Sorrento, Florida. The real estate includes 5.42 acres of outparcel land intended for ground lease or resale. This outparcel land is owned by us and is adjacent to an ongoing real estate development and construction project, consisting of 10.48 acres of land, which we have financed through the ADC Arrangement.
Rental expense under all facility leases was $304,000, $222,000 and $248,000 during the years ended December 31, 2015, 2014 and 2013, respectively.
We began operations in 2007 by participating in a “take-out program” which is a legislatively mandated program designed to encourage private companies to assume policies from Citizens, a Florida state sponsored insurance carrier. Our growth since inception has resulted primarily from a series of policy assumptions from Citizens and one assumption transaction with HomeWise Insurance Company. This growth track has been beneficial to us in terms of reduced policy acquisition costs and, depending on the timing of the transaction, temporarily lower reinsurance costs. Even though expanding our policyholder base through opportunistic assumptions may continue to be a part of our growth plan, we will also seek opportunities to expand and to provide new product offerings such as our flood product and our wind-only policies.
Our results of operations for the year ended December 31, 2015 reflect income available to common stockholders of $65,861,000, or $5.90 earnings per diluted common share, compared with income available to common stockholders of $62,668,000, or $5.36 earnings per diluted common share, for the year ended December 31, 2014. The year over year improvement in our income available to stockholders was primarily attributable to a $57,632,000 increase in gross premiums earned, resulting from assumptions of homeowners multi-peril policies and wind-only policies from Citizens in December 2014 and February 2015. The increase in 2015 was negatively impacted by increased reinsurance costs as a percentage of gross earned premium, $3,245,000 of net realized losses related to limited partnership investments, $4,681,000 of other-than-temporary impairment losses during 2015, $608,000 of net realized losses from investment sales, increased policy acquisition costs, and increased losses and loss adjustment expenses attributable to increased premiums and the settlement and further development of older claims which were recently reported to us.
Net Premiums Earned for the years ended December 31, 2015 and 2014 were approximately $282,506,000 and $252,065,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.
* Unearned premiums are impacted by the timing and size of any takeout completed during the year net of attrition.
Net Realized Investment Losses for the year ended December 31, 2015 were approximately $608,000 as compared with $4,735,000 of net realized investment gains for the year ended December 31, 2014. The losses in 2015 primarily result 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, 2015 and 2014 were approximately $4,681,000 and $107,000, respectively. During 2015, we recognized impairment losses specific to two fixed-maturity securities and 17 equity securities. Two 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.
Other Operating Expenses for the years ended December 31, 2015 and 2014 were approximately $19,658,000 and $20,790,000, respectively. The $1,132,000 decrease in 2015 was primarily attributable to a $2,411,000 decrease in stock-based compensation partially offset by an increase in other administrative expenses.
Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013
Premiums Ceded for the years ended December 31, 2014 and 2013 were approximately $113,423,000 and $102,865,000, respectively. During the years ended December 31, 2014 and 2013, premiums ceded reflect net reductions of approximately $23,543,000 and $12,521,000, respectively, that relate to certain provisions under certain reinsurance contracts. Premiums ceded were 31.0% and 30.5% of gross premiums earned during the years ended December 31, 2014 and 2013, respectively.
Net Realized Investment Gains for the years ended December 31, 2014 and 2013 were approximately $4,735,000 and $80,000, respectively. The increase in 2014 was due to sales of fixed-maturity securities primarily in the third quarter of 2014.
Our Losses and Loss Adjustment Expenses amounted to approximately $79,468,000 and $65,123,000, respectively, during the years ended December 31, 2014 and 2013.
Other Operating Expenses for the years ended December 31, 2014 and 2013 were approximately $20,790,000 and $19,572,000, respectively. The $1,218,000 increase in 2014 was primarily attributable to a $3,383,000 increase in stock-based compensation and employee benefit expenses offset by a decrease in other general expenses such as professional service fees, director fees, and charitable contributions.
