Tampa, Florida. The real estate consists of 3.5 acres of land, a three-story building with a gross area of 122,000 square feet, and a four-level parking garage. This facility is 60% occupied by us and serves as our headquarters. The remaining space is leased to non-affiliates.
Treasure Island, Florida. The real estate consists of approximately 10 acres of waterfront property and land improvements, a restaurant and a marina facility. The marina facility and the restaurant are currently owned and operated by us. This property has been listed for sale since November 2018 and has yet to receive an offer to purchase with acceptable terms. As a result, we reclassified this property from assets held for sale back to real estate investments in December 2019.
Tierra Verde, Florida. The real estate consists of 7.1 acres of waterfront property, a dry rack storage building with gross area of 57,500 square feet, and two buildings with retail space having an aggregate gross area of approximately 23,000 square feet. This marina facility is owned and operated by us. Approximately 5% of the available retail space is occupied by us, 54% of the retail space is leased to non-affiliates, and the remaining space is available for lease.
Riverview, Florida. The real estate consists of 2.57 acres of land, 1.27 acres of which is leased to Thorntons, LLC, a gas station and convenience store chain. Our retail structure with 8,400 square feet of net rentable space is situated on the remaining land. Approximately 88% of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Melbourne, Florida. The real estate includes 2.26 acres of outparcel land intended for ground lease, resale or future development and a retail shopping center with 49,995 square feet of rentable area. Approximately 42% of the rentable space is currently leased to Fresh Market supermarket. Approximately 95% of the rentable space is leased to non-affiliates and the remaining space is available for lease.
Miami Lakes, Florida. We lease approximately 5,600 square feet of office space for our claims related administration. The lease commenced March 1, 2018 and has an initial term of approximately three years.
We began insurance operations 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. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens.
Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. For instance, HCPCI will accept the transfer of approximately 43,000 homeowners’ insurance policies from a troubled insurance company in April 2020 as described in the Recent Developments section below.
On February 28, 2020, we entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of $10,000,000. The agreement bears interest at a fixed rate of 3.90% and is secured by our property in Melbourne, Florida and the assignment of associated lease agreements. Approximately $60,000 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of $5,007,000 including principal and unpaid interest payable on March 1, 2032. The promissory note may be repaid in full as long as the Company provides at least 60 days’ written notice and pays a prepayment premium plus a processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due in February 2020.
Our results of operations for the year ended December 31, 2019 reflect net income of $26,576,000, or $3.31 earnings per diluted common share, compared with a net income of $17,725,000, or $2.34 earnings per diluted common share, for the year ended December 31, 2018. The year-over-year increase was primarily attributable to an increase in net premiums earned of $2,892,000, a net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains/losses) of $8,776,000, and a $5,041,000 decrease in interest expense, offset by a $5,204,000 increase in payroll costs and other personnel expenses and an increase in policy acquisition expenses of $3,554,000.
Net Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $216,314,000 and $213,422,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.
Net Investment Income for the years ended December 31, 2019 and 2018 was approximately $13,642,000 and $16,581,000, respectively. The year-over-year decrease was primarily attributable to a decrease in income from limited partnership investments of approximately $3,254,000. See Note 5 -- “Investments” under Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Net Unrealized Investment Gains for the year ended December 31, 2019 were approximately $7,950,000 versus approximately $10,202,000 of net unrealized investment losses for the year ended December 31, 2018. Net unrealized investment gains or losses represent the net change in the fair value of equity securities. The increase in 2019 reflected an improvement in the fair value of equity securities compared with values prevalent during the general downturn in the securities markets in December 2018.
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2019 and 2018 were approximately $42,497,000 and $38,943,000, respectively. The increase from 2018 was primarily attributable to the organic growth of TypTap business resulting in increased agent commissions and property inspection costs.
General and Administrative Personnel Expenses for the years ended December 31, 2019 and 2018 were approximately $31,112,000 and $25,908,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the payroll costs associated with the processing and settlement of Hurricane Irma claims which are recoverable from reinsurers under reinsurance contracts. The year-over-year increase of $5,204,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late March 2019, higher share-based compensation expense, and an increase in employee incentive bonus.
