Tampa, Florida. The real estate consists of 3.5 acres of land, a three-story building which has a gross area of 122,000 square feet, and a four-level parking garage. This facility is 57% occupied by us and our U.S. subsidiaries and serves as our headquarters. In addition, we lease approximately 40% to non-affiliates and the remaining space is available for lease.
Ocala, Florida. The real estate consists of 1.6 acres of land and an office building with gross area of approximately 16,000 square feet. The facility is 100% designated for our insurance operations and will be used as an alternative location in the event a catastrophic event impacts our operations in Tampa, Florida.
Riverview, Florida. The real estate consists of 2.57 acres of land, 1.27 acres of which is leased to a gas station and convenience store chain. Our retail structure with 8,400 square feet of net rentable space is situated on the remaining land. Approximately 88% of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Sorrento, Florida. The real estate includes 5.42 acres of outparcel land intended for ground lease or resale and a retail shopping center with 61,400 square feet of net rentable area. Approximately 74% of the rentable space is currently leased to a large, well-known grocery retailer. Approximately 96% of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Melbourne, Florida. The real estate includes 2.26 acres of outparcel land intended for ground lease, resale or future development and a retail shopping center with 49,995 square feet of rentable area. Approximately 42% of the rentable space is currently leased to a large well-known grocery retailer. Approximately 95% of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Rental expense under all facility leases was $336,000, $333,000 and $304,000 during the years ended December 31, 2017, 2016 and 2015, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Significant changes in the 2017 Tax Act affecting us include the reduction of the federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017 and a limitation on the consolidated basis of the carryback as well as the carryforward of net operating losses (“NOL”) arising after December 31, 2017. In addition, the 2017 Tax Act eliminates the deductibility exception for performance-based executive compensation and expands the definition of covered executives to include the chief financial officer. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is enacted. Because the enactment of the 2017 Tax Act was close to the end of the fiscal year, measurement of certain income tax effects relied on estimates that we believed to be reasonable. Deviation from these estimates may arise as relevant information becomes available and, as a result, we may recognize material adjustments to income tax expense during 2018. See Note 17 - “Income Taxes” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
On February 8, 2018, we granted 40,000 shares of restricted stock and options to purchase 110,000 of our common shares at an exercise price of $40 per share to our chief executive officer, Paresh Patel. The options will expire on February 8, 2028. These share-based awards were granted pursuant to our 2012 Omnibus Incentive Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by us. The grant date fair values of the restricted stock and options were approximately $1,397,000 and $939,000, respectively.
On February 20, 2018, we entered into a subscription agreement with another limited partnership and committed to provide $5,000,000 of capital for investment. The capital is callable at the discretion of the general partner during a commitment period.
Gross Premiums Earned for the years ended December 31, 2017 and 2016 were approximately $358,253,000 and $378,678,000, respectively. The decrease in 2017 was primarily attributable to policy attrition as well as a rate decrease effective on new and renewal policies beginning in January 2016.
Net Premiums Earned for the years ended December 31, 2017 and 2016 were approximately $224,618,000 and $243,627,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.
The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2017 and 2016 (amounts in thousands):
Net Realized Investment Gains for the years ended December 31, 2017 and 2016 were approximately $4,346,000 and $2,601,000, respectively. The gains in 2017 resulted primarily from sales intended to take advantage of an upturn in the security market.
Net Other-Than-Temporary Impairment Losses for the years ended December 31, 2017 and 2016 were approximately $1,467,000 and $2,482,000, respectively. During 2017, we recognized impairment losses specific to four fixed-maturity securities and six equity securities. Three of these fixed-maturity securities were written down before being sold. Six equity securities were impaired because each of them had been in an unrealized loss position for a length of time with no near term prospect for recovery.
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 treaties and to assume a proportional share of losses defined in one quota share arrangement, which was cancelled effective May 31, 2016. For the years ended December 31, 2016 and 2015, premiums ceded reflect net reductions of $12,677,000 and $18,322,000, respectively, related to provisions under certain multi-year catastrophe reinsurance contracts. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.” The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.
Net Premiums Written for the years ended December 31, 2016 and 2015 totaled approximately $232,140,000 and $255,724,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. We had approximately 150,000 policies in force at December 31, 2016 as compared with approximately 160,000 policies in force at December 31, 2015.