Income Tax Expense for the years ended December 31, 2014 and 2013 was approximately $38,298,000 and $40,891,000, respectively, for state, federal and foreign income taxes resulting in an effective tax rate of 37.9% for 2014 and 38.4% for 2013.
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 equity offerings to support our growth and future investment opportunities.
Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. Substantially all of our losses and loss adjustment expenses are fully settled and paid within approximately 100 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.
In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and also to fund operating expenses. In addition, we intend to continue investing in real estate to maximize returns and diversify our sources of income, pursue acquisition opportunities, or consider other strategic opportunities.
Our long-term debt at December 31, 2015 consisted of 8% Senior Notes due 2020 and 3.875% Senior Convertible Notes due 2019. We make quarterly interest payments of $805,000 on the senior notes due 2020 with quarterly payments due on January 30, April 30, July 30 and October 30. We make semiannual interest payments of approximately $1,996,000 on the convertible notes with payments due in arrears on March 15 and September 15 of each year. See Note 9 - “Long-Term Debt” 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, 2015, 2014 and 2013 are summarized below.
Net cash provided by operating activities for the year ended December 31, 2013 was $55,472,000, which consisted primarily of cash received from net written premiums less cash disbursed for operating expenses, reinsurance premiums and losses and loss adjustment expenses. Net cash used in investing activities of $90,040,000 was primarily due to the purchases of available-for-sale securities of $94,215,000, the purchase of $3,433,000 in property and equipment and the purchase of $565,000 in other investments offset by redemptions and repayments of fixed-maturity securities of $3,607,000, and the proceeds from sales of available-for-sale securities of $4,558,000. Net cash provided by financing activities totaled $97,752,000, which was primarily due to $143,250,000 from the issuance of long-term debt offset by $4,770,000 of related underwriting and issuance costs, $10,902,000 of cash dividend payments, and $30,886,000 of payments to repurchase common stock.
At December 31, 2015, we had $173,246,000 of available-for-sale investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.
As of December 31, 2015, we had unexpired capital commitments for three of the four limited partnership in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 17 - “Commitments and Contingencies” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K and Contractual Obligations and Commitments below for additional information.
The following table summarizes our material contractual obligations and commitments as of December 31, 2015 (amounts in thousands):
(3) Represents the unfunded balance of capital commitment under the subscription agreements related to certain limited partnerships in which we hold an interest.
Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including LAE. Carried loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid, and (ii) claims that have been incurred but not yet reported. 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
For the years ended December 31, 2015 and 2014, we accrued benefits of $21,692,000 and $20,794,000, respectively. For the year ended December 31, 2015, we recognized net ceded premiums of $3,370,000, representing amortization of previously deferred reinsurance costs for increased coverage decreased by an increase of ceded premiums deferred for the period. For the year ended December 31, 2014, we deferred recognition of $2,749,000 in ceded premiums. For the years ended December 31, 2015 and 2014, net reductions in ceded premiums totaled $18,322,000 and $23,543,000, respectively.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014 and
We have audited the accompanying consolidated balance sheets of HCI Group, Inc. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We have audited HCI Group, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
The Company’s insurance subsidiaries also include Alabama domiciled Homeowners Choice Assurance Company, Inc. and TypTap Insurance Company, a Florida insurance company approved by the Florida Office of Insurance Regulation (“FLOIR”) in January 2016.
Adoption of New Accounting Standard. In December 2015, the Company early adopted Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability and must be adopted on a retrospective basis. Prior to the adoption, debt issuance costs were reported as deferred costs in other assets in the Company’s consolidated balance sheet. As a result of adopting this standard, the Company reclassified debt issuance costs from other assets to reduce the carrying value of long-term debt. The following table shows the Company’s other assets, total assets, long-term debt and total liabilities at each reporting date had the change been applied retrospectively as of December 31, 2014 and in all periods thereafter.
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 the fixed-maturity securities 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 other comprehensive income.