Interest Expense for the years ended December 31, 2019 and 2018 was approximately $13,055,0000 and $18,096,000, respectively. The decrease resulted from the repayment of our 3.875% convertible senior notes in March 2019.
Income Tax Expense for the year ended December 31, 2019 was approximately $9,517,000 for state, federal, and foreign income taxes compared with income tax expense of approximately $9,177,000 for the year ended December 31, 2018, resulting in an effective tax rate of 26.4% for 2019 and 34.1% for 2018. The decrease was primarily attributable to 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 occurred in 2018 and related to restricted stock awards with market conditions that were not 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 loss ratio applicable to the year ended December 31, 2019 (losses and loss adjustment expenses incurred related to net premiums earned) was 49.7% compared with 51.2% for the year ended December 31, 2018. The decrease was primarily due to the increase in net premiums earned combined with the decrease in losses and loss adjustment expenses.
The expense ratio applicable to the year ended December 31, 2019 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 45.7% compared with 44.6% for the year ended December 31, 2018. The increase in our expense ratio was primarily attributable to the increases in policy acquisition expenses and general and administrative personnel expenses, offset by the increase in net premiums earned as described earlier.
The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the year ended December 31, 2019 was 95.4% compared with 95.8% for the year ended December 31, 2018. The decrease was primarily to the increase in net premiums earned as described earlier.
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the year ended December 31, 2019 was 60.3% compared with 59.6% for the year ended December 31, 2018. The increase in 2019 was primarily attributable to the net increase in total expenses.
Our results of operations for the year ended December 31, 2018 reflect net income of $17,725,000, or $2.34 earnings per diluted common share, compared with a net loss of $6,893,000, or $0.75 loss per common share, for the year ended December 31, 2017. Losses and loss adjustment expenses were approximately $56,301,000 lower in 2018, attributable to lower catastrophe losses and decreased adverse development. Catastrophe losses in 2018 primarily included net losses of approximately $16,520,000 from Hurricane Michael versus net losses of approximately $54,000,000 from Hurricane Irma in 2017. The year-over-year improvement in losses and loss adjustment expenses was offset by a net $11,196,000 decrease in net premiums earned, a net $3,315,000 decrease in income from investment activities and a $1,329,000 increase in interest expense. Income tax expense in 2018 was negatively impacted by the derecognition of deferred tax assets of approximately $1,825,000 related to unvested restricted stock with market conditions and the nondeductible expense of approximately $1,887,000 associated with the reclassified dividends on such restricted stock awards, offset by a lower federal corporate income tax rate effective January 1, 2018.
Unearned premiums are impacted by the timing and size of any takeout completed during the year net of attrition.
Net Realized Investment Gains for the years ended December 31, 2018 and 2017 were approximately $6,183,000 and $4,346,000, respectively. 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.
Net Unrealized Investment Losses for the year ended December 31, 2018 were approximately $10,202,000 versus approximately $92,000 of net unrealized investment gains for the year ended December 31, 2017. Net unrealized investment gains or losses represent the net change in the fair value of equity securities. The decrease in 2018 primarily resulted from the adoption of the new accounting standard with regard to equity securities, combined with a general downturn in the U.S. securities markets in December 2018.
General and Administrative Personnel Expenses for the years ended December 31, 2018 and 2017 were approximately $25,908,000 and $25,127,000, respectively. The year-over-year increase of $781,000 was primarily attributable to the recognition of approximately $1,505,000 of cumulative dividends paid on unvested restricted stock awards of which market conditions will not be met and an increase of approximately $606,000 in employee incentive bonus, offset by an increase in recoverable Hurricane Irma payroll costs of $1,231,000 and lower share-based compensation expense during 2018.
The loss ratio applicable to the year ended December 31, 2018 was 51.2% compared with 73.8% for the year ended December 31, 2017. The decrease was primarily due to the decrease in losses and loss adjustment expenses as described previously.
