
—
|
|
Total, at cost
|
|
|
13,805
|
|
|
|
5,976
|
|
Less: accumulated amortization
|
|
|
(2,550
|
)
|
|
|
(2,408
|
)
|
Intangible assets, net
|
|
$
|
11,255
|
|
|
$
|
3,568
|
|
* An anchor tenant is a tenant that attracted more customers than other tenants.
The remaining weighted-average amortization periods for the intangible assets at March 31, 2021 are summarized in the table below:
Anchor tenant relationships*
|
|
13 years
|
In-place leases
|
|
10 years
|
Policy renewal rights - United
|
|
(a)
|
Non-compete agreement - United
|
|
3 years
|
(a) The amortization period has not been determined as the attrition rate in those states needs further observation.
The Company recorded intangible assets of $7,829 representing the renewal rights and non-compete agreement described in Note 1 -- “Nature of Operations” in exchange for 100,000 shares of HCI’s common stock and contingent consideration which is a 6% commission on any replacement premium in excess of $80,000. The contingent consideration was estimated at $2,419 which was included in other liabilities on the consolidated balance sheet. Amortization of the intangible assets was expected to begin June 1, 2021.
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 intangibles assets as an asset acquisition. Total consideration paid consisted of $5,410 worth of HCI’s common stock plus a contingent liability of $2,419.
25
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 9 -- Other Assets
The following table summarizes the Company’s other assets.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Funds held in a trust account*
|
|
$
|
41,355
|
|
|
$
|
—
|
|
Benefits receivable related to retrospective reinsurance
contract
|
|
|
15,600
|
|
|
|
10,920
|
|
Prepaid expenses
|
|
|
2,503
|
|
|
|
2,365
|
|
Deposits
|
|
|
452
|
|
|
|
445
|
|
Lease acquisition costs, net
|
|
|
466
|
|
|
|
453
|
|
Other
|
|
|
3,408
|
|
|
|
8,428
|
|
Total other assets
|
|
$
|
63,784
|
|
|
$
|
22,611
|
|
* Represents a balance of unearned written premium, net of provisional commission and catastrophe cost allowance under the reinsurance contract between HCPCI and United.
Note 10 -- Revolving Credit Facility
In March 2021, the Company repaid the entire credit facility balance of $23,750. For the three months ended March 31, 2021 and 2020, interest expense was $104 and $153, respectively, including $25 and $39 of amortization of issuance costs, respectively. At March 31, 2021, the Company was in compliance with all required covenants with no borrowings outstanding. The borrowing capacity of the facility is now $65,000.
Note 11 -- Long-Term Debt
The following table summarizes the Company’s long-term debt.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
4.25% Convertible senior notes, due March 1, 2037
|
|
$
|
139,200
|
|
|
$
|
139,200
|
|
3.90% Promissory note, due through April 1, 2032
|
|
|
9,692
|
|
|
|
9,777
|
|
3.75% Callable promissory note, due through
September 1, 2036
|
|
|
7,518
|
|
|
|
7,607
|
|
4.55% Promissory note, due through August 1, 2036
|
|
|
5,409
|
|
|
|
5,470
|
|
Finance lease liabilities, due through August 15, 2023
|
|
|
39
|
|
|
|
43
|
|
Total principal amount
|
|
|
161,858
|
|
|
|
162,097
|
|
Less: unamortized discount and issuance costs*
|
|
|
(1,319
|
)
|
|
|
(5,586
|
)
|
Total long-term debt
|
|
$
|
160,539
|
|
|
$
|
156,511
|
|
* Effective January 1, 2021, the balance includes only unamortized issuance costs. See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies.”
26
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table summarizes future maturities of long-term debt as of March 31, 2021, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.
