HCI GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion under this Item 2 in conjunction with
our consolidated financial statements and related notes and information included
elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with
the
context requires otherwise, as used in this Form 10-Q, the terms "HCI," "we,"
"us," "our," "the Company," "our company," and similar references refer to
Group, Inc.
All dollar amounts in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are in whole dollars unless specified
otherwise.
Forward-Looking Statements
In addition to historical information, this quarterly report contains
forward-looking statements as defined under federal securities laws. Such
statements involve risks and uncertainties, such as statements about our plans,
objectives, expectations, assumptions or future events. 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 the novel coronavirus ("COVID-19") pandemic; and other
risks and uncertainties detailed herein and from time to time in our
reports.
OVERVIEW - General
and casualty insurance, reinsurance, real estate and information technology.
After the reorganization of our business in the first quarter of 2021, we now
manage our operations in the following organizational segments, based on
managerial emphasis and evaluation of financial and operating performances:
a)
HCPCI Insurance Operations ? Property and casualty insurance ? Reinsurance and other auxiliary operations b)TypTap Group ? Property and casualty insurance ? Information technology c) Real Estate Operations d) Other Operations ? Holding company operations
For the three months ended
insurance operations before intracompany elimination represented 73.9% and
59.1%, respectively, and revenues from
respectively, of total revenues of all operating segments. For the nine months
ended
before intracompany
52
--------------------------------------------------------------------------------
elimination represented 76.4% and 73.8%, respectively, and revenues from
Group
operating segments. At
operations' total assets represented 60.2% and 68.9%, respectively, and
Group's
assets of all operating segments. See Note 14 -- "Segment Information" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q for additional information.
HCPCI Insurance Operations
HCPCI provides various forms of residential insurance products such as
homeowners insurance, fire insurance, flood insurance and wind-only insurance.
HCPCI is authorized to write residential property and casualty insurance in the
states of
Effective
all in-force, new and renewal policies issued by
Insurance Company
("United") in the states of
Island
previously purchased catastrophe reinsurance and a provisional ceding commission
of 25% of premium. That percentage can increase up to 31.5% depending on the
direct loss ratio results from the reinsured business.
We and United agreed to postpone the policy replacement date under the renewal
rights agreement to a later date and we, through HCPCI and TypTap, entered into
a new quota share reinsurance agreement in
on all of United's in-force, new and renewal policies in those states from
1, 2021
business and pays United a ceding commission of 24% of premium. Annual premiums
from the total assumed business approximate
of the total premiums.
Reinsurance and other auxiliary operations
We have a
Casualty Insurance Company Ltd.
reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its
exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh
may mitigate a portion of its risk through retrocession contracts. Currently,
Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary
operations also include claim adjusting and processing services.
has four subsidiaries:
Company
primarily engaged in the property and casualty insurance business and is
currently using in-house developed technology to collect and analyze claims and
other supplemental data to generate savings and efficiency for its insurance
operations.
53
--------------------------------------------------------------------------------
TypTap, TTIG's insurance subsidiary, has been the primary source of our organic
growth in gross written premium since 2016. TypTap's policies in force have
increased from 6,721 in
been successful in using internally developed proprietary technology to
underwrite, select and write policies efficiently in
2021
of
future growth from the United policies assigned to TypTap through the renewal
rights agreement acquired by HCI.
In connection with the aforementioned new quota share agreement with United,
TypTap assumes 50% of the business. TypTap will receive approximately
Information Technology
Our information technology operations include a team of experienced software
developers with extensive knowledge in developing web-based products and
applications for mobile device. The operations, which are in
Noida,
services that support in-house operations as well as our third-party
relationships with our agency partners and claim vendors. These products include
SAMSTM, Harmony, AtlasViewer and ClaimColony®.
Real Estate Operations
Our real estate operations consist of properties we own and use for our own
operations and multiple properties we own and operate for investment purposes.
Properties used in operations consist of one
secondary insurance operations site in
include retail shopping centers, one office building, two marinas, and
undeveloped land near TTIG's headquarters in
Other Operations
Holding company operations
Activities of our holding company,
not meet the quantitative and qualitative thresholds for a reportable segment
comprise the operations of this segment.
Recent Events
On
shares of its common stock at an exercise price of
executive officer,
have a 10-year term and were granted pursuant to TTIG's 2021 Omnibus Incentive
Plan. The options will vest over a four-year period, so long as the optionees
remain employed by TTIG. TTIG is currently in the process of determining the
grant date fair value of the options.