At the option of the note holder, we may be required to repurchase for cash all or any portion of the note on March 1, 2022, March 1, 2027 or March 1, 2032.
In December 2019, our Board of Directors extended the expiry date of our share repurchase plan approved in 2018 to March 15, 2020. See Note 20 -- “Stockholders’ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.
Real estate has long been a significant component of our overall investment portfolio. It helps offset the volatility of other high-risk assets. Thus, we may consider increasing our real estate investment portfolio should an opportunity arise.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2019, 2018 and 2017 are summarized below.
Net cash provided by operating activities for the year ended December 31, 2019 was approximately $54,047,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $105,676,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $50,459,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $45,616,000, the proceeds from redemptions and maturities of fixed-maturity securities of $59,343,000, the proceeds from sales and maturities of short-term and other investments of $67,398,000, and the distributions of $2,121,000 from limited partnership investments, offset by the purchases of fixed-maturity and equity securities of $107,299,000, the purchases of real estate investments of $11,481,000, the purchases of property and equipment of $2,887,000, the purchases of short-term and other investments of $1,178,000, and the limited partnership investments of $1,174,000. Net cash used in financing activities totaled $114,724,000, which was primarily due to the repayment of long-term debt of $91,318,000, $20,054,000 used in our share repurchases, and $12,706,000 of net cash dividend payments, offset by $9,750,000 of borrowings from our revolving credit facility.
Net cash provided by operating activities for the year ended December 31, 2018 was approximately $28,595,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $128,300,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $17,678,000 was primarily due to the purchases of fixed-maturity and equity securities of $165,424,000, the purchases of short-term and other investments of $201,538,000, the purchases of real estate investments of $7,472,000, and the limited partnership investments of $7,182,000, offset by the proceeds from sales of fixed-maturity and equity securities of $148,248,000, the proceeds from redemptions and maturities of fixed-maturity securities of $82,177,000, and the proceeds from sales and maturities of short-term and other investments of $135,256,000. Net cash used in financing activities totaled $27,288,000, which was primarily due to $21,166,000 used in our share repurchases, $10,351,000 of net cash dividend payments and the repayment of long-term debt of $1,127,000, offset by the proceeds from the issuance of 4.55% promissory note of $6,000,000.
The following table summarizes our material contractual obligations and commitments as of December 31, 2019 (amounts in thousands):
Represents the minimum payment of reinsurance premiums under one multi-year reinsurance contract. 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.
A factor load to loss and allocated loss adjustment expenses reserves for the unallocated LAE.
Description of Ultimate Loss Estimation Methods. The reported loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be reasonably predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor derived from development patterns observed in the historical reported data. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy for the historical experience that is considered. In order to derive loss development patterns that are predictive for our business, we compile and review loss development triangles of our experience on an accident quarter basis, and select loss development factors based on indications from this analysis of our data.
The loss ratio method used by us relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of currently reported losses. The expected loss ratio is multiplied by earned premium to produce ultimate losses. Reported losses are then subtracted from this estimate to produce expected unreported losses.
The loss ratio method is more useful than other models for immature loss years. For these immature years, the amounts reported or paid may not be fully predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when variations in reporting or payment patterns distort the historical development of losses.
Finally, we employ several variations of the frequency/severity method for exposures that do not tend to follow historical payment and reported patterns, such as catastrophes as well as for the separate analysis of litigated claims, discussed below. For such exposures, we estimate future development of reported claims and average severities on IBNR claims. We combine this estimate with our open claims in order to derive an estimate of expected unreported losses. Paid losses are added to this estimate in order to derive an estimate of ultimate losses. This method is based on the assumption that future unreported claims and the average severity of open claims and unreported claims can be reasonably estimated from the experience available.