Due in 12 months following March 31,
|
|
|
|
|
2021
|
|
$
|
979
|
|
2022
|
|
|
140,216
|
|
2023
|
|
|
1,048
|
|
2024
|
|
|
1,084
|
|
2025
|
|
|
1,129
|
|
Thereafter
|
|
|
17,402
|
|
Total
|
|
$
|
161,858
|
|
Information with respect to interest expense related to long-term debt is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
$
|
1,707
|
|
|
$
|
1,806
|
|
Non-cash expense (a)
|
|
|
268
|
|
|
|
1,052
|
|
Capitalized interest (b)
|
|
|
—
|
|
|
|
(41
|
)
|
|
|
$
|
1,975
|
|
|
$
|
2,817
|
|
|
(a)
|
Includes amortization of debt discount and issuance costs. Amortization of debt discount discontinued effective January 1, 2021. See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies” for additional information.
|
|
(b)
|
Interest was capitalized for a construction project.
|
Convertible Senior Notes
4.25% Convertible Notes. 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 Notes. Accordingly, as of March 31, 2021, the conversion rate of the Company’s 4.25% Convertible Notes was 16.45 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.80 per share.
As of March 31, 2021, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 1 year.
Note 12 -- Reinsurance
The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30% ceding commission on ceded premiums written. The reinsurance premiums under one flood catastrophe excess of loss reinsurance contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter.
27
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.
The impact of the reinsurance contracts on premiums written and earned is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Premiums Written:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
110,131
|
|
|
$
|
76,572
|
|
Assumed
|
|
|
15,717
|
|
|
|
(54
|
)
|
Gross written
|
|
|
125,848
|
|
|
|
76,518
|
|
Ceded
|
|
|
(43,099
|
)
|
|
|
(30,719
|
)
|
Net premiums written
|
|
$
|
82,749
|
|
|
$
|
45,799
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
110,292
|
|
|
$
|
90,767
|
|
Assumed
|
|
|
20,650
|
|
|
|
1,598
|
|
Gross earned
|
|
|
130,942
|
|
|
|
92,365
|
|
Ceded
|
|
|
(43,099
|
)
|
|
|
(30,719
|
)
|
Net premiums earned
|
|
$
|
87,843
|
|
|
$
|
61,646
|
|
During the three months ended March 31, 2021 and 2020, the Company recognized ceded losses of $107 and $338, respectively, as a reduction in losses and loss adjustment expenses. At March 31, 2021 and December 31, 2020, there were 38 reinsurers participating in the Company’s reinsurance program. Total gross amounts recoverable and receivable from reinsurers at March 31, 2021 and December 31, 2020 were $71,722 and $85,146, respectively. Approximately 61.3% of the reinsurance recoverable balance at March 31, 2021 was receivable from two reinsurers, including the Florida Hurricane Catastrophe Fund, a state trust fund. Based on all available information considered in the rating-based method, the Company recognized decreases in credit loss expense of $12 and $24 for the three months ended March 31, 2021 and 2020, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $73 and $85 at March 31, 2021 and December 31, 2020, respectively.
One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three months ended March 31, 2021 and 2020, the Company recognized reductions in premiums ceded of $4,680 and $2,520, respectively, related to these adjustments in the consolidated statements of income.
Amounts receivable pursuant to retrospective provisions are reflected in other assets. At March 31, 2021 and December 31, 2020, other assets included $15,600 and $10,920, respectively. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.
28
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Effective January 2021, the Company began providing 69.5% quota share reinsurance on all in-force, new and renewal policies issued by United. The policies were issued in the states of Connecticut, New Jersey, Massachusetts and Rhode Island. For the three months ended March 31, 2021, assumed premiums written related to United were $15,717. At March 31, 2021, the Company had a net balance of $2,024 due from United, consisting of premiums receivable of $5,788 offset by ceding commission payable of $1,447 and payable on paid losses and loss adjustment expenses of $2,317.
Note 13 -- Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (“LAE”) is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred but not reported.
