On February 5, 2020, we, through HCPCI, entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”). Under the agreement, Anchor will cancel all its policies as of April 1, 2020 and HCPCI will offer short-term replacement policies to those policyholders, who are under no obligation to accept them. The replacement policies will have substantially the same terms and rates as the cancelled polices and will expire on the same dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI will offer renewals to those policyholders at its own rates and terms. At April 1, 2020, HCPCI expects to offer up to approximately 43,000 replacement policies, representing annualized premiums of up to $69,000,000. In addition, HCPCI will pay a cash bonus at the agreed rate ($50,000 per $1,000,000 of premium in force), provided that Anchor is in compliance with the covenants specified in the agreement,
On January 16, 2020, we granted 40,000 shares of restricted stock and options to purchase 110,000 of our common shares at an exercise price of $48 per share to our chief executive officer, Paresh Patel. The options will expire on January 16, 2030. 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 $1,839,000 and $1,234,000, respectively.
On January 21, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are to be paid March 20, 2020 to stockholders of record on February 21, 2020.
Comparison of the Year Ended December 31, 2019 with the Year Ended December 31, 2018
Gross Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $342,079,000 and $343,065,000, respectively. The decrease in 2019 was primarily attributable to a net decrease in policies in force. Although the number of policies in force and gross premiums written from TypTap business have increased steadily, these premiums have yet to be earned over the term of the policies.
Net Realized Investment Losses for the year ended December 31, 2019 were approximately $254,000 versus $6,183,000 of net realized investment gains for the year ended December 31, 2018. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the impact from the rising interest rate trend and to decrease our holdings in municipal bonds as they become less attractive in a low tax rate environment.
Comparison of the Year Ended December 31, 2018 with the Year Ended December 31, 2017
Premiums Ceded for the years ended December 31, 2018 and 2017 were approximately $129,643,000 and $133,635,000, respectively, representing 37.8% and 37.3%, respectively, of gross premiums earned. The $3,992,000 decrease was primarily attributable to an unfavorable adjustment of $12,465,000 to premiums ceded in connection with retrospective provisions under certain reinsurance contracts due to losses incurred by Hurricane Irma during the third quarter of 2017, offset by the recognition of additional premiums ceded of approximately $1,222,000 resulting from the termination of one reinsurance contract during the second quarter of 2018 (See Note 26 -- “Related Party Transactions” to our audited consolidated financial statements under Item 8 of this Annual Report on Form 10-K for additional information) and an increase in premiums ceded attributable to a lower retention level for the reinsurance contract year 2019/20.
For the year ended December 31, 2018, premiums ceded included a net decrease of approximately $485,000 versus a net increase of approximately $5,740,000 for the year ended December 31, 2017 related to retrospective provisions.
Net Premiums Earned for the years ended December 31, 2018 and 2017 were approximately $213,422,000 and $224,618,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.
Net Investment Income for the years ended December 31, 2018 and 2017 was approximately $16,581,000 and $11,439,000, respectively. The year-over-year increase was attributable to an increase in income from limited partnership investments of approximately $2,096,000, an increase of approximately $1,358,000 in income from real estate investments, and an increase in interest income from cash and short-term investments. See Note 5 -- “Investments” under Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Our Losses and Loss Adjustment Expenses amounted to approximately $109,328,000 and $165,629,000 for the years ended December 31, 2018 and 2017, respectively. During 2018, losses and loss adjustment expenses included net losses of approximately $16,520,000 for Hurricane Michael as well as adverse development related to Hurricane Matthew of approximately $2,100,000 and adverse development related to non-catastrophe claims of approximately $9,900,000 primarily related to assignment of benefits litigation. Losses and loss adjustment expenses in 2017 included net losses related to Hurricane Irma of approximately $54,000,000 as well as adverse development related to Hurricane Matthew of approximately $2,500,000 and adverse development related to non-catastrophe claims of approximately $16,200,000 primarily related to assignment of benefits litigation.
Loss on repurchases of Senior Notes for the year ended December 31, 2017 was approximately $743,000, resulting from the early extinguishment of our 8% Senior Notes.