While the property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and mold, and other uncertain or environmental exposures, we have not experienced significant losses from these types of claims. We have experienced material losses associated with sinkholes in past years, but the materiality of this hazard has decreased significantly since the passing of Florida Senate Bill 408. We continue to segregate this data in our derivation of estimated required reserves. While the losses we have experienced from exposures to catastrophes have not historically been material, we have experienced significant losses related to recent catastrophes. These losses have followed materially different development patterns than the balance of our experience. To address this situation, we separate this exposure from the remainder of the business and derive reserves specific to each catastrophe event. We have seen a significant difference in development patterns between litigated and non-litigated claims. For instance, claims associated with Assignment of Benefits (“AOB”) lawsuits have driven up our legal and claim settlement costs in past years. It is still too early for us to gauge the impact of the AOB reform passed by the Florida Legislature during 2019 in curbing inflated claims and volumes of lawsuits. Therefore, we have performed the reserving methods separately on these two groups of claims as well. Total reserves are determined by adding the reserves related to each line of business.
As of December 31, 2019, we had $9,480,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limits. As of December 31, 2018, accrued benefits totaled $3,136,000.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2020 expressed an unqualified opinion.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019, and our report dated March 6, 2020, expressed an unqualified opinion on those consolidated financial statements.
Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less than three months to be cash and cash equivalents. At December 31, 2019 and 2018, cash and cash equivalents consisted of cash on deposit with financial institutions and securities brokerage firms, commercial paper, and certificates of deposit.
When reviewing impaired securities, the Company considers its ability and intent to hold these securities and whether it is probable that the Company will be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intends to sell or it is probable that the Company will have to sell before recovery or maturity, the unrealized losses are recognized as other-than-temporary losses in income. In instances where there are credit related losses associated with the impaired fixed-maturity securities for which the Company asserts that it does not have the intent to sell, and it is probable that the Company will not be required to sell until a market price recovery or maturity, the amount of the other-than-temporary impairment loss related to credit losses is recognized in income, and the amount of the other-than-temporary impairment loss related to other non-credit factors such as changes in interest rates or market conditions is recorded as a component of accumulated other comprehensive income.
Equity Securities. Equity securities represent ownership interests held by the Company in entities for investment purposes. Unrealized holding gains and losses related to equity securities are reported in the consolidated statement of income as net unrealized investment gains and losses. Realized investment gains and losses from sales are recorded on the trade date and are determined using the first-in first-out method (see Equity Securities in Note 5 -- “Investments”). Prior to January 1, 2018, these equity securities were classified as either available-for-sale or trading and were carried at fair value on the Company’s consolidated balance sheet. Unrealized holding gains and losses from the changes in the fair values of available-for-sale equity securities were reported in accumulated other comprehensive income.
Short-Term Investments. Short-term investments include certificates of deposit issued by financial institutions and commercial paper with original maturities of more than three months but less than one year at date of acquisition. These short-term investments are carried at cost or amortized cost, which approximates fair value.
Limited Partnership Investments. The Company has interests in limited partnerships that are not registered under the United Stated Securities Act of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public market and any withdrawal is subject to the terms and conditions of the partnership agreement. The Company has no influence over partnership operating and financial policies. The Company did not elect the fair value option and, therefore, uses the equity method to account for these investments (see Limited Partnership Investments in Note 5 -- “Investments”). The Company generally recognizes its share of the limited partnership’s earnings or losses on a three-month lag.
In determining the fair value of the assets less costs to sell, the Company primarily relies on the value determined by an independent appraiser. If the estimated fair value less costs to sell is less than the carrying value of the asset, the asset is written down to its estimated fair value less costs to sell and an impairment loss is recognized in the consolidated statement of income. Depreciation is not recorded while assets are classified as held for sale.
If the contract is or contains a lease and the Company has the right to control the use of the identified asset, the ROU asset and the lease liability is measured from the lease component of the contract and recognized on the consolidated balance sheet. In measuring the lease liability, the Company uses its incremental borrowing rate for a loan secured by a similar asset that has a term similar to the lease term to discount the lease payments. The contract is further evaluated to determine the classification of the lease as to whether it is finance or operating. If the lease is a finance lease, the ROU asset is depreciated to depreciation expense over the shorter of the useful life of the asset or the lease term. Interest expense is recorded in connection with the lease liability using the effective interest method. If the lease is an operating lease, the ROU asset is amortized to lease expense on a straight-line basis over the lease term. For the presentation of finance leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with property and equipment, net, and long-term debt, respectively. For the presentation of operating leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with other assets and other liabilities, respectively.