The Company primarily writes insurance in the 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:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net balance, beginning of period*
|
|
$
|
141,065
|
|
|
$
|
98,174
|
|
Incurred, net of reinsurance, related to:
|
|
|
|
|
|
|
|
|
Current period
|
|
|
41,920
|
|
|
|
25,803
|
|
Prior period
|
|
|
3,831
|
|
|
|
2,275
|
|
Total incurred, net of reinsurance
|
|
|
45,751
|
|
|
|
28,078
|
|
Paid, net of reinsurance, related to:
|
|
|
|
|
|
|
|
|
Current period
|
|
|
(7,596
|
)
|
|
|
(4,484
|
)
|
Prior period
|
|
|
(34,590
|
)
|
|
|
(15,892
|
)
|
Total paid, net of reinsurance
|
|
|
(42,186
|
)
|
|
|
(20,376
|
)
|
Net balance, end of period
|
|
|
144,630
|
|
|
|
105,876
|
|
Add: reinsurance recoverable before allowance for
credit losses
|
|
|
61,143
|
|
|
|
101,232
|
|
Gross balance, end of period
|
|
$
|
205,773
|
|
|
$
|
207,108
|
|
* 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 months ended March 31, 2021, the Company recognized losses related to prior periods of $3,831 primarily to increase the reserve for the 2020 loss year. Losses and LAE for the three months ended March 31, 2021 included estimated losses, net of reinsurance, of approximately $11,000 related to policies assumed from United and approximately $12,299 related to TypTap.
29
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 14 -- 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 now has four reportable segments: HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance operations, excluding the insurance operations under TypTap Group, are grouped together into one reportable segment under HCPCI insurance operations. The TypTap Group segment includes its property and casualty insurance operations, information technology operations and its management company’s activities. The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and other segment represents the activities of the holding companies and any other companies that do not meet the quantitative and qualitative thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performance based on revenue and operating income.
30
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
For the three months ended March 31, 2021 and 2020, revenues from the HCPCI insurance operations segment before intracompany elimination represented 77.7% and 79.3%, respectively, and revenues from the TypTap Group segment represented 17.2% and 15.6%, respectively, of total revenues of all operating segments. At March 31, 2021 and December 31, 2020, HCPCI insurance operations’ total assets represented 62.2% and 68.9%, respectively, and TypTap Group’s total assets represented 23.9% and 16.7%, respectively, of the combined assets of all operating segments.
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 March 31, 2021
|
|
Operations
|
|
|
Group
|
|
|
Estate(a)
|
|
|
Others(b)
|
|
|
Elimination
|
|
|
Consolidated
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums earned (c)
|
|
$
|
104,521
|
|
|
$
|
28,811
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,390
|
)
|
|
$
|
130,942
|
|
Premiums ceded
|
|
|
(35,980
|
)
|
|
|
(9,509
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,390
|
|
|
|
(43,099
|
)
|
Net premiums earned
|
|
|
68,541
|
|
|
|
19,302
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,843
|
|
Net income from investment portfolio
|
|
|
880
|
|
|
|
336
|
|
|
|
—
|
|
|
|
1,495
|
|
|
|
2,727
|
|
|
|
5,438
|
|
Policy fee income
|
|
|
712
|
|
|
|
258
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
970
|
|
Other
|
|
|
521
|
|
|
|
175
|
|
|
|
5,134
|
|
|
|
560
|
|
|
|
(5,767
|
)
|
|
|
623
|
|
Total revenue
|
|
|
70,654
|
|
|
|
20,071
|
|
|
|
5,134
|
|
|
|
2,055
|
|
|
|
(3,040
|
)
|
|
|
94,874
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
33,439
|
|
|
|
12,312
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,751
|
|
Amortization of deferred policy acquisition costs
|
|
|
12,747
|
|
|
|
4,637
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,384
|
|
Other policy acquisition expenses
|
|
|
4,824
|
|
|
|
1,041
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(184
|
)
|
|
|
5,681
|
|
Interest expense
|
|
|
—
|
|
|
|
90
|
|
|
|
482
|
|
|
|
1,752
|
|
|
|
(245
|
)
|
|
|
2,079
|
|
Depreciation and amortization
|
|
|
20
|
|
|
|
288
|
|
|
|
587
|
|
|
|
176
|
|
|
|
(633
|
)
|
|
|
438
|
|
Personnel and other operating expenses
|
|
|
5,819
|
|
|
|
5,489
|
|
|
|
1,201
|
|
|
|
2,908
|
|
|
|
(1,978
|
)
|
|
|
13,439
|
|
Total expenses
|
|
|
56,849
|
|
|
|
23,857
|
|
|
|
2,270
|
|
|
|
4,836
|
|
|
|
(3,040
|
)
|
|
|
84,772
|
|
Income (loss) before income taxes
|
|
$
|
13,805
|
|
|
$
|
(3,786
|
)
|
|
$
|
2,864
|
|
|
$
|
(2,781
|
)
|
|
$
|
—
|
|
|
$
|
10,102
|
|
Total revenue from non-affiliates(d)
|
|
$
|
70,200
|
|
|
$
|
20,379
|
|
|
$
|
4,795
|
|
|
$
|
1,524
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
80,988
|
|
|
$
|
44,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other revenue under real estate primarily consisted of rental income from investment properties.