The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2016 and 2015 (amounts in thousands):
Net Realized Investment Gains for the year ended December 31, 2016 were approximately $2,601,000 as compared with $608,000 of net realized investment losses for the year ended December 31, 2015. The losses in 2015 resulted primarily from sales intended to rebalance the mix of our investment portfolio to meet our long-term investment goals and strategies.
Net Other-Than-Temporary Impairment Losses for the years ended December 31, 2016 and 2015 were approximately $2,482,000 and $4,681,000, respectively. During 2016, we recognized impairment losses specific to four fixed-maturity securities, three of which were subject to credit loss impairment, and 17 equity securities. Three fixed-maturity securities were subject to credit related loss impairments resulting from our analysis of their expected cash flows. Seventeen equity securities were impaired because each of them had been in an unrealized loss position for a length of time with no near term prospect for recovery.
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2016 and 2015 of approximately $42,642,000 and $41,984,000, respectively, primarily reflect commissions and premium taxes related to the policies that have renewed.
General and Administrative Personnel Expenses for the years ended December 31, 2016 and 2015 were approximately $26,200,000 and $28,276,000, respectively. The $2,076,000 decrease in 2016 was primarily attributable to a decrease in discretionary incentive pay in 2016. The level of discretionary incentive pay in 2016 was influenced in large part by our financial results for the year, which were negatively impacted by Hurricane Matthew in the fourth quarter of 2016. The decrease was offset in part by increased payroll costs resulting from our growing workforce.
Income Tax Expense for the years ended December 31, 2016 and 2015 was approximately $17,835,000 and $40,331,000, respectively, for state, federal and foreign income taxes resulting in an effective tax rate of 38.1% for 2016 and 38.0% for 2015.
The loss ratio applicable to the year ended December 31, 2016 was 51.2% compared with 30.9% for the year ended December 31, 2015. The increase was primarily attributable to losses in October 2016 from Hurricane Matthew as well as reserve strengthening throughout 2016.
Our combined ratio for the year ended December 31, 2016 was 89.3% compared with 63.6% for the year ended December 31, 2015. Our combined ratio was negatively impacted by increased expenses for losses and loss adjustment expenses and a reduction in 2016 net premiums earned.
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the year ended December 31, 2016 was 57.5% compared with 42.5% for the year ended December 31, 2015. The increase in 2016 was primarily attributable to the factors described above.
Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by insurance subsidiaries from premiums written and investment income. We may consider raising additional capital through debt and/or equity offerings to support our growth and future investment opportunities.
The following table summarizes our principal and interest payment obligations for long-term debt at December 31, 2017:
Our limited partnership investments consist of four private equity funds managed by their general partners. 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. At December 31, 2017, there was an aggregate unfunded capital balance of $14,328,000. See Limited Partnership Investments under Note 4 - “Investment” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2017, 2016 and 2015 are summarized below.
Net cash provided by operating activities for the year ended December 31, 2015 was approximately $45,282,000, which consisted primarily of cash received from net premiums written less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $80,374,000 was primarily due to the funding of the limited partnership investments of $24,636,000, the purchases of available-for-sale securities of $131,379,000, the funding of the acquisition, development and construction arrangement of $6,968,000, and $4,871,000 used to purchase real estate investments, decreased by redemptions and repayments of fixed-maturity securities of $9,344,000, and the proceeds from sales of available-for-sale
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 and available-for-sale investments.
The following table summarizes our material contractual obligations and commitments as of December 31, 2017 (amounts in thousands):
(1) Represents the lease for office space in Miami, Florida and the lease and maintenance service agreement for office space in Noida, India. Liabilities related to our India operations were converted from India Rupees to U.S. dollars using the January 2, 2018 exchange rate, the first available rate subsequent to December 31, 2017, which was a non-business day.
(2) Represents the minimum payment of reinsurance premiums under multi-year reinsurance contracts. Reinsurance premiums payable after December 31, 2017 under one contract are estimated and subject to subsequent revision as the premiums are determined on a quarterly basis based on the premiums associated with the applicable flood total insured value on the last day of the preceding quarter.