In addition, the Company considers any rights or features embedded in the ADC Arrangement that may require bifurcation and derivative accounting. Due to its participation in the expected residual profit, which is deemed a variable interest, the Company evaluates if the Company has the power to direct the activities that significantly impact the economic performance of the entity to which the Company provides financing for possible consolidation as the primary beneficiary under the Variable Interest Model.
Any subsequent changes in terms, rights or the developer’s equity interest that may result in a reclassification or a change in the accounting treatment of the ADC Arrangement will be evaluated. The Company will continually assess the collectability of principal, accrued interest and fees.
Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is included in net investment income and allocated over the estimated useful life of the asset using the straight-line method of depreciation. Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable.
The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned.
Transaction costs related to issuing a debt instrument that embodies both liability and equity components are allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs are recognized and presented as a deduction from the carrying value of the debt. Prior to adopting Accounting Standards Update No. 2015-03 in December 2015, debt issuance costs were recognized in other assets. Both debt discount and deferred debt issuance costs are amortized to interest expense over the expected life of the debt instrument using the effective interest method. Equity issuance costs are a reduction to the proceeds allocated to the equity component.
Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results 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
Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies and is included in gross premiums earned. Unearned premiums represent the portion of the premiums attributable to the unexpired policy term. The Company reviews its policy detail and establishes an allowance for any amount outstanding for more than 90 days. As of December 31, 2015 and 2014, there was no allowance required.
Foreign Currency. The functional currency of the Company’s Indian subsidiary is the U.S. dollar. As such, the monetary assets and liabilities of this subsidiary are remeasured into U.S. dollars at the exchange rate in effect on the balance sheet date. Non-monetary assets and liabilities are
remeasured using historical rates. Expenses recorded in the local currency are remeasured at the prevailing exchange rate. Exchange gains and losses resulting from these remeasurements are included in other operating expenses.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than fifty percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2015, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements.
Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 2015 and 2014. Fair values for securities are based on the framework for measuring fair value established by U.S. GAAP (see Note 5 - “Fair Value Measurements”).
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 including stock options and restricted stock issuances 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 an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company’s restricted stock awards include service, market and performance conditions. As a result, restricted stock grants with market condition are expensed over the derived service period for each separately vesting tranche. For awards with performance
Accounting Standards Update No. 2015-14. In July 2015, the FASB approved a one-year deferral of the effective date of this update, Revenue from Contracts with Customers (Topic 606). This standard will now become effective for the Company beginning with the first quarter of 2018. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
Accounting Standards Update No. 2015-09. In May 2015, the FASB issued Accounting Standards Update No. 2015-09 (“ASU 2015-09”), Financial Services - Insurance (Topic 944), which improves disclosure requirements for all insurance entities that issue short-duration contracts. The amendments in ASU 2015-09 increase transparency of significant estimates made in measuring the
liability for unpaid claims and claim adjustment expenses, improve comparability by requiring consistent disclosure of information, and provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of cash flows and the development of loss reserve estimates. ASU 2015-09 is effective for all public entities for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2017. Early adoption is permitted. Application of this guidance will have no effect on the Company’s consolidated results of operations and comprehensive income.
The Company holds investments in fixed-maturity securities and equity securities that are classified as available-for-sale. At December 31, 2015 and 2014, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:
At December 31, 2015 and 2014, fixed-maturity securities include $113 of U.S. Treasury securities related to a statutory deposit held in trust for the Treasurer of Alabama.
Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the years ended December 31, 2015, 2014 and 2013 were as follows:
The Company regularly reviews its individual impaired investment securities for other-than-temporary impairment. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
Securities with gross unrealized loss positions at December 31, 2015 and 2014, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
(a) Represents the Company’s percentage investment in the fund at the balance sheet date.
For the years ended December 31, 2015 and 2014, the Company recognized net investment losses of $3,244 and $90, respectively, for these investments. At December 31, 2015 and 2014, the Company’s cumulative contributed capital to the partnerships totaled $27,276 and $2,640, respectively, and the Company’s maximum exposure to loss aggregated $23,930 and $2,550, respectively. The limited partners received no income distributions during the years ended December 31, 2015 and 2014.