|
|
(b)
|
Other revenue under corporate and other primarily consisted of revenue from marina business.
|
|
(c)
|
Gross premiums earned consist of $102,131 from HCPCI and $2,390 from a reinsurance company.
|
|
(d)
|
Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
|
31
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
|
|
HCPCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
TypTap
|
|
|
Real
|
|
|
Corporate/
|
|
|
Reclassification/
|
|
|
|
|
|
For Three Months Ended March 31, 2020
|
|
Operations
|
|
|
Group
|
|
|
Estate(a)
|
|
|
Others(b)
|
|
|
Elimination
|
|
|
Consolidated
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums earned
|
|
$
|
75,770
|
|
|
$
|
16,595
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,365
|
|
Premiums ceded
|
|
|
(26,926
|
)
|
|
|
(3,793
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,719
|
)
|
Net premiums earned
|
|
|
48,844
|
|
|
|
12,802
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,646
|
|
Net (loss) income from investment portfolio
|
|
|
(3,541
|
)
|
|
|
(470
|
)
|
|
|
1
|
|
|
|
(3,514
|
)
|
|
|
(156
|
)
|
|
|
(7,680
|
)
|
Policy fee income
|
|
|
650
|
|
|
|
179
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
829
|
|
Other
|
|
|
231
|
|
|
|
44
|
|
|
|
2,559
|
|
|
|
1,355
|
|
|
|
(3,604
|
)
|
|
|
585
|
|
Total revenue
|
|
|
46,184
|
|
|
|
12,555
|
|
|
|
2,560
|
|
|
|
(2,159
|
)
|
|
|
(3,760
|
)
|
|
|
55,380
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
21,838
|
|
|
|
6,240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,078
|
|
Amortization of deferred policy acquisition costs
|
|
|
7,656
|
|
|
|
3,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,857
|
|
Other policy acquisition expenses
|
|
|
707
|
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(162
|
)
|
|
|
835
|
|
Interest expense
|
|
|
—
|
|
|
|
—
|
|
|
|
473
|
|
|
|
2,717
|
|
|
|
(220
|
)
|
|
|
2,970
|
|
Depreciation and amortization
|
|
|
23
|
|
|
|
266
|
|
|
|
656
|
|
|
|
144
|
|
|
|
(612
|
)
|
|
|
477
|
|
Personnel and other operating expenses
|
|
|
5,015
|
|
|
|
4,465
|
|
|
|
1,251
|
|
|
|
3,541
|
|
|
|
(2,766
|
)
|
|
|
11,506
|
|
Total expenses
|
|
|
35,239
|
|
|
|
14,462
|
|
|
|
2,380
|
|
|
|
6,402
|
|
|
|
(3,760
|
)
|
|
|
54,723
|
|
Income (loss) before income taxes
|
|
$
|
10,945
|
|
|
$
|
(1,907
|
)
|
|
$
|
180
|
|
|
$
|
(8,561
|
)
|
|
$
|
—
|
|
|
$
|
657
|
|
Total revenue from non-affiliates(c)
|
|
$
|
46,184
|
|
|
$
|
12,555
|
|
|
$
|
2,094
|
|
|
$
|
(2,640
|
)
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
58,122
|
|
|
$
|
18,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other revenue under real estate primarily consisted of rental income from investment properties.
|
|
(b)
|
Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
|
|
(c)
|
Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.