(3) Represents the unfunded balance of capital commitments under the subscription agreements related to four limited partnerships in which we hold interests.
but not yet paid in full, and (ii) claims that have been incurred but not yet reported to us (“IBNR”). Reserves established by us represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss reserves represent, we believe, management’s best estimate of our company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss reserves is complex and inherently imprecise, as it involves using judgment that is affected by many variables such as past loss experience, current claim trends and the prevailing social changes in our claims adjusting process, economic and legal environments. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. Our exposure is impacted by both the risk characteristics of the physical locations where we write policies, such as hurricane and tropical storm-related risks, as well as risks associated with varying social, judicial and legislative characteristics in the locations in which we have exposure. In determining loss reserves, we give careful consideration to all available data and actuarial analyses.
The paid and reported Bornhuetter-Ferguson methods are a weighting of the loss ratio method and the corresponding development method. Outstanding reserves or IBNR reserves are derived by applying the loss ratio estimate to the estimated unpaid or unreported percent of losses based on the development patterns from the development methods.
Currently, our estimated ultimate liability is calculated monthly using the principles and procedures described above, which are applied to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material, adverse effect on our results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
As described in Note 14 - “Reinsurance” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K, we adjusted the balances of accrued benefits and deferred reinsurance premiums during the third quarter of 2017 due to the impact of Hurricane Irma. For the year ended December 31, 2017, we derecognized $3,413,000 of net accrued benefits. We
also recognized ceded premiums of $2,327,000, including the reversal of the majority of previously deferred reinsurance costs. In contrast, for the year ended December 31, 2016, we accrued benefits of $13,610,000 and recognized net ceded premiums of $933,000, representing amortization of $1,219,000 of previously deferred reinsurance costs for increased coverage offset by $2,152,000 of ceded premiums deferred for the period. In combination, for the year ended December 31, 2017, we recognized a net increase in ceded premiums of $5,740,000 as opposed to a net reduction in ceded premiums of $12,677,000 for the year ended December 31, 2016.
In June 2016, we received cash totaling $37,800,000 in connection with the benefits accrued under two retrospective reinsurance contracts that were terminated effective May 31, 2016. In September 2016, we received the final cash payment of $5,716,000 under the terms of the remaining retrospective reinsurance contract which terminated May 31, 2016. As of December 31, 2017, we had $2,393,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limits provided under such agreements and in the period that the increased coverage is applicable. As of December 31, 2016, we had $5,810,000 of accrued benefits and $2,152,000 of ceded premiums deferred related to these agreements.
Notes to Consolidated Financial Statements for the Years Ended December 31, 2017, 2016 and 2015
We have audited the accompanying consolidated balance sheets of HCI Group, Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 2018 expressed an unqualified opinion.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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”), its principal operating subsidiary, and TypTap Insurance Company (“TypTap”). HCPCI is authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsed and wind-only policies to Florida customers. During 2017, HCPCI received regulatory approval to write residential property and casualty insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. HCPCI has yet to commence operations in these states. TypTap, on the other hand, primarily offers standalone flood policies to Florida homeowners. HCPCI’s and TypTap’s operations are supported by HCI Group, Inc. and certain HCI subsidiaries.
The Company obtained a majority of its policies through participation in a “take-out program” with Citizens Property Insurance Corporation (“Citizens”), a Florida state supported insurer. Policies were obtained in separate assumption transactions with Citizens that took place from July 2007 through December 2017. The Company is required to offer renewals on the policies acquired for a period of three years subsequent to the initial expiration of the assumed policies. During the first full year after assumption, such renewals are required to have rates that are equivalent to or less than the rates charged by Citizens. Substantially all of the Company’s premium revenue since inception comes from these assumptions and one additional assumption through which the Company acquired the Florida policies of another Florida insurance carrier.
Basis of Presentation. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Material estimates that are particularly susceptible to significant change in the near term are primarily related to losses and loss adjustment expenses, reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, and stock-based compensation expense.
After the adoption of the aforementioned guidance, the Company evaluates whether substantially all of the fair value of the gross assets acquired in a real estate transaction is concentrated in a single identifiable asset or group of similar identifiable assets. If such concentration is substantial, the transaction is accounted for as an asset acquisition. As a result, the cost of acquiring real estate is allocated to the individual assets based on the relative fair values of the individual assets. Acquisition related costs are capitalized and allocated among the assets acquired.
