HCI GROUP, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements as defined under federal securities laws. Such
statements, including statements about our plans, objectives, expectations,
assumptions or future events, involve risks and uncertainties. These statements
involve estimates, assumptions, known and unknown risks, uncertainties and other
factors that could cause actual results to differ materially from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Typically, forward-looking statements can be
identified by terminology such as "anticipate," "estimate," "plan," "project,"
"continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should,"
"could," and similar expressions. The important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include but are not limited to the effects of governmental
regulation; changes in insurance regulations; the frequency and extent of
claims; uncertainties inherent in reserve estimates; catastrophic events;
changes in the demand for, pricing of, availability of or collectability of
reinsurance; restrictions on our ability to change premium rates; increased rate
pressure on premiums; the severity and impact of a pandemic; and other risks and
uncertainties and other factors listed under Item 1A - "Risk Factors" and
elsewhere in this Annual Report on Form 10-K and in our other
Exchange Commission
OVERVIEW General
subsidiaries is engaged in a variety of business activities, including property
and casualty insurance, information technology services, insurance management,
real estate and reinsurance. Its principal business is property and casualty
insurance.
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
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. Our growth strategies also include assumption of policies from other
insurance companies with the intention of renewing and/or replacing them with
our policies.
Recent Events
Since
leased to an unaffiliated company has been used in our operations. As a result,
it is reclassified out of real estate investments to property and equipment on
the consolidated balance sheet subsequent to
On
stockholders of record on
On
flood insurance policies written in
dates no later than
attributable to the increased costs and reduced availability of flood
reinsurance. The discontinuation will not have a material impact to our results
of operations.
On
JV, the unconsolidated joint venture that we had a 90% equity interest in which
was liquidated on
On
principal and unpaid accrued interest of the
with TTIG to
On
shopping center investment property in
a price of
completed within 45
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days after the contract date.
On
shopping center investment property in
a price of
completed within 45 days after the contract date.
On
subsidiary was placed into receivership by the
financial insolvency. Under the existing contracts, United is responsible for
payment of ceded premiums owed to us while we are responsible for adjudicating
and paying claims. At
administrator ("TPA") services provided to, United. We cannot predict the
actions a receiver might take, which may include cancellation of policies
subject to the quota share contracts, termination of the TPA service agreement
and restrictions on, or use of, funds held in trust. Any such actions could have
a material adverse effect on our financial position and results of operations.
RESULTS OF OPERATIONS
Comparison of the Year Ended
2021
Our results of operations for the year ended
of approximately
of approximately
ended
to a
an
by an
in income from our investment portfolio (consisting of net investment income and
net realized and unrealized gains or losses).
Revenue
Gross Premiums Earned on a consolidated basis for the years ended
2022
The
policies in force from the growth in TypTap's business, offset by a normal
decrease due to policy attrition. Gross premiums earned from the United policies
assumed were
gross premiums earned were
2021. TypTap's gross premiums earned were
Premiums Ceded for the years ended
respectively, of gross premiums earned. Our premiums ceded represent costs of
reinsurance to cover losses from catastrophes that exceed the retention levels
defined by our catastrophe excess of loss reinsurance contracts or to assume a
proportional share of losses defined in a quota share agreement. The rates we
pay for reinsurance are based primarily on policy exposures reflected in gross
premiums earned. The
increased reinsurance costs effective
reinsurance coverage amount as a result of premium growth and expansion, offset
by a net reduction in premiums ceded attributable to retrospective provisions
under multi-year reinsurance contracts. In addition, premiums ceded were
increased by a reversal of
attributable to retrospective provisions under multi-year reinsurance contracts
due to the effects of Hurricane Ian. See "Economic Impact of Reinsurance
Contracts with Retrospective Provisions" under "Critical Accounting Policies and
Estimates."
Net Premiums Written for the years ended
approximately
represent the premiums charged on policies issued during a fiscal period less
any applicable reinsurance costs. The
primarily from an increase in premiums ceded to reinsurers as described above,
offset by an increase in gross premiums written from the growth of TypTap
business of approximately
written were approximately
compared with approximately
2021. We had approximately 210,400 policies in force at
(excluding policies assumed from United) as compared with approximately 180,700
policies in force at
Net Premiums Earned for the years ended
approximately
premiums earned less reinsurance costs as described above.