Income Tax Expense for the year ended December 31, 2018 was approximately $9,177,000 for state, federal, and foreign income taxes compared with income tax benefit of approximately $8,731,000 for the year ended December 31, 2017, resulting in an effective tax rate of 34.1% for 2018 and 55.9% for 2017. The decrease was primarily attributable to the positive impact from a lower federal corporate income tax rate effective January 1, 2018, offset by the negative effect of the derecognition of deferred tax assets of approximately $1,825,000 and the nondeductible expense of approximately $1,887,000, both of which related to restricted stock awards with market conditions that will not be met. (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K).
The expense ratio applicable to the year ended December 31, 2018 was 44.6% compared with 42.0% for the year ended December 31, 2017. The increase in our expense ratio was primarily attributable to the decrease in net premiums earned.
The following table summarizes the principal and interest payment obligations for our indebtedness at December 31, 2019:
Our limited partnership investments consist of five private equity funds managed by their general partners. Three of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances. At December 31, 2019, there was an aggregate unfunded capital balance of $15,130,000. See Limited Partnership Investments under Note 5 -- “Investment” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
At December 31, 2019, we had $238,124,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.
As of December 31, 2019, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 23 -- “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.
Represents a lease for office space in Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment and storage space. Liabilities related to our India operations were converted from India Rupees to U.S. dollars using the December 31, 2019 exchange rate.
Amounts represent principal and interest payments over the lives of various long-term debt obligations. See Note 13 -- “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (LAE). Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to 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 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 the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss reserves, we give careful consideration to all available data and actuarial analyses.
Reserves represent estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported. The amount of loss reserves for reported claims consist of case reserves established by our claims department (based on a case-by-case evaluation of the kind of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss) and bulk reserves for additional growth on carried case reserves on known claims. The amounts of reserves for unreported claims and LAE (incurred but not reported claims, or IBNR) are determined using our historical information for each line of business adjusted to reflect current conditions. Inflation is ordinarily implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.
Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior years. As we continue to expand historical data regarding paid and incurred losses, we use this data to develop expected ultimate loss and loss adjustment expense ratios. We then apply these expected loss and loss adjustment expense ratios to earned premium to derive a reserve level for each line of business. In connection with the determination of these reserves, we will also consider other specific factors such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability. Therefore, we use the loss ratio method, among other methods, to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses.
The paid and reported experience-modified Bornhuetter-Ferguson methods are similar to the traditional paid and reported Bornhuetter-Ferguson methods described above, with the distinction being that the initial (unadjusted Bornhuetter-Ferguson) estimates are compared to actual paid or reported losses. A modification factor is selected based on the difference in the actual losses and the estimate based on the expected loss ratio and development pattern. The modification factor is applied to the initial expected ultimate loss to produce modified expected ultimates, which are then utilized as the basis for the traditional paid and reported Bornhuetter-Ferguson methods.
Currently, our estimated ultimate liability is calculated using the principles and procedures described above, which are applied to the lines of business written. However, because the establishment of loss 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.
For the year ended December 31, 2019, we accrued benefits of $6,344,000 and recognized a reduction in ceded premiums of $434,000. For the year ended December 31, 2018, we recognized a net increase in accrued benefits of $743,000 and a net increase in ceded premiums of $258,000. In contrast, 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. The adjustments made in 2017 were attributable to the impact of Hurricane Irma. In combination, for the year ended December 31, 2019, we recognized a decrease in ceded premiums of $6,778,000. For the year ended December 31, 2018, we recognized a net reduction in ceded premiums of $485,000 as opposed to a net increase in ceded premiums of $5,740,000 for the year ended December 31, 2017.
Stock-Based Compensation. We account for stock-based compensation awards under our shareholder approved incentive plans in accordance with the fair value recognition provisions of U.S. GAAP, which require the measurement, and recognition of compensation for all stock-based awards made to employees and non-employee directors including stock options and restricted stock issuances based on estimated fair values. We recognize stock-based compensation in the consolidated statements of income on a straight-line basis over the vesting period. We use the Black-Scholes option-pricing model, which requires the following variables for input to calculate the fair value of each stock award on the option grant date: 1) expected volatility of our stock price, 2) the risk-free interest rate, 3) expected term of each award, 4) expected dividends, and 5) an expected forfeiture rate.