When reviewing impaired fixed-maturity securities, the Company considers its ability and intent to hold these securities and whether it is probable that the Company will be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intends to sell or it is probable that the Company will have to sell before recovery or maturity, the unrealized losses are recognized as other-than-temporary losses in income. In instances where there are credit related losses associated with the impaired fixed-maturity securities for which the Company asserts that it does not have the intent to sell, and it is probable that the Company will not be required to sell until a market price recovery or maturity, the amount of the other-than-temporary impairment loss related to credit losses is recognized in income, and the amount of the other-than-temporary impairment loss related to other non-credit factors such as changes in interest rates or market conditions is recorded as a component of accumulated other comprehensive income.
When determining impairment due to a credit related loss, the Company carefully considers factors such as the issuer’s financial ratios and condition, the security’s current ratings and maturity date, and overall market conditions in estimating the cash flows expected to be collected. The expected cash flows discounted at the effective interest rate of the security implicit at the date of acquisition is then compared with the security’s amortized cost at the measurement date. A credit loss is incurred when the present value of the expected cash flows is less than the security’s amortized cost. The Company considers various factors in determining whether an individual security is other-than-temporarily impaired (see Available-for-Sale Securities in Note 4 - “Investments”).
Limited Partnership Investments. The Company has interests in limited partnerships that are not registered under the United Stated Securities Act of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public market and any withdrawal is subject to the terms and conditions of the partnership agreement. The Company has no influence over partnership operating and financial policies. The Company did not elect the fair value option and, therefore, uses the equity method to account for these investments (see Limited Partnership Investments in Note 4 - “Investments”). The Company will generally recognize its share of the limited partnership’s earnings or losses on a three-month lag.
Lease Acquisition Costs. Lease acquisition costs represent capitalized costs of finding and acquiring tenants such as leasing commissions, legal, and marketing expenses. The Company amortizes these costs in other operating expenses on a straight-line basis over the term of a lease.
Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the applicable reinsurance contract or contracts. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of gross premiums earned. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.
The Company receives ceding commissions from ceding gross written premiums to a third-party reinsurer under one flood quota share reinsurance contract. The ceding commissions represent the reimbursement of the Company’s policy acquisition, underwriting and other operating expenses. Ceding commissions received cover a portion of premium taxes and agent commissions capitalized by the Company and a portion of non-capitalized acquisition costs and other underwriting expenses. Ceding commissions are recognized to income on a pro-rata basis over the terms of the policies reinsured, the amount of which is included in policy acquisition and other underwriting expenses in the 2017 consolidated statement of income. The unearned portion of ceding commissions that represents recovery of capitalized acquisition costs is classified as a reduction of deferred policy acquisition costs whereas the remaining unearned balance is classified as deferred revenue in other liabilities.
Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 2017 and 2016. Fair values for securities or financial instruments are based on the framework for measuring fair value established by U.S. GAAP (see Note 7 - “Fair Value Measurements”).
Reclassifications. Certain reclassifications of prior year amounts have been made to conform to the current year presentation. For example, certain payroll-related costs such as share-based compensation expense, payroll taxes and employee benefits, which were previously reported in other operating expenses totaling $7,163 and $8,136 for the years ended December 31, 2016 and 2015, respectively, were reclassified to general and administrative personnel expenses to conform with the 2017 presentation.
Accounting Standards Update No. 2017-03. In January 2017, the FASB issued Accounting Standards Update No. 2017-03 (“ASU 2017-03”), Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), which adds and amends SEC paragraphs pursuant to SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force meetings. The announcement made at the September 22, 2016 meeting provides the SEC staff view on the disclosure of the impact that recently issued accounting standards will have on a public entity’s financial statements when the standards are adopted in a future period. This announcement applies to ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and any subsequent amendments to guidance in the ASUs that are issued prior to the adoption of the aforementioned ASUs.
Accounting Standards Update No. 2017-01. In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805), which clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. If the screen is not met, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. ASU 2017-01 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted under certain circumstances. When adopted, this guidance will impact how the Company determines whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. The Company elected to adopt this standard in the fourth quarter of 2017.
Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the years ended December 31, 2017, 2016 and 2015 were as follows:
For the year ended December 31, 2017, the Company recognized impairment losses of $428 related to the sale of four intent-to-sell fixed-maturity securities in the consolidated statement of income. For the year ended December 31, 2016, the Company recognized $1,565 of impairment losses on four fixed-maturity securities, representing $1,335 of additional losses recorded during the period and $230 of the net change recorded in other comprehensive income. For the year ended December 31, 2015, the Company recorded $705 of impairment losses on two fixed-maturity securities, of which $111 was considered other-than-temporarily impaired due to credit related losses, with the remaining amount of $594 related to non-credit factors.