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The following is a reconciliation of our Net Premiums Written to Net Premiums
Earned for the years ended
Years Ended December 31,
2022 2021
Net Premiums Written $ 464,875 $ 474,648
Increase in Unearned Premiums (1,303 ) (97,345 )
Net Premiums Earned
$ 463,572 $ 377,303
Net Investment Income for the years ended
approximately
increase was primarily attributable to a
real estate investments, a
fixed-maturity securities and a
and cash equivalents. See Net Investment Income under Note 4 -- "Investments" to
our consolidated financial statements under Item 8 of this Annual Report on Form
10-K.
Net Realized Investment Losses for the year ended
approximately
investment gains for the year ended
primarily attributable to net realized losses of approximately
sales of equity securities during the year ended
net realized gains of approximately
during the year ended
Net Unrealized Investment Losses for the year ended
approximately
unrealized investment gains for the year ended
investment gains or losses represent the net change in the fair value of equity
securities. The decrease in 2022 was primarily attributable to an overall
deterioration in the equity market compared with 2021.
Gain from Remeasurement of Contingent Liabilities for the year ended
31, 2022
balance of contingent liabilities in connection with the renewal rights
agreements entered into with United. See Note 9 -- "Intangible Assets, Net" to
our consolidated financial statements under Item 8 of this Annual Report on Form
10-K for additional information.
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
respectively. The losses and loss adjustment expenses of HCPCI Insurance
Operations were
2022
approximately
increase in losses attributable to the United policies due to an increase in the
number of policies assumed from United or any subsequent renewal or replacement
of United policies. Losses and loss adjustment expenses for TypTap were
respectively. The increase was primarily attributable to
due to the greater number of TypTap policies in force, approximately
of losses from Hurricane Ian, a
to the United policies due to an increase in the number of policies assumed from
United or any subsequent renewal or replacement of United policies, and
Adjustment Expenses" under "Critical Accounting Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the years ended
31, 2022
and primarily reflect the amortization of deferred acquisition costs such as
commissions payable to agents for production and renewal of policies,
catastrophe allowance payable to United, and premium taxes. Policy acquisition
expenses for HCPCI were
31, 2022
respectively. The increase was primarily attributable to amortization of
increased commission costs related to the growth of TypTap's policies in force
during 2022 and the policies assumed from United or any subsequent renewal or
replacement of United policies.
General and Administrative Personnel Expenses for the years ended
2022
general and administrative personnel expenses include salaries, wages, payroll
taxes, stock-based compensation expense, 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 projects to develop software for internal use and the payroll costs
associated with the processing and settlement of certain catastrophe claims
which are recoverable from reinsurers under reinsurance contracts. The
year-over-year increase of
headcount of temporary and full-time employees and merit increases for
non-executive employees and a
expense.
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Interest Expense for the years ended
approximately
resulted from interest expense related to our 4.75% Convertible Senior Notes
issued in
during the second half of 2021.
Impairment Loss for the year ended
policies in-force as well as the impairment assessment of the renewal rights
intangible assets associated with the renewal rights agreements entered into
with United.
Income Tax Benefit for the year ended
tax expense of approximately
resulting in an effective tax rate of 20.2% for 2022 and 35.5% for 2021. The
decrease in the effective tax rate was primarily attributable to a valuation
allowance established as of
benefits attributable to restricted stock that vested during 2022.
Ratios:
The loss ratio applicable to the year ended
adjustment expenses incurred related to net premiums earned) was 80.1% compared
with 60.3% for the year ended
to the increase in losses and loss adjustment expenses due to Hurricane Ian,
offset in part by the increase in net premiums earned.
The expense ratio applicable to the year ended
total expenses excluding losses and loss adjustment expenses related to net
premiums earned) was 42.4% compared with 44.8% for the year ended
2021
increase in net premiums earned and the decrease in debt conversion expense,
offset in part by the increase in policy acquisition, underwriting and personnel
expenses.