Notes to Consolidated Financial Statements for the Years Ended December 31, 2019, 2018 and 2017
We have audited HCI Group, Inc. and Subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). 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 and has regulatory approval to underwrite residential property and casualty insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. However, Florida is still HCPCI’s primary market. TypTap offers standalone flood and homeowners multi-peril policies to Florida homeowners. The operations of both insurance subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. In particular, the Company is developing technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries.
In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities and one restaurant. See Note 16 -- “Segment Information.”
Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. As a result, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. The Company elected a package of practical expedients, which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. Upon adoption, the Company, as a lessee, recognized ROU assets of approximately $771 and lease liabilities of approximately $812 for all operating leases except for those that have a lease term of 12 months or less.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of HCI Group, Inc. and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships or investments for consolidation pursuant to authoritative accounting guidance related to the consolidation of variable interest entities under the Variable Interest Model prescribed by the FASB. A variable interest entity is consolidated when the Company has the power to direct activities that most significantly impact the economic performance of the variable interest entity and has the obligation to absorb losses or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity. When a variable interest entity is not consolidated, the Company uses the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment 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 Fixed-Maturity Securities in Note 5 -- “Investments”).
Investment in Unconsolidated Joint Venture. The Company has a 90% equity interest in a limited liability company (treated as a joint venture under U.S. GAAP) that owns land for lease or for sale. The joint venture was determined to be a variable interest entity as it lacks sufficient equity to finance its activities without additional subordinated financial support. Despite having a majority equity interest, the Company does not have the power to direct the activities that most significantly impact the economic performance of the joint venture and, accordingly, is not required to consolidate the joint venture as its primary beneficiary. As a result, the Company uses the equity method to account for this investment.
DAC is reviewed to determine if it is recoverable from future premium income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of the disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.
The Company as a lessor leases its commercial and retail properties, boat slips, and docks to non-affiliates at various terms. If the contract gives the Company’s customer the right to control the use of the identified asset, revenue is recognized on a straight-line basis over the lease term. Initial direct costs incurred by the Company are deferred and amortized on a straight-line basis over the lease term. The Company also records an unbilled receivable, which is the amount by which straight-line revenue exceeds the amount billed in accordance with the lease.
Lease Acquisition Costs. Lease acquisition costs represent capitalized costs of finding and acquiring tenants such as leasing commissions, legal, and marketing expenses. The costs are included in other assets in the consolidated balance sheet. The Company amortizes these costs in other operating expenses on a straight-line basis over the term of a lease.
One of the Company’s current reinsurance contracts contains retrospective provisions including terms and conditions that adjust premiums based on the loss experience under the contracts. In such cases, a with-and-without method is used to estimate the asset or liability amount to be recognized at each reporting date. The amount of the estimate is the difference between the net contract costs before and after the loss experience under the contract. Estimates related to premium adjustments are recognized in ceded premiums earned. These estimates are reviewed monthly based on the loss experience to date and as adjustments become necessary. Such adjustments are reflected in the Company’s current operations and recorded in other assets until received upon the expiration of the contracts.
Basic and diluted earnings (loss) per common share. Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP requires the inclusion of restricted stock as participating securities since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. In addition, the intrinsic value of restricted stock declines when the Company experiences operating losses. As a result, holders of the Company’s restricted stock are allocated a proportional share of net income and loss determined by dividing total weighted-average shares of restricted stock by the sum of total weighted-average common shares and shares of restricted stock (the “two-class method”). Diluted earnings (loss) per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as participating equities. During loss periods, common stock equivalents such as stock options and convertible debt are excluded from the calculation of diluted loss per share, as the inclusion would have an anti-dilutive effect. See Note 19 -- “Earnings Per Share” for potentially dilutive securities at December 31, 2019, 2018 and 2017.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326), effective January 1, 2020. This update amends guidance on the recognition and measurement of credit losses for assets held at amortized cost and available-for-sale debt securities. For assets held at amortized cost, ASU 2016-13 eliminates the probable initial recognition threshold and, instead, requires credit losses to be measured using the Current Expected Credit Loss (“CECL”) model. The CECL model requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. For available-for-sale debt securities, credit losses will continue to be measured in a manner similar to the current standard. ASU 2016-13 requires a valuation allowance, rather than a write-down, to be recognized for the Company’s expected credit losses. The valuation allowance account is a deduction from the amortized cost basis of the financial assets to reflect the net amount expected to be collected. Any subsequent changes to the expected credit losses of the financial assets will be recorded in earnings. The Company is required to use the modified-retrospective method by recognizing a cumulative-effect adjustment to the beginning retained income of fiscal year 2020. As for debt securities in which an other-than-temporary impairment had been recognized before the effective date, the prospective transition method will be used. On January 1, 2020, a cumulative-effect adjustment of $453 related to reinsurance recoverable was recognized to beginning retained income with a corresponding entry to an allowance for credit losses account.
Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements.
Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the years ended December 31, 2019, 2018 and 2017 were as follows:
the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
There was no activity related to cumulative credit losses during 2018. During 2017, the Company sold two fixed-maturity securities with cumulative credit losses totaling $475.
Securities with gross unrealized loss positions at December 31, 2019 and 2018, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
At December 31, 2018, there were 82 securities in an unrealized loss position. Of these securities, 35 securities had been in an unrealized loss position for 12 months or longer.
Unrealized holding gains and losses for the comparative year in 2017 were reported in accumulated other comprehensive income.
Proceeds received, and the gross realized gains and losses from sales of equity securities, for the years ended December 31, 2019, 2018 and 2017 were as follows:
Prior to 2018, equity securities classified as available-for-sale were evaluated for other-than-temporary impairment. When the impairment existed, an impairment loss was recognized in the consolidated statement of income. For the year ended December 31, 2017, the Company recognized impairment losses of $1,039 related to available-for-sale equity securities.
Represents the Company’s percentage investment in the fund at each balance sheet date.
At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.
Expected to have a ten-year term and the capital commitment is expected to expire on June 30, 2020.
The capital commitment was extended and is now expected to expire on December 1, 2020.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized net investment income of $1,176, $4,430 and $2,334, respectively, for these investments. At December 31, 2019 and 2018, the Company’s cumulative contributed capital to the partnerships existing at each respective balance sheet date totaled $29,528 and $28,354, respectively, and the Company’s maximum exposure to loss aggregated $28,346 and $32,293, respectively.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized its share of earnings or losses based on the respective partnership’s statement of income. The carrying value of these investments approximates the amount the Company expected to recover at December 31, 2019 and 2018.
For the year ended December 31, 2019, the Company did not receive any cash distributions. For the year ended December 31, 2018, the Company received a cash distribution of $763, representing a combined distribution of $68 in earnings and $695 in capital. 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 following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:
In November 2018, Greenleaf Capital, LLC, the Company’s wholly owned subsidiary, listed for sale its 10-acre waterfront property, consisting of land, commercial and marina buildings in Treasure Island, Florida. With the expectation of a sale within a year, the property was reclassified in the Company’s consolidated balance sheet from real estate investments to assets held for sale, and depreciation ceased. Although this property has drawn interest from several potential buyers since the listing, the Company has yet to receive an offer with acceptable terms. The Company will continue to market the property but can no longer reasonably assume a sale will occur within a year. Accordingly, in December 2019 the property was reclassified back to real estate investments at its carrying value before it was classified as held for sale. The carrying value of $10,031, including additional improvement costs of $221, was then adjusted for catch-up depreciation expense of $261, which is included in net investment income in the Company’s consolidated statement of income.
Real estate investments include land, buildings with office and retail space for lease, outparcels, and marinas. Real estate investments consist of the following as of December 31, 2019 and 2018:
Depreciation and amortization expense related to real estate investments was $1,782, $1,536 and $1,447, respectively, for the years ended December 31, 2019, 2018 and 2017.
From time to time, the Company may invest in financial assets other than stocks, mutual funds and bonds. For the years ended December 31, 2019, 2018, and 2017, net realized gains related to other investments were $54, $69, and $0, respectively.
The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
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, 2019 and 2018:
For the years ended December 31, 2019, 2018 and 2017, amortization expense associated with intangible assets was $608, $604 and $503, respectively. The remaining weighted-average amortization period as of December 31, 2019 was 14.2 years and 10.0 years for anchor tenant relationships and in-place leases, respectively, or a combined weighted average of 11.4 years.
The following table summarizes future maturities of long-term debt as of December 31, 2019, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.