During 2017, the Company sold two fixed-maturity securities with cumulative credit losses totaling $475. The decision to sell these securities before their maturity was primarily driven by the impact of the Tax Cut and Jobs Act signed into law in 2017. Of two fixed-maturity securities with credit related losses existing at December 31, 2015, one matured with full payment of principal and interest and one was sold due to uncertainties surrounding the issuer’s restructuring plan during 2016.
Securities with gross unrealized loss positions at December 31, 2017 and 2016, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
At December 31, 2017, there were 135 securities in an unrealized loss position. Of these securities, 22 securities had been in an unrealized loss position for 12 months or longer.
At December 31, 2017, the cost, net unrealized gains, and estimated fair value of the Company’s trading equity securities were $953, $92, and $1,045, respectively. There were no investments in trading equity securities at December 31, 2016.
Proceeds received, and the gross realized gains and losses from sales of trading equity securities, for the year ended December 31, 2017 were as follows:
The Company did not hold any trading equity securities during 2016.
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. In August 2017, the Company entered into a subscription agreement with another limited partnership. The following table provides information related to the Company’s investments in limited partnerships:
(c) Expected to have a 10-year term and the capital commitment is expected to expire on September 3, 2019.
(g) Expected to have a 10-year term and the capital commitment is expected to expire on June 30, 2020.
For the years ended December 31, 2017 and 2016, the Company recognized net investment income of $2,334 and $1,207, respectively, for these investments. For the year ended December 31, 2015, the Company recognized net investment loss of $3,244. At December 31, 2017 and 2016, the Company’s cumulative contributed capital to the partnerships existing at each respective balance sheet date totaled $21,172 and $31,946, respectively, and the Company’s maximum exposure to loss aggregated $23,184 and $29,263, respectively.
During the year ended December 31, 2017, the Company received total cash distributions of $12,639, representing $11,758 of returned capital and $881 of return on investment. Included in the return of capital was $11,626 from one limited partnership the Company withdrew from in February 2017. During the year ended December 31, 2016, the Company received in cash $544 of return on investment. There was a return on investment of $12 received by the Company during the year ended December 31, 2015.
In January 2016, FMJV sold a portion of its outparcel land for gross proceeds of $829, of which $515 was used to repay a portion of the construction loan obtained for its real estate development project. FMJV recognized a $404 gain on the outparcel sale of which $383 was allocated to the Company in accordance with the profit allocation specified in the operating agreement. On December 15, 2016, FMJV distributed its entire equity interest in FMKT Mel Manager, LLC (“FMKT MGA”),
At December 31, 2017 and 2016, the Company’s maximum exposure to loss relating to the variable interest entity was $1,304 and $2,102, respectively, representing the carrying value of the investment. At December 31, 2017, there was $0 of undistributed income from this equity method investment as compared with an undistributed loss, after an equity distribution, of $25 at December 31, 2016, the amounts of which were included in the Company’s consolidated retained income.
For the year ended December 31, 2017, the Company received a cash distribution of $564, representing a combined distribution of $147 in earnings and $417 in capital. The limited liability company members received no cash distributions during 2016 and 2015. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:
FMJV’s assets at December 31, 2017 and 2016 included primarily three outparcels for sale or lease which have increased in value since the adjacent retail shopping center was completed. The Company determined that there was no impairment loss associated with these assets for the years ended December 31, 2017 and 2016. In the fourth quarter of 2017, FMJV decided to terminate its development plan for nearby land, thereby expensing $382 of deferred costs associated with the land feasibility study. The 2015 results reflected expenses incurred during the initial development stage. Because the Company expected to incur such expenses during development of the property and prior to its occupancy, the Company determined there was no impairment loss for the year ended December 31, 2015.
* This project, which was developed by the Company’s consolidated variable interest entity, was completed in July 2017. The capitalized costs were reclassified to land, land improvement, and building.