The combined ratio is the measure of overall underwriting profitability before
other income. Our combined ratio for the year ended
compared with 105.1% for the year ended
primarily attributable to the increase in losses and loss adjustment expenses
combined with the increases in reinsurance costs and policy acquisition,
underwriting and personnel expenses.
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
with 68.7% for the year ended
primarily attributable to the increase in losses and loss adjustment expenses
due to Hurricane Ian, offset in part by the increase in gross premiums earned.
Comparison of the Year Ended
2020
Our results of operations for the year ended
income of approximately
compared with a net income of approximately
earnings per share, for the year ended
decrease was primarily attributable to a one-time gain on involuntary conversion
of approximately
increase in income from our investment portfolio (consisting of net investment
income and net realized and unrealized gains or losses) of approximately
Revenue
Gross Premiums Earned for the years ended
approximately
increase in 2021 was primarily attributable to the policies assumed from United
and increased policies in force from the growth in TypTap's business, offset by
a normal decrease due to policy attrition. Gross premiums earned in 2021 related
to the United policies assumed were
in 2021 were
premiums earned in 2021 were
Premiums Ceded for the years ended
respectively, of gross premiums earned. The
attributable to increased reinsurance costs effective
level of reinsurance coverage, offset by a reduction in premiums ceded
attributable to retrospective provisions under multi-year reinsurance contracts.
See "Economic Impact of Reinsurance Contracts with Retrospective Provisions"
under "Critical Accounting Policies and Estimates."
Net Premiums Written for the years ended
approximately
increase in 2021 resulted primarily from an increase in gross premiums written
from the growth of TypTap business of approximately
business from United of approximately
premiums written were approximately
for 2021 compared with
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approximately
approximately 180,700 policies in force at
approximately 154,000 policies in force at
Net Premiums Earned for the years ended
approximately
premiums earned less reinsurance costs as described above.
The following is a reconciliation of our Net Premiums Written to Net Premiums
Earned for the years ended
Years Ended December 31,
2021 2020
Net Premiums Written $ 474,648 $ 350,696
Increase in Unearned Premiums (97,345 ) (88,236 )
Net Premiums Earned
$ 377,303 $ 262,460
Net Investment Income for the years ended
approximately
increase was primarily attributable to an increase in income from limited
partnership investments of approximately
recognized in 2021 for a legal settlement received from The Kroger Co. See Net
Investment Income under Note 4 -- "Investments" to our consolidated financial
statements under Item 8 of this Annual Report on Form 10-K.
Net Realized Investment Gains for the years ended
were approximately
resulted primarily from sales of equity securities.
Net Unrealized Investment Gains for the years ended
were approximately
reflected an overall improvement in the equity market compared with 2020.
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
respectively. The increase was primarily attributable to losses associated with
the assumption of policies from United, the organic growth in TypTap's
homeowners business, and the unfavorable loss development for the 2020 loss
year. See "Reserves for Losses and Loss Adjustment Expenses" under "Critical
Accounting Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the years ended
31, 2021
The increase was primarily attributable to amortization of increased costs
associated with the policies assumed from United and the amortization of
increased commission costs related to the growth of TypTap's policies in force
during 2021.
Debt Conversion Expense for the year ended
4.25% Convertible Senior Notes.
General and Administrative Personnel Expenses for the years ended
2021
year-over-year increase of
headcount of temporary and full-time employees and merit increases for
non-executive employees, and a
expense, offset by a decrease in employee incentive bonus and higher capitalized
and recoverable payroll costs.
Interest Expense for the years ended
approximately
resulted from conversions of our 4.25% Convertible Senior Notes during the
second half of 2021 and the early adoption of ASU 2020-06 "Debt - Debt with
Conversion and Other Options and Derivatives and Hedging - Contracts in Entity's
Own Equity." ASU 2020-06 allows the reversal of discounts previously recorded to
account for the cash conversion feature of convertible debt instruments. Our
4.25% Convertible Senior Notes contain such a cash conversion feature and
accordingly the discount was reversed on
expense no longer includes amounts representing the amortization of the
discount.