On March 3, 2017, the Company issued 4.25% Convertible Senior Notes in a private offering for an aggregate principal amount of $143,750. The net proceeds were $138,775 after $4,975 in related issuance and transaction costs. The notes mature March 1, 2037 and the cash interest is payable semiannually in arrears on March 1 and September 1 of each year.
Since May 2018, the Company’s cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of December 31, 2019, the conversion rate of the Company’s 4.25% Convertible Notes was 16.3667 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.10 per share.
The note holders who elect to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures 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, 2019, none of the conditions allowing the holders of the Convertible Senior Notes to convert had been met.
At the option of the holders of the Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the Convertible Senior Notes at par on March 1, 2022, March 1, 2027 or March 1, 2032. The Company concluded that this embedded feature is not a derivative financial instrument. In addition, based on economic factors at the time when the Convertible Senior Notes were issued, the Company determined it is probable that the note holders will exercise this option. Thus, the Company amortizes the liability component and related issuance costs associated with the Convertible Senior Notes over the period from March 3, 2017 to March 1, 2022.
On July 6, 2018, Century Park Holdings, LLC, a subsidiary of the Company, entered into a 18-year loan agreement for $6,000 secured by commercial real estate in Tampa, Florida and an associated lease agreement. The loan bears interest at a fixed annual rate of 4.55%. Approximately $41 of principal and interest is payable in 216 monthly installments. The promissory note may be repaid in full or in part after September 1, 2020 as long as the Company provides at least 30 days’ written notice and pays a prepayment consideration as specified in the loan agreement.
During the years ended December 31, 2019, 2018, and 2017, ceded losses of $114,443, $149,120, and $214,082, respectively, were recognized as reductions in losses and LAE. Ceded losses related to Hurricane Irma, Hurricane Michael, other non-catastrophe claims were $103,613, $10,750, and $80, respectively, for 2019 and $143,890 and $5,230, respectively, for 2018. For 2017, the reduction in losses and LAE entirely related to Hurricane Irma. Ceded losses recognized in 2018 included $7,400 attributable to Oxbridge Reinsurance Limited, a related party. At December 31, 2019 and 2018, there were 31 and 38 reinsurers, respectively, participating in the Company’s reinsurance program. Amounts receivable with respect to reinsurers at December 31, 2019 and 2018 were $132,678 and $123,911, respectively. Approximately 61.4% of the reinsurance recoverable balance at December 31, 2019 was receivable from the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. 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’ obligation to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of December 31, 2019. The ratio of assumed premiums earned to net premiums earned for the years ended December 31, 2019, 2018 and 2017 was 0.66%, 0.98%, and 4.9%, respectively.
Net balance represents beginning-of-period liability for unpaid losses and LAE less beginning-of-period reinsurance recoverable for unpaid losses and LAE.
The following is information about incurred and paid claims development as of December 31, 2019, 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.
Excludes losses from multi-peril and dwelling fire insurance (2012 through 2019) and any hurricane event prior to 2019.
Other revenue under real estate primarily consisted of rental income from investment properties.
Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
As of December 31, 2019, maturities of lease liabilities were as follows:
The following table provides quantitative information with regard to the Company’s operating and finance leases.
State net operating loss carryforwards were fully utilized in 2018 and as such, there are no state net operating loss carryforwards as of December 31, 2018.
A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. Thus, the Company did not have a valuation allowance established as of December 31, 2019 or 2018.
Loss attributable to participating securities included the reclassification of cumulative dividends paid on certain restricted stock with market based vesting conditions from retained income to expense. See Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” for additional information.
Stock options and convertible senior notes were excluded due to antidilutive effect.
The Company determined that the forward contract does not meet the characteristics of a derivative instrument and, as such, the transaction resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted earnings (loss) per share.
In November 2018, the Company’s share repurchase forward contract with Deutsche Bank AG, London Branch, entered into in conjunction with the 2013 issuance of the 3.875% Convertible Notes, was settled with the delivery of 622,751 shares of the Company’s common stock.
At December 31, 2019 and 2018, there were no Series B Preferred issued or outstanding.