|
The following table presents segment assets reconciled to the Company’s total assets in the consolidated balance sheets.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Segments:
|
|
|
|
|
|
|
|
|
HCPCI Insurance Operations
|
|
$
|
617,293
|
|
|
$
|
648,600
|
|
TypTap Group
|
|
|
258,012
|
|
|
|
157,581
|
|
Real Estate Operations
|
|
|
128,476
|
|
|
|
128,383
|
|
Corporate and Other
|
|
|
33,854
|
|
|
|
29,022
|
|
Consolidation and Elimination
|
|
|
(21,082
|
)
|
|
|
(22,273
|
)
|
Total assets
|
|
$
|
1,016,553
|
|
|
$
|
941,313
|
|
32
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 15 -- Leases
The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases:
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
ROU Assets
|
|
$
|
3,571
|
|
|
$
|
4,002
|
|
Liabilities
|
|
$
|
3,579
|
|
|
$
|
4,014
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
ROU Assets
|
|
$
|
79
|
|
|
$
|
79
|
|
Liabilities
|
|
$
|
39
|
|
|
$
|
43
|
|
The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:
|
|
|
|
Renewal
|
|
Other Terms and
|
Class of Assets
|
|
Initial Term
|
|
Option
|
|
Conditions
|
Operating lease:
|
|
|
|
|
|
|
Office equipment
|
|
1 to 63 months
|
|
Yes
|
|
(a), (b)
|
Office space
|
|
3 to 10 years
|
|
Yes
|
|
(b), (c)
|
Finance lease:
|
|
|
|
|
|
|
Office equipment
|
|
3 to 5 years
|
|
Not applicable
|
|
(d)
|
|
(a)
|
At the end of the lease term, the Company can purchase the equipment at fair market value.
|
|
(b)
|
There are no variable lease payments.
|
|
(c)
|
Rent escalation provisions exist.
|
|
(d)
|
There is a bargain purchase option.
|
As of March 31, 2021, maturities of lease liabilities were as follows:
|
|
Leases
|
|
|
|
Operating
|
|
|
Finance
|
|
Due in 12 months following March 31,
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,818
|
|
|
$
|
19
|
|
2022
|
|
|
1,536
|
|
|
|
15
|
|
2023
|
|
|
507
|
|
|
|
7
|
|
Total lease payments
|
|
|
3,861
|
|
|
|
41
|
|
Less: interest and foreign taxes
|
|
|
282
|
|
|
|
2
|
|
Total lease obligations
|
|
$
|
3,579
|
|
|
$
|
39
|
|
33
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table provides quantitative information with regards to the Company’s operating and finance leases.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Lease costs:
|
|
|
|
|
|
|
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization – ROU assets*
|
|
$
|
4
|
|
|
$
|
4
|
|
Interest expense
|
|
|
1
|
|
|
|
1
|
|
Operating lease costs*
|
|
|
454
|
|
|
|
78
|
|
Short-term lease costs*
|
|
|
37
|
|
|
|
49
|
|
Total lease costs
|
|
$
|
496
|
|
|
$
|
132
|
|
Cash paid for amounts included in the measurement of lease
liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows – finance leases
|
|
$
|
1
|
|
|
$
|
1
|
|
Operating cash flows – operating leases
|
|
$
|
458
|
|
|
$
|
80
|
|
Financing cash flows – finance leases
|
|
$
|
4
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
|
|
|
Weighted-average remaining lease term:
|
|
|
|
|
|
|
|
|
Finance leases (in years)
|
|
|
2.6
|
|
|
|
|
|
Operating leases (in years)
|
|
|
2.7
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
|
|
Finance leases
|
|
|
3.7
|
%
|
|
|
|
|
Operating leases
|
|
|
2.8
|
%
|
|
|
|
|
|
*
|
Included in other operating expenses of the consolidated statements of income.
|
The following table summarizes the Company’s operating leases in which the Company is a lessor:
|
|
|
|
Renewal
|
|
Other Terms and
|
Class of Assets
|
|
Initial Term
|
|
Option
|
|
Conditions
|
Operating lease:
|
|
|
|
|
|
|
Office space
|
|
1 to 3 years
|
|
Yes
|
|
(e)
|
Retail space
|
|
3 to 20 years
|
|
Yes
|
|
(e)
|
Boat docks/wet slips
|
|
1 to 12 months
|
|
Yes
|
|
(e)
|
|
(e)
|
There are no purchase options.
|
Note 16 -- Income Taxes
During the three months ended March 31, 2021 and 2020, the Company recorded approximately $3,257 and $110 respectively, of income taxes, which resulted in effective tax rates of 32.2% and 16.7%, respectively. The increase in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the derecognition of deferred tax assets attributable to unvested restricted stock that was cancelled in February 2021, offset by a slight decrease in non-deductibility of certain executive compensation. 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.