Income Tax Expense for the year ended
expense of approximately
resulting in an effective tax rate of 35.5% for 2021 and 25.3% for 2020. The
increase in the effective tax rate was primarily due to the non-deductibility of
certain executive compensation and the increase in deferred tax expense due to
the increased
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Ratios:
The loss ratio applicable to the year ended
with 61.0% for the year ended
to an increase in net premiums earned.
The expense ratio applicable to the year ended
compared with 43.2% for the year ended
expense ratio was primarily attributable to the increase in policy acquisition,
underwriting and personnel expenses, offset by the increase in net premiums
earned and the decrease in interest expense.
The combined ratio to net premiums earned for the year ended
was 105.1% compared with 104.2% for the year ended
increase was primarily attributable to the increase in losses and loss
adjustment expenses combined with the increases in reinsurance costs and policy
acquisition and other underwriting expenses.
The combined ratio to gross premiums earned for the year ended
was 68.7% compared with 65.8% for the year ended
in 2021 was primarily attributable to the increase in losses and loss adjustment
expenses, offset by the increase in gross premiums earned.
Seasonality of Our Business
Our insurance business is seasonal. Hurricanes and tropical storms affecting
during the period from
storms in the northeast usually occur during the period
March 31st
effective on
reinsurance, whether due to changes in reinsurance rates, coverage levels or
changes in the total insured value of our policy base, will occur and be
reflected in our financial results beginning on
LIQUIDITY AND CAPITAL RESOURCES
Throughout our history, our liquidity requirements have been met through
issuances of our common and preferred stock, debt offerings and funds from
operations. We expect our future liquidity requirements will be met by funds
from operations, primarily the cash received by our insurance subsidiaries from
premiums written and investment income. We may consider raising additional
capital through debt and/or equity offerings to support our growth and future
investment opportunities.
Our insurance subsidiaries require liquidity and adequate capital to meet
ongoing obligations to policyholders and claimants and to fund operating
expenses. In addition, we attempt to maintain adequate levels of liquidity and
surplus to manage any differences between the duration of our liabilities and
invested assets. In the insurance industry, cash collected for premiums from
policies written is invested, interest and dividends are earned thereon, and
losses and loss adjustment expenses are paid out over a period of years. This
period of time varies by the circumstances surrounding each claim. Substantially
all of our losses and loss adjustment expenses, excluding litigated claims, are
fully settled and paid within approximately 100 days of the claim receipt date.
Additional cash outflow occurs through payments of underwriting costs such as
commissions, taxes, payroll, and general overhead expenses.
We believe that we maintain sufficient liquidity to pay claims and expenses, as
well as to satisfy commitments in the event of unforeseen events such as
reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We
maintain a comprehensive reinsurance program at levels management considers
adequate to diversify risk and safeguard our financial position.
In the future, we anticipate our primary use of funds will be to pay claims,
reinsurance premiums, interest, and dividends and to fund operating expenses and
real estate acquisitions.
Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and
Finance Leases
The following table summarizes the principal and interest payment obligations
for our indebtedness at
Maturity Date Payment Due Date
4.75% Convertible Senior June 2042 June 1 and December 1**
Notes*
4.25% Convertible Senior March 2037 March 1 and September 1
Notes***
3.75% Callable Promissory Through September 2036 1st day of each month
Note
3.90% Promissory Note Through April 2032 1st day of each month
4.55% Promissory Note Through August 2036 1st day of each month
Finance leases Through October 2024 Various
Revolving credit facility Through December 2023 January 1, April 1, July 1, October 1
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* At the option of the noteholders, we may be required to repurchase for cash
all or any portion of the notes on
2037.
** The cash interest is payable semiannually in arrears on
1 of each year, beginning on
*** At the option of the noteholders, we may be required to repurchase for cash
all or any portion of the notes on
See Note 12 -- "Long-Term Debt" to our consolidated financial statements under
Item 8 of this Annual Report on Form 10-K.