The Company has a commercial property in Riverview, Florida. The development project of this property was completed in July 2017 through a limited liability company treated under U.S. GAAP as a joint venture in which the Company’s subsidiary had a controlling financial interest and, as a result, it was the primary beneficiary (See Note 27 - “Subsequent Events”). The real estate investments of this limited liability company primarily include a retail strip center with 8,400 square feet of net rentable space and an adjacent parcel of land which is currently leased in its entirety to a large gas station and convenience store chain. The following table summarizes the assets and liabilities related to this variable interest entity which are included in the accompanying consolidated balance sheets.
The table below presents an allocation of the purchase price to the net assets acquired based on their fair values at the acquisition date:
The acquired businesses, in aggregate, contributed $426 of rental income and $460 of net loss to the Company for the period from the acquisition date to December 31, 2016. Pro forma results of operations are not presented as the effects of the acquisition were not material to the Company’s consolidated results of operations.
Other inputs that are observable for the assets, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.
The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of December 31, 2017 and 2016:
Amortization expense for intangible assets after December 31, 2017 is as follows:
In February 2017, the Company exercised the conversion option under the credit agreement. See 3.95% Promissory Note in Note 13 - “Long-Term Debt” for additional information.
The following table summarizes future maturities of long-term debt as of December 31, 2017, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.
3.875% Convertible Notes. Since January 2015, the Company’s cash dividends on common stock have exceeded $0.275 per share, resulting in adjustments to the conversion rate of the 3.875% Convertible Notes. Accordingly, as of December 31, 2017, the conversion rate of the Company’s 3.875% Convertible Notes was 16.2172 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.66 per share.
The effective interest rates for the 3.875% Convertible Notes and the 4.25% Convertible Notes, taking into account both cash and non-cash components, approximate 8.3% and 7.6%, respectively. Had a 20-year term been used for the amortization of the liability component and issuance costs of the 4.25% Convertible Notes, the annual effective interest rate charged to earnings would have been decreased to approximately 5.4%. As of December 31, 2017, the remaining amortization periods of the debt discounts were expected to be 1.2 years for the 3.875% Convertible Notes and 4.2 years for the 4.25% Convertible Notes.
On February 27, 2017, the Company converted its outstanding revolving credit facility of $9,441 into a three-year mortgage loan primarily collateralized by a retail shopping center in Melbourne, Florida. Shortly after the loan conversion, the Company withdrew an additional amount of $109, thereby increasing the loan amount to $9,550. The loan bears a fixed annual interest rate of 3.95%. Approximately $50 of principal and interest is payable in 35 monthly installments beginning March 17, 2017 plus a final balloon payment of $8,891 including principal and unpaid interest payable on February 17, 2020. The promissory note may be repaid in part or in full at any time without penalty.
On January 14, 2016, HCPCI Holdings, LLC, a subsidiary of the Company, entered into a 15-year secured loan agreement for proceeds of $9,200. The loan is collateralized by the Company’s Tampa, Florida real estate, which is owned by HCPCI Holdings, and the lease agreements associated with this property. The loan bears a fixed annual interest rate of 4%. Approximately $68 of principal and interest is payable in 180 monthly installments. The promissory note may be repaid in full after February 1, 2017 as long as the Company provides at least 60 days’ written notice and pays a prepayment premium as specified in the loan agreement. The proceeds were used for real estate development projects or other general business purposes.
The impact of the reinsurance treaties on premiums written and earned is as follows:
During the year ended December 31, 2017, ceded losses of $214,082 were recognized as a reduction in losses and LAE, $7,400 of which related to Oxbridge Reinsurance Limited, a related party. The reduction in 2017 was primarily related to Hurricane Irma which made landfall in the Florida peninsula and caused significant property damages across the region. During the years ended December 31, 2016 and 2015, there were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred. At December 31, 2017 and 2016, there were 37 and 35 reinsurers, respectively, participating in the Company’s reinsurance program. Amounts receivable with respect to reinsurers at December 31, 2017 and 2016 were $103,104 and $0, respectively. Approximately 29.7% of the reinsurance recoverable balance at December 31, 2017 was concentrated in two reinsurers. Based on the insurance ratings, the payment history and the financial strength of the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of December 31, 2017. The ratio of assumed premiums earned to net premiums earned for the years ended December 31, 2017, 2016 and 2015 was 4.9%, 2.5%, and 22.0%, respectively.