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. At December 31, 2019 and 2018, allowances for uncollectible premiums were $528 and $558, respectively.
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, 2019, 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, 2019 and 2018. Fair values for securities or financial instruments are based on the framework for measuring fair value established by U.S. GAAP (see Note 7 -- “Fair Value Measurements”).
Accounting Standards Update No. 2019-12. In December 2019, the FASB issued Accounting Standards Update No. 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. It eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill, along with other clarifications. ASU 2019-12 is effective for the Company beginning with the first quarter of 2021. Early adoption is permitted. This guidance will not have a material impact on the Company’s consolidated financial statements. However, it will impact the Company’s future income tax disclosures in its notes to the consolidated financial statements.
The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At December 31, 2019 and 2018, 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:
Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at December 31, 2019 and 2018 are as follows:
The Company regularly reviews its individual investment securities for other-than-temporary impairment. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including-
The Company recognized $289 of credit-related impairment loss on one fixed-maturity security for the year ended December 31, 2019 in the consolidated statement of income compared with $80 of non-credit related impairment loss pertaining to one fixed-maturity security for the year ended December 31, 2018. For the year ended December 31, 2017, the Company recognized impairment losses of $428 related to the sale of four intent-to-sell fixed-maturity securities.
At December 31, 2019, there were eight securities in an unrealized loss position. Of these securities, none had been in an unrealized loss position for 12 months or longer.
The Company holds investments in equity securities measured at fair values which are readily determinable. At December 31, 2019 and 2018, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:
The table below presents the portion of unrealized gains and losses in the Company’s consolidated statement of income for the periods related to equity securities still held.
During the year ended December 31, 2019, the Company received in cash a return on investment of $4,176 and a return of capital of $2,121 compared with a return on investment of $2,345 and a return of capital of $158 during the year ended December 31, 2018. During the year ended December 31, 2017, the Company received total cash distributions of $12,639, representing $11,758 of returned capital and $881 of return on investment. Included in the return of capital was $11,626 from one limited partnership the Company withdrew from in February 2017.
Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At December 31, 2019 and 2018, the Company’s maximum exposure to loss relating to this variable interest entity was $762 and $845, respectively, representing the carrying value of the investment. At December 31, 2019, 2018 and 2017, there was no undistributed income from this equity method investment.
On February 27, 2019, the Company acquired approximately nine acres of undeveloped land located near its current headquarters in Tampa, Florida for a purchase price of $8,500, which was primarily financed by the Company’s revolving credit facility. The transaction was accounted for as an asset acquisition. As such, all acquisition-related costs were capitalized.
At December 31, 2019, $126,347 or 55.1% of the Company’s cash and cash equivalents were deposited at three national banks and included $12,188 in two custodial accounts. At December 31, 2018, $180,508 or 75.4% of the Company’s cash and cash equivalents were deposited at three national banks and included $73,511 in two custodial accounts. At December 31, 2019 and 2018, the Company’s cash deposits at any one bank generally exceed the Federal Deposit Insurance Corporation’s $250 coverage limit for insured deposit accounts.
Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.
The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values.
As described in Note 5 -- “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.
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2019 and 2018.
The amount of policy acquisition costs amortized and included in policy acquisition and other underwriting expenses for the years ended December 31, 2019, 2018 and 2017 was $37,146, $35,204 and $35,663, respectively.
Amortization expense for intangible assets after December 31, 2019 is as follows:
The Company has a three-year secured revolving credit agreement (“Credit Agreement”) with Fifth Third Bank that expires on December 5, 2021. The Credit Agreement provides the Company with borrowing capacity of up to $65,000 and bears interest at an annual rate equal to monthly-determined LIBOR plus a margin based on the type of collateral used to secure each borrowing. The interest payment is due quarterly in arrears on January 1, April 1, July 1, and October 1. The Credit Agreement contains affirmative and negative covenants as well as customary events of defaults. Under the terms of the Credit Agreement, the Company must comply with certain financial and non-financial covenants and agree to pay a fee equal to the product of the unused line fee rate and the average of the daily unused available credit balances. The unused line fee rate is determined monthly based on the average daily deposit balances.