34
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 17 -- Earnings Per Share
U.S. GAAP requires the Company to use the two-class method in computing basic earnings 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 per share during periods of net income or loss. For a majority-owned subsidiary, its basic and diluted earnings per share are first computed separately. Then, the Company’s proportionate share in that majority-owned subsidiary’s earnings is added to the computation of both basic and diluted earnings per share at a consolidated level.
A summary of the numerator and denominator of the basic and diluted earnings per common share is presented below.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
Income
|
|
|
Shares (a)
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares (a)
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Net income attributable to HCI
|
|
$
|
6,148
|
|
|
|
|
|
|
|
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
Less: Income attributable to participating
securities
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocated to common stockholders
|
|
|
6,130
|
|
|
|
7,474
|
|
|
$
|
0.82
|
|
|
|
534
|
|
|
|
7,369
|
|
|
$
|
0.07
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
96
|
|
|
|
|
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
Convertible senior notes* (b)
|
|
|
1,312
|
|
|
|
2,288
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
|
72
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders and
assumed conversions
|
|
$
|
7,442
|
|
|
|
9,930
|
|
|
$
|
0.75
|
|
|
$
|
534
|
|
|
|
7,378
|
|
|
$
|
0.07
|
|
|
(b)
|
See Adoption of New Accounting Standards under Note 2 -- “Summary of Significant Accounting Policies” for additional information.
|
|
*
|
For the three months ended March 31, 2020, convertible senior notes were excluded due to anti-dilutive effect.
|
Note 18 -- Redeemable Noncontrolling Interest
On February 26, 2021, TTIG completed a capital investment transaction with a fund associated with Centerbridge Partners, L.P (collectively, the “Lead Investor”), a private investment management fund. Under the investment agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $0.001 par value, at a price of $10 per share for total proceeds of $100,000. The proceeds will be used for TypTap’s operations and future expansion. The Company incurred $6,262 of related issuance costs. In connection with the transaction, the Lead Investor was granted by HCI warrants to purchase 750,000 shares of HCI’s common stock with an exercise price of $54.40 per share. The warrants valued at $9,217 or $12.29 per warrant were immediately exercisable and will expire on the fourth anniversary of the date of issuance.
35
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Dividends
Dividends accrue and accumulate from the date of issuance. Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option. Cash dividend rates are $0.50 per share in Year 1, $0.60 per share in Year 2, $0.75 per share in Year 3, and $0.95 per share in Year 4 and thereafter. The rates for paid-in-kind dividends are $0.60 per share in Year 1 and $0.70 per share in Year 2. In addition, the Series A Preferred Stock will be paid dividends on an as-converted basis when and if TTIG declares common stock dividends.
Conversion Rights
The holders of TTIG’s Series A Preferred Stock have the right to convert the stock at any time into shares of TTIG’s common stock with an initial conversion rate of 1 to 1. The conversion rate will be adjusted under certain conditions. Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon (1) a qualified public offering of TTIG’s common stock with gross proceeds of not less than $250,000 with a price per share at least equal to 150% of the original purchase price of the Series A Preferred Stock, or (2) at the election of requisite holders of a majority of TTIG’s Series A Preferred Stock, whichever comes first.
Redemption Rights
On or after the fourth anniversary of the issuance date, TTIG’s Series A Preferred Stock is redeemable at the option of the holders at a price equal to the greater of (1) $10 per share plus any accrued but unpaid dividends and (2) a fair market value per share determined by an independent valuation firm selected by TTIG’s board of directors. Management determined that the redemption was not probable at March 31, 2021.