Certain of the reinsurance contracts include retrospective provisions that adjust premiums, increase the amount of future coverage, or result in a profit commission in the event losses are minimal or zero. Due to the losses incurred by Hurricane Irma, the balances of previously accrued benefits and deferred reinsurance premiums were adjusted with the changes recognized in the consolidated statement of income as additional ceded premiums.
For the year ended December 31, 2017, the Company recognized net premiums ceded of $5,740, related to these adjustments. Included in these amounts attributable to the Company’s contract with Oxbridge for the year ended December 31, 2017 were $933. In contrast, these adjustments were reflected as a net reduction in premiums ceded of $12,677 and $18,322 for the years ended December 31, 2016 and 2015, respectively, of which $1,929 and $2,797 related to the Company’s contract with Oxbridge. In June 2016, the Company received a total of $37,800 in cash benefits related to two retrospective reinsurance contracts that terminated May 31, 2016 of which $7,560 was received from Oxbridge. In September 2016, the Company received the final cash payment of $5,716 under the terms of the remaining retrospective reinsurance contract which terminated May 31, 2016.
The Company currently writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. The occurrence of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.
The following is information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2015 to 2012 is presented as supplementary information and is unaudited.
The following is supplementary and unaudited information about average historical claims duration as of December 31, 2017:
(a) Other revenue under real estate primarily consisted of rental income from investment properties.
The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. The tax returns filed for the years ending December 31, 2016, 2015, and 2014 remain subject to examination by the Company’s major taxing jurisdictions.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Key components of the 2017 Tax Act are: a permanent reduction to the federal corporate income tax rate from a bracket system with a top tax rate of 35% to a flat rate of 21% beginning on January 1, 2018; implementation of a territorial tax system; an amendment to Internal Revenue Code Section 965 that requires U.S. shareholders (10% or greater) of controlled foreign corporations and other specified foreign corporations to include in income, for the last taxable year of such foreign corporation beginning before January 1, 2018, such U.S. shareholder’s pro rata share of a deemed repatriation amount; and changes to carryback and carryforward rules for net operating losses arising after December 31, 2017. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is enacted. On the same day of the passing and enactment of the 2017 Tax Act, the Securities Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company used estimates with regard to several gross temporary book and tax differences, including depreciable assets, deductions for loss reserves and income from limited partnership interests in measuring provisional tax effects. The ultimate outcome may materially differ from these provisional amounts due to, among other things, changes in interpretations and assumptions, and additional regulatory guidance. The Company expects to finalize the accounting for the tax effects when the 2017 U.S. corporate income tax return is filed in October 2018. For the year ended December 31, 2017, the Company recognized a provisional $1,400 tax benefit related to net deferred tax liabilities due to the lower future corporate income tax rates enacted by the 2017 Tax Act in the Company’s consolidated statement of income.
foreign subsidiary at December 31, 2017 will be subjected to federal and state income taxes as a result of the one-time mandatory deemed repatriation and all earnings of its foreign subsidiaries after December 31, 2017 will not be subject to U.S. income taxes, the Company will no longer be required to consider the establishment of a deferred tax liability related to the undistributed earnings of its foreign subsidiary.
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 (loss) earnings per share during periods of net income (loss).
For each of the last two years, the Company’s Board of Directors authorized a one-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the years ended December 31, 2017 and 2016, the Company repurchased and retired 433,175 and 643,703 shares, respectively, at weighted average prices per share of $34.94 and $31.07, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended December 31, 2017 and 2016 were $15,155 and $20,026, respectively, or $34.98 and $31.11 per share, respectively.
In October 2013, the Company’s Board of Directors declared a dividend of one preferred share purchase right (“Right”) for each outstanding share of the Company’s common stock to shareholders of record at the close of business on November 15, 2013. Each Right entitled the common shareholder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, no par value, at a price of $125.00 per one one-hundredth of such preferred share, subject to adjustment for certain events. The Right was intended to prevent any unsolicited takeover attempt that is unfair and unfavorable to the Company’s shareholders.
The Right would not be exercisable until ten days following a public announcement that a person or group had acquired beneficial ownership of 10% or more of the Company’s common stock or until ten business days after a person or group began a tender or exchange offer that would result in beneficial ownership of 10% or more of the Company’s common stock. The Right could be redeemed or exchanged by the Company for $0.001 per Right at any time until the Right’s expiration date on October 18, 2018. On April 18, 2017, the Company’s Board of Directors terminated the Company’s shareholder rights plan by amending the Right’s expiration date to April 18, 2017.