Limited Partnership Investments
Our limited partnership investments consist of six private equity funds managed
by their general partners. Two 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. Under certain circumstances, we may be
required to provide additional capital for the four remaining funds with expired
capital commitments. At
capital balance of
-- "Investments" 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 diversifies our portfolio and helps offset the volatility of other
higher-risk assets. Thus, we may consider expanding our real estate investment
portfolio should an opportunity arise.
We had a 90% equity interest in
company for which we were not the primary beneficiary. In
sold its last outparcel and recognized a net gain of
distributed its earnings in
Sources and Uses of Cash
Our cash flows from operating, investing and financing activities for the years
ended
Cash Flows for the Year Ended
Net cash used in operating activities for the year ended
approximately
expenses, losses and loss adjustment expenses and interest payments less cash
received from net premiums written and reinsurance recoveries of approximately
primarily due to the purchases of fixed-maturity and equity securities of
purchase of intangible assets from United of
from calls, repayments and maturities of fixed-maturity securities of
through eminent domain, and distributions received from limited partnership
investments of
Convertible Senior Notes of
repurchases,
revolving credit facility of
Cash Flows for the Year Ended
Net cash provided by operating activities for the year ended
was approximately
net premiums written and reinsurance recoveries of approximately
less cash disbursed for operating expenses, losses and loss adjustment expenses
and interest payments. Net cash provided by investing activities of
was primarily due to the proceeds from sales of fixed-maturity and equity
securities of
of fixed-maturity securities of
received from limited partnership investments, offset by the purchases of
fixed-maturity and equity securities of
limited partnership interests of
equipment of
Centerbridge for investment in TTIG, offset by
payments, net repayment of our revolving credit facility of
dividends paid to redeemable noncontrolling interest of
of debt conversion expense paid and
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Cash Flows for the Year Ended
Net cash provided by operating activities for the year ended
was approximately
net premiums written and reinsurance recoveries of approximately
less cash disbursed for operating expenses, losses and loss adjustment expenses
and interest payments. Net cash provided by investing activities of
was primarily due to the proceeds from sales of fixed-maturity and equity
securities of
of fixed-maturity securities of
received for the property relinquished through eminent domain, and the
distributions of
offset by the purchases of fixed-maturity and equity securities of
the purchases of property and equipment of
limited partnership interests of
investments of
repurchase a portion of our 4.25% Convertible Senior Notes, and
net cash dividend payments, offset by
revolving credit facility and the proceeds from issuance of a 3.90% promissory
note of
Investments
The main objective of our investment policy is to maximize our after-tax
investment income with a reasonable level of risk given the current financial
market. Our excess cash is invested primarily in money market accounts,
certificates of deposit, and fixed-maturity and equity securities.
At
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.
In the future, we may alter our investment policy with regard to investments in
federal, state and municipal obligations, preferred and common equity securities
and real estate mortgages, as permitted by applicable law, including insurance
regulations.
OFF-BALANCE SHEET ARRANGEMENTS
As of
partnerships in which we hold interests. Such commitments are not recognized in
the consolidated financial statements but are required to be disclosed in the
notes to the consolidated financial statements. See Note 23 -- "Commitments and
Contingencies" to our consolidated financial statements under Item 8 of this
Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in
GAAP"). The preparation of these consolidated financial statements requires us
to make estimates and judgments to develop amounts reflected and disclosed in
our consolidated financial statements. Material estimates that are particularly
susceptible to significant change in the near term are related to our losses and
loss adjustment expenses, which include amounts estimated for claims incurred
but not yet reported. We base our estimates on various assumptions and actuarial
data we believe to be reasonable under the circumstances. Actual results may
differ materially from these estimates.
We believe our accounting policies specific to losses and loss adjustment
expenses, reinsurance recoverable, reinsurance with retrospective provisions,
deferred income taxes, stock-based compensation expense, limited partnership
investments, acquired intangible assets, warrants, and redeemable noncontrolling
interest involve our most significant judgments and estimates material to our
consolidated financial statements.
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
and LAE 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 and LAE 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
and LAE reserves, we give careful consideration to all available data and
actuarial analyses.