Guaranty by HCI
All payment obligations to the holders of TTIG’s Series A Preferred Stock are fully guaranteed by HCI as long as TTIG’s Series A Preferred Stock is outstanding. As the guarantor, HCI is subject to certain financial covenants.
Liquidation Preference
In the event of any liquidation, the Series A Preferred Stock ranks senior to TTIG’s common stock with respect to distribution rights.
Anti-Dilutive Protection
The holders of TTIG’s Series A Preferred Stock receive protection in form of a down-round feature which will be triggered in the event that TTIG issues additional common equivalent shares at an effective price per share less than $10 per share.
36
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table summarizes the activity of redeemable noncontrolling interest during the three months ended March 31, 2021:
|
|
|
|
|
Balance at January 1, 2021
|
|
$
|
—
|
|
Initial proceeds from Centerbridge
|
|
|
100,000
|
|
Increase (decrease):
|
|
|
|
|
Proceeds allocated to warrants*
|
|
|
(9,217
|
)
|
Issuance costs
|
|
|
(6,262
|
)
|
Issuance costs allocated to warrants*
|
|
|
577
|
|
Accrued dividends
|
|
|
458
|
|
Accretion - increasing dividend rates
|
|
|
336
|
|
Balance at March 31, 2021
|
|
$
|
85,892
|
|
*Net decrease related to warrants of $8,640.
For the three months ended March 31, 2021, net income attributable to redeemable noncontrolling interest was $794, consisting of accrued dividends of $458 and accretion related to increasing dividend rates of $336.
Note 19 -- Equity
Stockholders’ Equity
Common Stock
The Company’s 2020 stock repurchase plan was considered expired and there was no new stock repurchase plan approved by the Board of Directors during the first quarter of 2021.
On December 19, 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020. On March 13, 2020, the Board approved a new stock repurchase plan for 2020 to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended March 31, 2020, the Company repurchased and retired a total of 76,851 shares at a weighted average price per share of $39.55 under these authorized repurchase plans. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended March 31, 2020 was $3,041 or $39.58 per share.
On January 19, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on March 19, 2021 to stockholders of record on February 19, 2021.
Warrants
At March 31, 2021, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock. These warrants were issued by HCI to the Lead Investor described in Note 18 -- “Redeemable Noncontrolling Interest.”
Noncontrolling Interests
TTIG is authorized to issue 175 million shares of common stock with a par value of $0.001 per share, and 25 million shares of preferred stock. In February 2021, TTIG issued 10 million shares of Series A Preferred Stock (see Note 18 -- “Redeemable Noncontrolling Interest”). At March 31, 2021, there were 80,749,300 shares of TTIG’s common stock outstanding, of which 5,749,300 shares were not owned by HCI.
37
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 20 -- 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 March 31, 2021, there were 1,073,540 shares available for grant.
Stock Options
Stock options granted and outstanding under the incentive plans vest over periods ranging from immediately vested to five years and are exercisable over the contractual term of ten years.
A summary of the stock option activity for the three months ended March 31, 2021 and 2020 is as follows (option amounts not in thousands):
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
Value
|
|
Outstanding at January 1, 2021
|
|
|
440,000
|
|
|
$
|
45.25
|
|
|
7.6 years
|
|
$
|
3,113
|
|
Outstanding at March 31, 2021
|
|
|
440,000
|
|
|
$
|
45.25
|
|
|
7.3 years
|
|
$
|
13,464
|
|
Exercisable at March 31, 2021
|
|
|
275,000
|
|
|
$
|
43.40
|
|
|
6.8 years
|
|
$
|
8,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2020
|
|
|
340,000
|
|
|
$
|
43.21
|
|
|
7.9 years
|
|
$
|
1,657
|
|
Granted
|
|
|
110,000
|
|
|
$
|
48.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
$
|
6.30
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
440,000
|
|
|
$
|
45.25
|
|
|
8.3 years
|
|
$
|
—
|
|
Exercisable at March 31, 2020
|
|
|
165,000
|
|
|
$
|
42.17
|
|
|
7.5 years
|
|
$
|
—
|
|
The following table summarizes information about options exercised for the three months ended March 31, 2021 and 2020 (option amounts not in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Options exercised
|
|
|
—
|
|
|
|
10,000
|
|
Total intrinsic value of exercised options
|
|
$
|
—
|
|
|
$
|
288
|
|
Tax benefits realized
|
|
$
|
—
|
|
|
$
|
71
|
|
For the three months ended March 31, 2021 and 2020, the Company recognized $223 and $283, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $1 and $19 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and December 31, 2020, there was $1,666 and $1,889, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.2 years.