On
stockholders of record on
During the months of October and
Notes was converted for 458,533 and 71,464 shares, respectively, of HCI's common
stock and aggregate cash consideration of approximately
debt conversion expense of
54
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three and nine months endedSeptember 30, 2021 and 2020 (dollar amounts in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue Gross premiums earned$ 149,809 $ 106,694 $ 420,191 $ 306,862 Premiums ceded (55,577 ) (44,231 ) (145,112 ) (109,304 ) Net premiums earned 94,232 62,463 275,079 197,558 Net investment income 2,520 1,832 9,749 3,244 Net realized investment gains (losses) 1,232 177 4,952 (632 ) Net unrealized investment (losses) gains (1,869 ) 1,340 (649 ) (581 ) Credit losses on investments - (70 ) - (596 ) Policy fee income 1,000 895 2,962 2,571 Gain on involuntary conversion - 36,969 - 36,969 Other income 2,102 421 3,502 1,591 Total revenue 99,217 104,027 295,595 240,124
Expenses
Losses and loss adjustment expenses 62,664 51,743 164,332 119,664
Policy acquisition and other
underwriting expenses
23,340 14,210 69,574 39,027 General and administrative personnel expenses 11,537 9,871 31,733 27,969 Interest expense 1,664 2,856 5,743 8,846 Loss on repurchases of convertible senior notes - - - 150 Loss on extinguishment of debt - 98 - 98 Debt conversion expense 1,273 - 1,273 - Other operating expenses 5,243 3,713 14,245 10,354 Total expenses 105,721 82,491 286,900 206,108 (Loss) income before income taxes (6,504 ) 21,536 8,695 34,016 Income tax (benefit) expense (1,636 ) 6,146 2,888 9,143 Net (loss) income (4,868 ) 15,390 5,807 24,873 Net income attributable to noncontrolling interests (1,369 ) - (3,979 ) - Net (loss) income after noncontrolling interests$ (6,237 ) $ 15,390 $ 1,828 $ 24,873 Ratios to Net Premiums Earned: Loss Ratio 66.50 % 82.84 % 59.74 % 60.57 % Expense Ratio 45.69 % 49.23 % 44.56 % 43.76 % Combined Ratio 112.19 % 132.07 % 104.30 % 104.33 % Ratios to Gross Premiums Earned: Loss Ratio 41.83 % 48.50 % 39.11 % 39.00 % Expense Ratio 28.74 % 28.82 % 29.17 % 28.17 % Combined Ratio 70.57 % 77.32 % 68.28 % 67.17 % Earnings Per Share Data: Basic$ (0.72 ) $ 1.97 $ 0.23 $ 3.21 Diluted$ (0.72 ) $ 1.70 $ 0.22 $ 3.03 55
--------------------------------------------------------------------------------
Comparison of the Three Months Ended
Ended
Our results of operations for the three months ended
a net loss of approximately
with a net income of approximately
share, for the three months ended
decrease was primarily due to a one-time gain on involuntary conversion of
loss adjustment expenses, a
underwriting expenses, and a
offset by an increase in net premiums earned of
increase in other income, and a
Revenue
Gross Premiums Earned on a consolidated basis for the three months ended
respectively. HCPCI gross premiums earned were
ended
from the United insurance policies assumed. TypTap's gross premiums earned were
due to a greater number of policies in force from the organic growth in TypTap's
business and from the business assumed from United beginning
Premiums Ceded for the three months ended
approximately
41.5%, respectively, of gross premiums earned. The
primarily attributable to higher reinsurance costs for the 2021 contract year
due to an increased overall reinsurance coverage amount as a result of premium
growth and expansion. Reinsurance costs were offset by a reduction in premiums
ceded attributable to retrospective provisions under multi-year reinsurance
agreements.
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 as
defined in a quota share agreement. The rates we pay for reinsurance are based
primarily on policy exposures reflected in gross premiums earned. For the three
months ended
of Reinsurance Contracts with Retrospective Provisions" under "Critical
Accounting Policies and Estimates."
Net Premiums Written for the three months ended
totaled approximately
written represent the premiums charged on policies issued during a fiscal period
less any applicable reinsurance costs. The increase in 2021 resulted from an
increase in gross premiums written from the United insurance policies assumed
and the growth of TypTap business. We had approximately 156,000 policies in
force at
with approximately 157,000 policies in force at
Net Premiums Earned for the three months ended
approximately
premiums earned less reinsurance costs as described above.