On March 15, 2019, the Company repaid the outstanding principal balance of its notes totaling $89,990 plus accrued interest of $1,744. Prior to the repayment, the conversion rate was 16.4074 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.95 per share.
The effective interest rate for the Convertible Senior Notes, taking into account both cash and non-cash components, approximates 7.6%. Had a 20-year term been used for the amortization of the liability component and issuance costs, the annual effective interest rate charged to earnings would have decreased to approximately 5.4%. As of December 31, 2019, the remaining amortization period of the debt discount was expected to be 2.2 years.
On February 27, 2017, the Company converted its outstanding revolving credit facility of $9,441 into a three-year mortgage loan primarily collateralized by a retail shopping center in Melbourne, Florida. Shortly after the loan conversion, the Company withdrew an additional amount of $109, thereby increasing the loan amount to $9,550. The loan bore a fixed annual interest rate of 3.95%. Approximately $50 of principal and interest was payable in 35 monthly installments beginning March 17, 2017 plus a final balloon payment of $8,891 including principal and unpaid interest payable on February 17, 2020.
The loan is collateralized by the Company’s Tampa, Florida headquarters, which is owned by HCPCI Holdings, LLC, and the lease agreements associated with this property. The loan bears interest at a fixed annual rate of 4%. Approximately $68 of principal and interest is payable in 180 monthly installments. The promissory note may be repaid in full as long as the Company provides at least 60 days’ written notice and pays a prepayment premium as specified in the loan agreement.
The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30% ceding commission on ceded premiums written. The reinsurance premiums under one multi-year flood catastrophe excess of loss reinsurance contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter.
One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the year ended December 31, 2019, the Company recognized a reduction in ceded premiums of $6,778. For the year ended December 31, 2018, the Company recognized a net reduction in ceded premiums of $485 in contrast with a net increase in ceded premiums of $5,740 for the year ended December 31, 2017. Included in these adjustments attributable to the Company’s contract with Oxbridge for the years ended December 31, 2018 and 2017 were $448 and $933, respectively, of net increase in ceded premiums.
In addition, adjustments related to retrospective provisions are reflected in other assets. At December 31, 2019 and 2018, other assets included $9,480 and $3,136, respectively. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.
The liability for losses and LAE is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred, but not reported. See Loss and Loss Adjustment Expenses in Note 2 -- “Summary of Significant Accounting Policies.”
The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as these estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are adjusted. During the year ended December 31, 2019, the Company recognized losses related to prior years of $10,559, which were primarily attributable to unfavorable development resulting from litigation. Included in adverse development for 2019 were losses related to Hurricane Matthew of $1,923. Losses for the 2019 loss year included estimated losses of $7,400 pertaining to one severe storm event during the first quarter. During 2019, the Company increased its estimated gross losses for Hurricane Irma from $411,000 to $514,000 and for Hurricane Michael from $22,250 to $33,000 due to an increase in the number of claims and lawsuits. These increases had no impact on the Company’s results of operations as these additional losses were entirely ceded.
Excludes losses from Wind-only insurance (2012 through 2019) and any hurricane event prior to 2019.
For the years ended December 31, 2019, 2018 and 2017, revenues from the Company’s insurance operations before intracompany elimination represented 95.0%, 95.0% and 96.2%, respectively, of total revenues of all operating segments. At December 31, 2019 and 2018, insurance operations’ total assets represented 85.5% and 85.9%, respectively, of the combined assets of all operating segments. See Note 1 -- “Nature of Operations” for a description of the Company’s insurance operations. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.
At December 31, 2019, the Company had operating leases’ ROU assets and corresponding liabilities of $484 and $513, respectively. In addition, the Company had finance leases with ROU assets of $79 and corresponding lease liabilities of $60 at December 31, 2019. The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:
Included in other operating expenses of the consolidated statement of income.