For the years ended December 31, 2015 and 2014, the Company recognized its share of earnings or losses based on the partnership’s statement of income The carrying value of these investments approximates the amount the Company expected to recover at December 31, 2015 and 2014.
In September 2014, Melbourne FMA, LLC, a wholly owned subsidiary, entered into a joint venture agreement with FMKT Sponsor, LLC to organize FMKT Mel JV, LLC (“FMJV”), a Florida limited liability company. Melbourne FMA and FMKT Sponsor initially contributed cash of $4,500 and $500, respectively, for equity interests in FMJV of 90% and 10%, respectively. FMJV currently owns land on which a retail shopping center is being constructed for lease or for sale in Melbourne, Florida. During 2015, the Company contributed additional cash of $435 to FMJV. FMJV used the additional funds to survey additional land for development. In September 2015, part of the construction project was completed and leased to a regional supermarket chain. FMJV is deemed a variable interest entity due to its lack of sufficient equity to finance its operations without direct or indirect additional financial support from parties to the joint venture. Although Melbourne FMA holds a majority interest in FMJV, certain major economic decisions specified in the agreement are not under Melbourne FMA’s control. As a result, Melbourne FMA is not the primary beneficiary and is not required to consolidate FMJV.
In addition, FMJV is contractually required to engage affiliates of FMKT Sponsor to manage and develop the project, and also operate the property while the joint venture agreement is in effect. The agreement includes FMKT Sponsor’s right of sale and first offer as well as an embedded option under which Melbourne FMA can purchase the entire interest of FMKT Sponsor. Under the right of sale and first offer, Melbourne FMA can either choose to purchase the interest of FMKT Sponsor in the developed property or approve the sale of the developed property to a third party buyer. Either party can initiate these provisions after the expiration of a restricted period.
At December 31, 2015, $150,048 or 56.0% of the Company’s cash and cash equivalents were deposited at three national banks and included $65,291 in three custodial accounts. At December 31, 2014, $234,025 or 74.4% of the Company’s cash and cash equivalents were deposited at three national banks and included $48,674 in three custodial accounts. At December 31, 2015 and 2014, the Company’s cash deposits at any one bank generally exceed the Federal Deposit Insurance Corporation’s $250 coverage limit for insured deposit accounts.
As described in Note 4 - “Investments” under ADC Arrangement, the ADC Arrangement represents a financing agreement with a purchase option between Greenleaf Capital and a property developer. Based on the characteristics of this ADC Arrangement which are similar to those of an investment, combined with the expected residual profit being greater than 50%, the arrangement is included in real estate investments at its carrying value in the balance sheet. Projected future cash inflows at maturity are discounted using a prevailing borrowing rate to estimate its fair value that relies on Level 3 inputs.
As described in Note 4 - “Investments” under Limited Partnership Investments, the Company has interests in limited partnerships which are private equity funds. Pursuant to U.S. GAAP, these funds are required to use fair value accounting; therefore, the estimated fair value approximates the carrying value of these funds.
Long-term debt includes the Company’s 8% senior notes due 2020 and 3.875% convertible senior notes due 2019. The 8% senior notes trade on the New York Stock Exchange. The estimated fair value of the 8% senior notes is based on the closing market price on December 31, 2015. The 3.875% convertible senior notes were sold in a private offering. The fair value of the 3.875% convertible senior notes is estimated using a discounted cash flow method that relies on Level 3 inputs.
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2015 and 2014.
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, 2015 and 2014:
The senior notes contain customary restrictive covenants relating to merger, modification of the indenture, subordination, issuance of debt securities and sale of assets, the most significant of which include limitations with respect to certain designated subsidiaries on the incurrence of additional indebtedness or guarantees secured by any security interest on any shares of their capital stock. The senior note covenants also limit the Company’s ability to sell or otherwise dispose of any shares of capital stock of such designated subsidiaries. The senior note covenants do not contain any restrictions on the Company’s payment or declaration of dividends nor require a sinking fund to be established for the purpose of redemption. The Company was in compliance with the senior note covenants during 2015 and 2014.