The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the years ended December 31, 2019, 2018 and 2017:
Information with respect to the activity of unvested restricted stock awards during the years ended December 31, 2019, 2018 and 2017 is as follows:
The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $5,590, $4,111 and $4,217 for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, there was approximately $12,661 and $11,199, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.6 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the years ended December 31, 2019, 2018 and 2017.
During the years ended December 31, 2019, 2018 and 2017, no awards were issued with other than service-based vesting conditions.
The Company also maintains benefit plans for its employees in India including a statutory post-employment benefit plan, or gratuity plan, providing defined, lump-sum benefits. The Company’s liability for the gratuity plan reflects the undiscounted benefit obligation payable as of the balance sheet date, which was based upon the employees’ salary and years of service. At December 31, 2019 and 2018, the amounts accrued under the gratuity plan were $89 and $72, respectively. In addition, the Company provides matching contributions with respect to two defined contribution plans: the Provident Fund and the Employees State Insurance Fund, both of which are available to qualifying employees in India. Expense recognized by the Company for all benefit plans in India was $17, $14 and $17, respectively, for the years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, the Company has a contractual obligation related to one multi-year reinsurance contract. This contract may be cancelled only with the other party’s consent. The future minimum aggregate premium amounts payable to the reinsurer is $2,024 due in 12 months following December 31, 2019. Reinsurance premiums payable after March 31, 2020 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.
The tables below summarize unaudited quarterly results of operations for 2019, 2018 and 2017.
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 2019, without prior regulatory approval, $88,780 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 2020. 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.
The Code requires HCPCI and TypTap to maintain capital and surplus equal to the greater of 10% of their respective liabilities or a statutory minimum as defined in the Code. TypTap, the Company’s insurance subsidiary organized in 2015, was subject to a consent order that required TypTap to maintain minimum capital and surplus of $20,000 during the year ending December 31, 2018. At December 31, 2019, HCPCI and TypTap were required to maintain minimum capital and surplus of $21,700 and $10,000, respectively. At December 31, 2018, HCPCI was required to maintain minimum capital and surplus of $21,700. HCPCI and TypTap were in compliance with these requirements at December 31, 2019 and 2018.
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, 2019, 2018 and 2017, HCPCI’s statutory-basis capital and surplus was approximately $159,000, $149,000 and $153,000, respectively. For the years ended December 31, 2019 and 2018, HCPCI had statutory-basis net income of approximately $18,400 and $20,700, respectively, in contrast with a statutory-basis net loss of approximately $10,500 for the year ended December 31, 2017. At December 31, 2019, 2018 and 2017, TypTap’s statutory-basis capital and surplus was approximately $27,200, $26,000 and $24,000, respectively. For the year ended December 31, 2019, TypTap’s statutory-basis net loss was approximately $5,200. For the year ended December 31, 2018, TypTap had statutory-basis net income of approximately $2,034 as opposed to statutory-basis net loss of approximately $797 for the year ended December 31, 2017. 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, 2019, 2018 and 2017.
In March 2018, the Company purchased six-month certificates of deposit totaling approximately $15,094 from First Home Bank, a local bank in the Tampa Bay area where two of the Company’s directors are members of the bank’s board of directors. In May 2018, the Company moved the funds from the certificate of deposit accounts to a money market account. The interest rates and terms of the accounts were comparable to those offered at the time to other clients of the bank. At December 31, 2019, all accounts with this bank were closed.
On February 5, 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”). Under the agreement, Anchor will cancel all its policies as of April 1, 2020 and HCPCI will offer short-term replacement policies to those policyholders, who are under no obligation to accept them. The replacement policies will have substantially the same terms and rates as the cancelled polices and will expire on the same dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI will offer renewals to those policyholders at its own rates and terms. At April 1, 2020, HCPCI expects to offer up to approximately 43,000 replacement policies, representing annualized premiums of up to $69,000. In addition, HCPCI will pay a cash bonus at the agreed rate ($50 per $1,000 of premium in force), provided that Anchor is in compliance with the covenants specified in the agreement.
On January 16, 2020, the Company granted 40,000 shares of restricted stock and 110,000 options to purchase the Company’s common shares at an exercise price of $48 per share to its chief executive officer, Paresh Patel. The options will expire on January 16, 2030. These share-based awards were granted pursuant to the 2012 Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by the Company. The grant date fair values of the restricted stock and options were $1,839 and $1,234, respectively.