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Currently, our estimated ultimate liability is calculated using the principles
and procedures described in Note 14 -- "Losses and Loss Adjustment Expenses" to
our consolidated financial statements under Item 8 of this Annual Report on Form
10-K, which are applied to the lines of business written. However, because the
establishment of loss and LAE reserves is an inherently uncertain process, we
cannot be certain that ultimate losses will not exceed the established loss and
LAE 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.
Our reported results, financial position and liquidity would be affected by
likely changes in key assumptions that determine our net loss reserves.
Management does not believe that any reasonably likely changes in the frequency
of claims would affect our loss and LAE reserves. However, management believes
that a reasonably likely increase or decrease in the severity of claims could
impact our net loss and LAE reserves. The table below summarizes the effect on
net loss and LAE reserves and equity in the event of reasonably likely changes
in the severity of claims considered in establishing loss and LAE reserves. The
range of reasonably likely changes in the severity of our claims was established
based on a review of changes in loss year development and applied to loss and
LAE reserves as a whole. The selected range of changes does not indicate what
could be the potential best or worst case or likely scenarios:
Year Ended
Percentage
Change in
Equity,
Change in Reserves Reserves Net of Tax
-20.0% 691,012 107.13 %
-15.0% 734,200 80.35 %
-10.0% 777,389 53.57 %
-5.0% 820,577 26.78 %
Base 863,765 -
5.0% 906,953 (26.78 )%
10.0% 950,142 (53.57 )%
15.0% 993,330 (80.35 )%
20.0% 1,036,518 (107.13 )%
Reinsurance Recoverable. Our reinsurance recoverable balance represents an
estimate of the amount of paid and unpaid losses and loss adjustment expenses
that is recoverable from reinsurers. This estimate is determined in a manner
consistent with the terms of the applicable reinsurance contracts and based on
the ultimate losses and loss adjustment expenses we expect to incur. Given the
uncertainty of the ultimate amounts of losses and loss adjustment expenses, the
estimate may vary significantly from the eventual outcome.
Economic Impact of Reinsurance Contracts with Retrospective Provisions. From
time to time, our reinsurance contracts may include retrospective provisions
that adjust premiums in the event losses are minimal or zero. As described
earlier, there is considerable uncertainty regarding the estimation of future
losses. In accordance with
in which the absence of loss experience obligates the reinsurer to pay cash or
other consideration under the contract. In the event that a loss arises, we will
derecognize such asset in the period in which a loss arises. Such adjustments to
the asset, which accrue throughout the contract term, will negatively impact our
operating results when a catastrophic loss event occurs during the contract
term.
Due to Hurricane Ian, the balance of previously accrued benefits under one
multi-year reinsurance contract with retrospective provisions was decreased by
benefits of
benefits of
benefits of
and 2021, we recognized decreases in premiums ceded of
As of
would be charged to earnings in the event we experience a catastrophic loss that
exceeds the coverage limit provided under such agreement. In
received a
multi-year reinsurance contracts which were commuted in
31, 2021
charged to earnings in the event we experience a catastrophic loss that exceeds
the coverage limit provided under such agreements. In
ended
collectability of these accrued benefits is minimal based on available
information about the reinsurer's financial position and the reinsurer's
demonstrated ability to comply with contract terms.
Income Taxes. We account for income taxes in accordance with
resulting in two components of income tax expense (benefit): current and
deferred. Current income tax expense (benefit) reflects taxes to be paid or
refunded for the current period
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by applying the provisions of the enacted tax law to the taxable income or
excess of deductions over revenues. We determine deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is based on the tax effects of the differences between the
book and tax bases of assets and liabilities, and enacted changes in tax rates
and laws are recognized in the period in which they occur. Deferred tax assets,
representing future reductions in taxable income, are recorded with the
assumption that taxable income will be present in the future. Given the
uncertainty regarding future taxable income, valuation allowances are provided
against deferred tax assets that are not likely to be realized, if any. We
concluded that the negative evidence outweighed the positive evidence and
therefore a valuation allowance on our deferred tax assets is established as of
penalties, if any, as income tax expense as permitted by current accounting
standards.