Interest expense with respect to the senior notes was approximately $3,419, $3,403 and $3,228, respectively, for the years ended December 31, 2015, 2014 and 2013 and included amortization of debt issuance costs of approximately $199, $182 and $159, respectively. The effective interest rate, taking into account the stated interest expense and amortization of debt issuance costs, approximates 8.7%.
The Company’s Convertible Senior Notes (the “Convertible Notes”) were issued in a private offering for an aggregate principal amount of $103,000. The Convertible Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. The Convertible Notes bear interest at a rate of 3.875% per year, payable semiannually in arrears on March 15 and September 15 of each year. The Convertible Notes will mature on March 15, 2019 unless repurchased or converted prior to such date. The Company may not redeem the Convertible Notes prior to maturity unless requested by the note holders under certain events specified in the indenture.
The note holders who elect to convert their Convertible Notes in connection with a fundamental change as described in the indenture will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of December 31, 2015, none of the conditions allowing the note holders to convert had been met.
The Company determined that the embedded conversion feature is not a derivative financial instrument but rather is required to be separately accounted for in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance, the Company accounted for the equity component of the embedded conversion feature as a reduction in the carrying amount of the debt and an increase in additional paid-in capital.
Certain of the reinsurance contracts are multi-year contracts that include retrospective provisions that adjust premiums, increase the amount of future coverage, or result in profit commissions in the event losses are minimal or zero. These adjustments are reflected in the statements of income as net reductions in ceded premiums of $18,322, $23,543 and $12,521, respectively, for the years ended December 31, 2015, 2014 and 2013. At December 31, 2015 and 2014, other assets included $36,176 and $28,596, respectively, and prepaid reinsurance premiums included $2,625 and $5,983, respectively, related to these adjustments. Management believes the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the individual reinsurer’s financial position.
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, 2014, 2013, and 2012 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify, if any, interest and penalties arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There have been no material amounts of interest or penalties for the years ended December 31, 2015 and 2014. Effective October 20, 2014, the Internal Revenue Service notified the Company that the examination of the Company’s 2011 federal income tax return was completed with no change to the Company’s reported tax. In addition, as of April 18, 2014, the Florida Department of Revenue completed an audit of the state income tax returns filed for 2010, 2011, and 2012. The audit resulted in no material changes to the state income taxes originally reported.
A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. As a result, the Company did not have a valuation allowance established as of December 31, 2015 or 2014.
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.
In March 2014, the Company’s Board of Directors authorized a one-year plan to repurchase up to $40,000 of the Company’s common shares before commissions and fees. This repurchase plan expired March 31, 2015. During the years ended December 31, 2015 and 2014, the Company repurchased and retired a total of 37,869 and 990,701 shares, respectively, at a weighted average price per share of $42.49 and $38.69, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended December 31, 2015 and 2014 were $1,610, or $42.51 per share, and $38,354, or $38.71 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 entitles 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 is intended to prevent any unsolicited takeover attempt that is unfair and unfavorable to the Company’s shareholders. The Right will not interfere with any merger approved by the Company’s Board of Directors.
On February 4, 2014, the Company announced its Board of Directors fixed April 1, 2014 as the cancellation date for the conversion rights on its 7% Series A cumulative convertible preferred stock. The Company later extended the conversion privilege in April 2014. On June 2, 2014, 3,386 shares of Series A Preferred were redeemed at $10 per share, resulting in the derecognition of $4 in dividends payable. During the year ended December 31, 2014, holders of 107,298 shares of Series A Preferred converted their Series A Preferred shares to 107,298 shares of common stock. No shares of Series A Preferred have been outstanding since June 2, 2014.