In conjunction with the issuance of the 4.25% Convertible Notes as described in Note 13 - “Long-Term Debt” under Convertible Senior Notes, the Company used $20,345 of the net proceeds to repurchase and retire an aggregate of 413,600 shares of its common stock at a price of $49.19 per share from institutional investors.
Each forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of each forward counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company pays any cash dividends on its common shares, each forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contracts will be treated as retired for financial statement purposes as of the effective date of each forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders votes.
As of December 31, 2017 and 2016, there were no Series A Cumulative Convertible Preferred Stock issued or outstanding.
liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per common share. Each Series B Preferred will have 100 votes per share, voting together as one class on all matters submitted to a vote of shareholders of the Company. Finally, in the event of any merger, consolidation or other transaction in which common shares are exchanged, each Series B Preferred will be entitled to receive 100 times the amount received per common share. The aforementioned rights of Series B Preferred are protected by customary anti-dilution provisions. As of December 31, 2017 and 2016, there were no Series B Preferred issued or outstanding.
The Company currently has outstanding stock-based awards granted under the 2007 Stock Option and Incentive Plan and the 2012 Omnibus Incentive Plan. Only the 2012 Plan is active and available for future grants. With respect to the 2012 Plan, the Company may grant stock-based awards to employees, directors, consultants, and advisors of the Company. On March 17, 2017, the Company’s board of directors amended the 2012 Omnibus Incentive Plan and reduced the number of shares reserved under the plan from 5,000,000 shares to 3,000,000 shares. At December 31, 2017, there were 1,995,655 shares available for grant.
A summary of the stock option activity for the years ended December 31, 2017, 2016 and 2015 is as follows (option amounts not in thousands):
During the year ended December 31, 2015, a total of 120,000 options were exercised, of which 30,000 options were net settled by surrender of 2,013 shares. For the years ended December 31, 2017, 2016 and 2015, the Company recognized $306, $0 and $0, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $78, $0 and $0 for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, there was $941 and $0, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 3.0 years.
The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $4,217, $4,198 and $5,212 for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, there was approximately $9,101 and $7,531, 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 32 months. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the years ended December 31, 2017, 2016 and 2015.
As of December 31, 2017, the Company has contractual obligations related to three multi-year reinsurance contracts. Two of these contracts have effective dates of June 1, 2016 and the other has an effective date of July 1, 2017. These contracts may be cancelled only with the other party’s consent. The table below presents the future minimum aggregate premiums amount payable to the reinsurers.
The Company leases 15,000 square feet of office space in Noida, India. The lease has an initial term of nine years. The monthly rental payment, exclusive of applicable service tax, has increased by five percent every year since the end of the first year of the lease term. In addition, the Company had a lease for office space in Miami, Florida which expired February 28, 2018.
Rental expense under all facility leases was $336, $333 and $304, respectively, during the years ended December 31, 2017, 2016 and 2015.
Provided the agreement is not early terminated, minimum future payments under the service agreement after December 31, 2017 are as follows:
The Company has no restrictions on the payment of dividends to its shareholders except those restrictions imposed by the Florida Business Corporation Act and those restrictions imposed by insurance statutes and regulations applicable to the Company’s insurance subsidiaries. As of December 2017, without prior regulatory approval, $95,310 of the Company’s consolidated retained earnings was free from restriction under the insurance statutes and regulations and available for the payment of dividends in 2018. The following briefly describes certain related and other requirements and restrictions imposed by the states or jurisdiction in which the Company’s insurance subsidiaries are incorporated.
Since inception, HCPCI and TypTap, each has maintained a cash deposit with the Insurance Commissioner of the state of Florida, in the amount of $300, to meet regulatory requirements.
Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the FLOIR if (1) the dividend is equal to or less than the greater of (a) 10.0% of
HCPCI and TypTap are subject to risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of minimum capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risks related to it. Pursuant to the RBC requirements, insurers having less statutory capital than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital
On February 20, 2018, the Company entered into a subscription agreement with another limited partnership and committed to provide $5,000 of capital for investment. The capital is callable at the discretion of the general partner during a commitment period.