The following table summarizes the Company’s operating leases in which the Company is a lessor:
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, 2018, 2017, and 2016 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify interest and penalties, if any, 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, 2019, 2018 and 2017.
For the years ended December 31, 2019 and 2018, the Company recorded income taxes of $9,517 and $9,177, respectively, resulting in effective tax rates of 26.4% and 34.1%, respectively. For the year ended December 31, 2017, the Company recorded approximately $8,731 of income tax benefits, which resulted in an effective tax rate of 55.9%. The decrease in the effective tax rate in 2019 as compared with 2018 was primarily attributable to the unfavorable factors in 2018 consisting of the negative effect of the derecognition of deferred tax assets of $1,825 for restricted stock awards of which market conditions would not be met prior to their expiry date, the disallowance of the deductibility of the $1,887 expense representing dividends cumulatively paid on such restricted stock awards which were reclassified from retained income (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation”), offset by an increase in nondeductible performance-based compensation expenses for 2019. The decrease in the effective tax rate in 2018 as compared with 2017 was primarily attributable to the reduction of the federal corporate income tax rate from 35% to 21%, offset by the opposing factors in 2018 as described earlier.
The 2017 Tax Act implemented a mandatory one-time tax of eight percent on illiquid assets and 15.5% percent on cash and cash equivalents attributable to the accumulated earnings of controlled foreign companies and other specified foreign corporations on U.S. shareholders owning ten percent or greater of the foreign company. The Company included this one-time federal income tax and the corresponding state taxes attributable to this deemed repatriation amount in the net income tax benefit for the year ended December 31, 2017. In addition to this mandatory one-time deemed repatriation, the 2017 Tax Act also implemented a territorial system which exempts U.S. corporations from U.S. taxes on most future foreign profits. Since all accumulated earnings of the Company’s foreign subsidiary at December 31, 2017 were subjected to federal and state income taxes as a result of the one-time mandatory deemed repatriation and all earnings of its foreign subsidiaries after December 31, 2017 will not be subject to U.S. income taxes, the Company will no longer be required to consider the establishment of a deferred tax liability related to the undistributed earnings of its foreign subsidiary.
For each of the last two years, the Company’s Board of Directors authorized a one-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. The shares may be purchased for cash in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. The share repurchase plan may be modified, suspended, terminated or extended by the Company any time without prior notice.
During the years ended December 31, 2019 and 2018, the Company repurchased and retired 454,010 and 511,628 shares, respectively, at weighted average prices per share of $41.49 and $39.09, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended December 31, 2019 and 2018 were $18,851 and $20,015, respectively, or $41.52 and $39.12 per share, respectively. On December 19, 2019, the Board decided to extend the repurchase plan to March 15, 2020.
On April 18, 2017, the Company’s Board of Directors terminated the Company’s shareholder rights plan by amending the share purchase right’s expiration date to April 18, 2017. Prior to the amended expiration date, one preferred share purchase right entitled a 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.
In conjunction with the issuance of the 4.25% Convertible Notes in March 2017 as described in Note 13 -- “Long-Term Debt” under Convertible Senior Notes , the Company used $20,345 of the net proceeds to repurchase and retire an aggregate of 413,600 shares of its common stock at a price of $49.19 per share from institutional investors.
The Company has one outstanding prepaid share repurchase forward contract entered into with Societe Generale, a forward counterparty. The Company entered into this forward contract in conjunction with the March 2017 issuance of the 4.25% Convertible Notes as described in Note 13 -- “Long-Term Debt” under Convertible Senior Notes. Under the forward contract, the Company made an initial upfront payment of $9,400 in exchange for the future delivery of 191,000 shares of the Company’s common stock over a settlement period in 2022.
The forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of the forward counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company pays any cash dividends on its common shares, the forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contract will be treated as retired for financial statement purposes as of the effective date of the forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholder votes.
The Company currently has outstanding stock-based awards granted under its 2007 Stock Option and Incentive Plan and 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, 2019, there were 1,761,804 shares available for grant.