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. At December 31, 2015, there were 4,205,967 shares available for grant.
A summary of the stock option activity for the years ended December 31, 2015, 2014 and 2013 is as follows (option amounts not in thousands):
The following table summarizes information about options exercised, and the fair value of vested options for the years ended December 31, 2015, 2014 and 2013 (option amounts not in thousands):
Information with respect to the activity of unvested restricted stock awards during the years ended December 31, 2015, 2014 and 2013 is as follows (share amounts not in thousands):
The Company recognized compensation expense related to restricted stock, which is included in other operating expenses, of $5,212, $8,104 and $5,346 for the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015 and 2014, there was approximately $7,641 and $10,355, 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 21 months. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards as well as related paid dividends, and the fair value of vested restricted stock for the years ended December 31, 2015, 2014 and 2013.
Rental expense under all facility leases was $304, $222 and $248, respectively, during the years ended December 31, 2015, 2014 and 2013.
Provided the agreement is not early terminated, minimum future payments under the service agreement after December 31, 2015 are as follows:
As a direct premium writer in the state of Florida, the Company is subject to mandatory assessments by Citizens and the Florida Hurricane Catastrophe Fund (“FHCF”). These assessments are paid based on a percentage of the Company’s direct written premium by line of business. Effective January 1, 2015, the FHCF assessment imposed on all property insurance policies was removed. For the years ended December 31, 2014 and 2013, HCPCI paid assessments to FHCF amounting to $4,481 and $4,103, respectively. In addition, the Citizens assessment was eliminated effective July 1, 2015. HCPCI paid assessments to Citizens of $2,756, $3,447 and $3,156, respectively, for the years ended December 31, 2015, 2014 and 2013. These assessments are recorded as a surcharge in premium billings to insureds. The Citizens surcharge rate in effect during the first five-months of 2015 was 1.0%. As of December 31, 2014 and 2013, the surcharge rates in effect for FHCF and Citizens were 1.3% and 1.0%, respectively, for each of these years.
As described in Note 4 - “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At December 31, 2015, there was an unfunded balance of $18,224.
In September 2013, the Company received a notice of intent to make audit adjustments from the Florida Department of Revenue in connection with the Department’s audit of the Company’s premium tax returns for the three-year period ended December 31, 2012. The auditor’s proposed adjustments primarily related to the Department’s proposed disallowance of the entire amount of $1,754 in Florida salary credits applicable to that period. The proposed adjustment, which included interest through September 10, 2013, approximated $1,913. To resolve the matter, the Company entered into negotiations with the Department and reached an agreement in principle whereby certain of the Company’s subsidiaries would individually file and pay state reemployment taxes plus interest covering the periods under audit through the second quarter of 2014. The payroll of certain of these subsidiaries would then continue to qualify for substantially all of the salary tax credits claimed by the Company. Any incremental reemployment taxes due as a result of the subsidiaries’ separate reemployment tax filings would be netted against amounts refundable to the parent for the same periods during which the parent filed and paid state reemployment taxes as a single payer. During the quarter ended September 30, 2015, the Department’s review of the reemployment matter was substantially complete and the Department indicated a net refund of reemployment tax was due to the Company. As such, and based on the status and expected resolution, the Company reversed approximately $140 during the quarter ended September 30, 2015, which was the net amount accrued as of December 31, 2014 related to this contingency. In December 2015, the Department issued its Notice of Decision indicating the Company owes approximately $38 in full settlement of the premium tax and interest. The Company is awaiting a final decision with respect to the state reemployment taxes due to the Company. The ultimate amount payable or refundable is not anticipated to be material.