38
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the three months ended March 31, 2020:
|
|
2020
|
|
Expected dividend yield
|
|
|
3.48
|
%
|
Expected volatility
|
|
|
38.68
|
%
|
Risk-free interest rate
|
|
|
1.63
|
%
|
Expected life (in years)
|
|
|
5
|
|
Restricted Stock Awards
From time to time, the Company has granted and may grant restricted stock awards to its 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 months ended March 31, 2021 and 2020 is as follows:
|
|
Number of
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
|
Awards
|
|
|
Fair Value
|
|
Nonvested at January 1, 2021
|
|
|
423,787
|
|
|
$
|
43.79
|
|
Granted
|
|
|
548,086
|
|
|
$
|
36.95
|
|
Vested
|
|
|
(41,250
|
)
|
|
$
|
42.18
|
|
Cancelled
|
|
|
(141,600
|
)
|
|
$
|
43.76
|
|
Forfeited
|
|
|
(2,050
|
)
|
|
$
|
45.67
|
|
Nonvested at March 31, 2021
|
|
|
786,973
|
|
|
$
|
39.11
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2020
|
|
|
396,760
|
|
|
$
|
41.71
|
|
Granted
|
|
|
45,000
|
|
|
$
|
44.97
|
|
Vested
|
|
|
(31,250
|
)
|
|
$
|
40.97
|
|
Forfeited
|
|
|
(7,138
|
)
|
|
$
|
42.60
|
|
Nonvested at March 31, 2020
|
|
|
403,372
|
|
|
$
|
42.12
|
|
39
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $1,905 and $1,558 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and December 31, 2020, there was approximately $27,449 and $13,666, 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 3.4 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 months ended March 31, 2021 and 2020.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax benefits (derecognized) recognized
|
|
$
|
(36
|
)
|
|
$
|
284
|
|
Tax benefits realized for restricted stock
and paid dividends
|
|
$
|
55
|
|
|
$
|
53
|
|
Fair value of vested restricted stock
|
|
$
|
1,740
|
|
|
$
|
1,280
|
|
In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to the TypTap Group (See Note 1 -- “Nature of Operations”). In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.
Subsidiary Equity Plan
On February 26, 2021, TTIG’s Board of Directors approved the 2021 Equity Incentive Plan (the “2021 Plan”) which is an incentive plan denominated in TTIG’s common shares. The 2021 Plan provides for broad-based equity awards to employees and nonemployee directors of TypTap Group. The maximum number of shares that may be issued under the 2021 Plan is 7,000,000 shares. In February 2021, TTIG issued a total of 5,749,300 shares of restricted stock to the employees who transitioned to TypTap Group. For the three months ended March 31, 2021, TypTap Group recognized compensation expense related to restricted stock of $215. At March 31, 2021, there was approximately $6,617 of total unrecognized compensation expense related to nonvested restricted stock.
Note 21 -- Commitments and Contingencies
Capital Commitments
As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At March 31, 2021, there was an aggregate unfunded balance of $9,861.
Note 22 -- Related Party Transactions
On February 12, 2021, the Company committed to provide a revolving line of credit with borrowing capacity of up to $ 60,000 to TTIG and the credit line would be available until the earlier of June 30, 2022 and the securing of alternative financing. This commitment has ended on February 26, 2021 after the investment transaction described in Note 18 -- “Redeemable Noncontrolling Interest.”
40
HCI GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(Amounts in thousands, except share and per share amounts, unless otherwise stated)
Note 23 -- Subsequent Events
On April 28, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on June 18, 2021 to stockholders of record on May 21, 2021.
41