Stock-Based Compensation. We account for stock-based compensation awards under
our stockholder-approved incentive plans in accordance with the fair value
recognition provisions of
recognition of compensation for all stock-based awards made to employees,
non-employee directors, and third-party award recipients including stock
options, restricted stock and warrant issuances based on estimated fair values.
For restricted stock with service-based vesting conditions, fair value is
determined by the market price of the stock on the grant date. Compensation
expense is then recognized ratably over the requisite or derived service period
of the award. Restricted stock awards with market-based vesting conditions
require the use of a Monte Carlo simulation model with the assistance of a
third-party valuation specialist to estimate the fair value and derived service
period of the award. We then recognize the compensation expense ratably over
this derived service period. Determining the appropriate fair value model and
calculating the fair value of stock-based awards at the grant date requires
considerable judgment, including estimating stock price volatility and derived
service periods. We develop our estimates based on historical data and market
information. We primarily 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. For stock-based awards granted by
non-public subsidiaries, we determine the fair value with the assistance of an
independent valuation specialist who may use different valuation methods such as
a Monte Carlo simulation model and a binomial distribution model. Inputs such as
an estimated stock price of our private subsidiary and expected price volatility
used in these valuation methods are derived mathematically from a data analysis
of many public peer companies with similar characteristics.
Limited Partnership Investments. The valuation of our limited partnership
investments is prepared by the general partner of each fund. We use net asset
value ("NAV") provided by the general partner to estimate our share of the fair
value of these investments. However, the timing of the delivery of the fund's
financial statements and NAV information is on a three-month lag which results
in a three-month delay in the recognition of our share of the limited
partnership's earnings or losses. But because this is the best information
available, we use it as an estimate for the fair value at our reporting dates,
unless conditions have changed significantly in the economy or securities
markets since the previous quarter due to an event such as the onset of COVID-19
or changes in the government's fiscal or monetary policies. In such a case, we
will adjust our estimate with the assistance from the general partner.
Acquired Intangible Assets. Acquired intangible assets represent the fair value
of consideration we paid and are estimated to pay in exchange for the renewal
rights and non-compete intangible assets acquired from the seller. In the
renewal rights transactions, we purchased the right, but not the obligation, to
offer homeowners insurance coverage to all policyholders of the seller in
certain states on the agreed-upon policy replacement date. The renewal rights
agreements also contain a non-compete clause whereby the seller agrees not to
offer homeowners insurance policies in these states through a specified date. We
record intangible assets based on the fair value of the consideration we paid
and are estimated to pay to the seller as provided in the renewal rights
agreements with the seller. We engaged a third-party valuation specialist to
assist with the allocation of the renewal rights and non-compete intangible
assets acquired. Uncertainty is inherent in the estimates of future payments and
in the assumptions made in allocating value to separate intangible assets.
Intangible assets are amortized over their estimated useful lives. Intangible
assets are evaluated to ensure that there is no impairment to carrying value and
no change required in the amortization period. During the fourth quarter of
2022, all available information pertaining to the policies in-force associated
with the renewal rights intangible assets was reviewed, and additionally, we
engaged an independent valuation specialist to assess for possible impairment of
the renewal rights intangible assets. Based on the review and the assessment, we
recognized an impairment loss of
intangible assets and, simultaneously, recorded a decrease in the contingent
liabilities associated with the renewal rights resulting in a remeasurement gain
of
33
--------------------------------------------------------------------------------
Warrants and Redeemable Noncontrolling Interest. In the capital investment
transaction completed by TTIG in 2021 with a fund associated with
Partners, L.P.
and HCI issued warrants to purchase 750,000 shares of HCI common stock, in
exchange for proceeds of
the warrants were estimated with assistance from a third-party valuation
specialist using a Monte Carlo simulation model. Total proceeds from the capital
investment transaction were allocated using the residual fair value method,
first to the warrants issued based on their estimated fair value, with the
residual proceeds being allocated to the fair value of Series A Preferred Stock.
See Note 19 -- "Redeemable Noncontrolling Interest" to our consolidated
financial statements under Item 8 of this Annual Report on Form 10-K for
additional information.
CITIZENS, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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