In December 2014, the company received two nearly identical letters from a single law firm representing two individual shareholders demanding the Company take action against its directors to remedy alleged damages to the Company. The Company, each of the directors and the two shareholders have agreed to a settlement. The directors agreed to cancel portions of their restricted stock awards aggregating 160,000 restricted shares, including 100,000 restricted shares issued to the Company’s chief executive officer. Those restricted shares were cancelled March 2, 2016. As a result, the Company’s results of operations for the year ended December 31, 2015 included $936 of expense related to this settlement, primarily expense related to the reclassification from retained earnings of dividends paid through December 2015 and expense related to the acceleration and recognition of the unamortized portion of accounting expense determined at the grant date. The board members and the Company also agreed to implement certain non-financial corporate governance changes. The board expects to revisit the chief executive’s equity based compensation during 2016. The Company is not aware of any other pending shareholder demands.
The tables below summarize unaudited quarterly results of operations for 2015, 2014 and 2013.
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 2015, without prior regulatory approval, $81,146 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 2016. 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.
U.S. GAAP differs in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory-basis). These entities’ statutory-basis financial statements are presented on the basis of accounting practices prescribed or permitted by the FLOIR. The FLOIR has adopted the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual as the basis of its statutory accounting practices. At December 31, 2015, 2014 and 2013, HCPCI’s statutory-basis capital and surplus was approximately $195,000, $168,000 and $116,900, respectively. HCPCI had statutory-basis net income of approximately $57,400, $48,900 and $45,700, respectively, for the years ended December 31, 2015, 2014 and 2013. Statutory-basis surplus differs from stockholders’ equity reported in accordance with U.S. GAAP primarily because policy acquisition costs are expensed when incurred. In addition, the recognition of deferred tax assets is based on different recoverability assumptions.
As a result, HCPCI was qualified to make dividend payments at December 31, 2015, 2014 and 2013.
In addition, Florida property and casualty insurance companies are required to adhere to prescribed premium-to-capital surplus ratios. Florida state law requires that the ratio of 90% of written premiums divided by surplus as to policyholders does not exceed 10 to 1 for gross written premiums or 4 to 1 for net written premiums. The ratio of gross and net written premium to surplus for the year ended December 31, 2015, was 1.85 to 1, and 1.00 to 1, respectively. The ratio of gross and net written premium to surplus for the year ended December 31, 2014, was 2.21 to 1, and 1.50 to 1, respectively. The ratio of gross and net written premium to surplus for the year ended December 31, 2013, was 2.76 to 1, and 1.68 to 1, respectively.
Homeowners Choice Assurance Company, Inc. (“HCA”) is domiciled in Alabama and was organized in 2013. HCA is required to maintain minimum paid-in capital of $500. In addition, HCA must maintain a minimum deposit in trust of $100 with the Treasurer of Alabama. At December 31, 2015 and 2014, HCA’s statutory capital and surplus was $1,917 and $1,926, respectively. Similar to the Company’s insurance subsidiaries in Florida, HCA is required to file statutory-basis financial statements with the Alabama Department of Insurance, which has also adopted the NAIC Accounting Practices and Procedures Manual as the basis of its statutory accounting practices.
HCPCI and HCA 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 inadequacy. At December 31, 2015 and 2014, the Company’s insurance subsidiaries individually exceeded any applicable minimum risk-based capital requirements and no corrective actions have been required. As of December 31, 2015, the combined statutory capital and surplus, minimum RBC requirement, and minimum capital and surplus of the Company’s U.S. insurance subsidiaries were approximately $196,810, $106,469, and $21,162, respectively.
On January 8, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.30 per common share. The dividends are scheduled for payment on March 18, 2016 to stockholders of record on February 19, 2016.
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 bears a fixed annual interest rate of 4%. Principal and interest are payable in 180 monthly installments. The loan is intended to be used for real estate development projects or other general business purposes.
On January 15, 2016, TypTap Insurance Company, the Company’s new Florida insurance subsidiary, was authorized by the Florida Office of Insurance Regulation to transact insurance in the state of Florida as a property and casualty insurer. TypTap is required to maintain minimum capital and surplus of $20,000. In January 2016, the Company contributed capital in the amount of $25,000 to TypTap of which $300 was allocated to meet TypTap’s statutory deposit requirement.