A summary of the stock option activity for the years ended December 31, 2019, 2018 and 2017 is as follows (option amounts not in thousands):
The following table summarizes information about options exercised for the years ended December 31, 2019, 2018 and 2017 (option amounts not in thousands):
For the years ended December 31, 2019, 2018 and 2017, the Company recognized $870, $521 and $306, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $22, $79 and $78 for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, there was $1,835 and $1,359, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.4 years.
During 2019, 284,000 shares of the Company’s restricted stock awards granted to employee and nonemployee directors were forfeited for not meeting their market-based vesting conditions. Any dividend payment associated with these awards during 2019 was expensed when declared. As a result, for the year ended December 31, 2019, the Company recognized dividends of $237 in general and administrative personnel expenses for $170 and in other operating expenses for $67.
The Company has a 401(k) Safe Harbor Profit Sharing Plan (“401(k) Plan”) that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees are eligible for company matching and discretionary profit sharing contributions. Plan participants may elect to defer up to one hundred percent of their pre-tax gross wages, subject to annual limitations. The Company matching contribution is limited to a maximum of four percent of the employee’s annual salary or wage and is fully vested when contributed. Eligibility and vesting of the Company’s discretionary profit sharing contribution is subject to the plan participant’s years of service. During the years ended December 31, 2019, 2018 and 2017, the Company contributed approximately $638, $536 and $560, respectively, in matching contributions, which are included in general and administrative personnel expenses. There has been no discretionary profit sharing contribution since the plan’s inception.
The Company leases available space at the Company’s headquarters and at its various investment properties to non-affiliates at various terms. In addition, the Company leases boat slips and docks on a long-term basis. Expected annual rental income due under non-cancellable operating leases for all properties owned at December 31, 2019 is as follows:
As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At December 31, 2019, there was an aggregate unfunded balance of $15,130.
During the quarter ended September 30, 2017, the convertible senior notes and stock options were antidilutive.
HCPCI and TypTap are subject to risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of minimum capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risks related to it. Pursuant to the RBC requirements, insurers having less statutory capital than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. At December 31, 2019 and 2018, 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, 2019, the combined statutory capital and surplus and minimum capital and surplus of the Company’s U.S. insurance subsidiaries were approximately $186,446 and $95,318, respectively.
At December 31, 2019 and 2018, restricted net assets represented by the Company’s insurance subsidiaries amounted to $191,210 and $181,571, respectively.
Claddaugh had a reinsurance agreement with Oxbridge Reinsurance Limited (“Oxbridge”) whereby a portion of the business assumed from the Company’s insurance subsidiary, HCPCI, was ceded by Claddaugh to Oxbridge. On May 28, 2018, Claddaugh terminated its multi-year reinsurance contract with Oxbridge, effective June 1, 2018. Upon termination, Claddaugh agreed to pay Oxbridge a settlement fee of $600 and derecognized the benefits accrued in connection with retrospective provisions. The settlement fee and the derecognition of the $622 of accrued benefits were recorded in premiums ceded. With respect to the period from June 1, 2016 through May 31, 2017, Oxbridge assumed $6,000 of the total covered exposure for approximately $3,400 in premiums. With respect to the period from June 1, 2017 through May 31, 2018, Oxbridge assumed $7,400 of the total covered exposure for approximately $3,400 in premiums. Among the Oxbridge shareholders are Paresh Patel, the Company’s chief executive officer, and members of his immediate family and three of the Company’s non-employee directors including Sanjay Madhu who serves as Oxbridge’s president and chief executive officer.
On February 28, 2020, the Company entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of $10,000. The agreement bears interest at a fixed rate of 3.90% and is secured by the property in Melbourne, Florida and the assignment of associated lease agreements. Approximately $60 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of $5,007 including principal and unpaid interest payable on March 1, 2032. The promissory note may be repaid in full at any time as long as the Company provides at least 60 days’ written notice and pays a prepayment premium and a processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due in February 2020.
On January 21, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are scheduled for payment on March 20, 2020 to stockholders of record on February 21, 2020.