56
--------------------------------------------------------------------------------
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months endedSeptember 30, 2021 and 2020 (amounts in thousands): Three Months Ended September 30, 2021 2020 Net Premiums Written$ 118,689 $ 72,220
Increase in Unearned Premiums (24,457 ) (9,757 )
Net Premiums Earned
$ 94,232 $ 62,463
Net Investment Income for the three months ended
approximately
primarily attributable to a
and real estate investments and a
investment in an unconsolidated joint venture, offset by a
interest income from fixed-maturity security investments. See Net Investment
Income (loss) under Note 5 -- "Investments" to our unaudited consolidated
financial statements under Item 1 of this Quarterly Report on Form 10-Q.
Net Realized Investment Gains for the three months ended
2020 were approximately
increase was primarily attributable to net gains from selling equity securities.
Net Unrealized Investment Losses for the three months ended
were approximately
approximately
decrease was primarily due to the sales of equity securities with aggregate net
gains during the quarter.
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
2020, respectively. The increase was attributable to additional losses
associated with the growth in TypTap's business during 2021 and was offset by
lower third quarter 2021 losses at HCPCI when compared with 2020. TypTap
experienced an additional
homeowners business,
2021 losses were comparatively lower due to 2020 losses of
Hurricane Sally,
Property & Casualty Insurance Company
re-estimation of losses from Hurricane Sally. Both companies recorded additional
losses during the quarter totaling a combined
losses from Tropical Storm Eta, a fourth quarter 2020 event. See "Reserves for
Losses and Loss Adjustment Expenses" under "Critical Accounting Policies and
Estimates."
Policy Acquisition and Other Underwriting Expenses for the three months ended
consolidated basis, respectively, and primarily reflect the amortization of
deferred acquisition costs such as commissions payable to agents for production
and renewal of policies, and premium taxes. Policy acquisition expenses for
HCPCI insurance operations were
30, 2021
The increase was due to amortization of increased costs associated with the
policies assumed from United.
attributable to amortization of increased commission costs related to the growth
of TypTap's policies in force over the past 12 months and the policies assumed
from United.
57
--------------------------------------------------------------------------------
Debt Conversion Expense for the three months ended
approximately
conversions of our 4.25% convertible senior notes.
General and Administrative Personnel Expenses for the three months ended
respectively. Our general and administrative personnel expenses include
salaries, wages, payroll taxes, stock-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 certain
catastrophe claims which are recoverable from reinsurers under reinsurance
contracts. The period-over-period increase of
attributable to higher stock-based compensation expense, an increase in the
headcount of temporary and full-time employees, and merit increases for
non-executive employees effective in late
Income Tax Benefit for the three months ended
approximately
in an effective tax rate of 25.2%. This compared with approximately
of income tax expense for the three months ended
in an effective tax rate of 28.5%. The decrease in the effective tax rate as
compared with the corresponding period in the prior year was primarily
attributable to the non-deductibility of certain executive compensation during
the three months ended
Ratios:
The loss ratio applicable to the three months ended
and loss adjustment expenses incurred related to net premiums earned) was 66.5%
compared with 82.8% for the three months ended
was primarily due to an increase in net premiums earned.
The expense ratio applicable to the three months ended
(defined as underwriting expenses, general and administrative personnel
expenses, interest and other operating expenses related to net premiums earned)
was 45.7% compared with 49.2% for the three months ended
decrease in our expense ratio was primarily attributable to the increase in net
premiums earned and the decrease in interest expense, offset by the increase in
losses and loss adjustment expenses and the increase in policy acquisition,
underwriting and personnel expenses.
The combined ratio (total of all expenses in relation to net premiums earned) is
the measure of overall underwriting profitability before other income. Our
combined ratio for the three months ended
with 132.0% for the three months ended
was attributable to the factors described above.
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 three months ended
compared with 77.3% for the three months ended
in 2021 was attributable to the factors described above.
58
--------------------------------------------------------------------------------
Comparison of the Nine Months Ended
Our results of operations for the nine months ended
net income of approximately
compared with approximately
the nine months ended
income was primarily due to a
expenses, a one-time gain on involuntary conversion of
our 2020 results, and a
underwriting expenses, offset by an increase in net premiums earned of
(consisting of net investment income/loss and net realized and unrealized
gains/losses), and a
Revenue
Gross Premiums Earned on a consolidated basis for the nine months ended
respectively. HCPCI gross premiums earned were
ended
from the United insurance policies assumed. TypTap's gross premiums earned were
increase due to a greater number of policies in force from the growth in
TypTap's business.
Premiums Ceded for the nine months ended
approximately
and 35.6%, respectively, of gross premiums earned. The
primarily attributable to higher reinsurance costs for the 2021 contract year
due to an increased overall reinsurance coverage amount as a result of premium
growth and expansion. Reinsurance costs were offset by a reduction in premiums
ceded attributable to retrospective provisions under multi-year reinsurance
agreements.
For the nine months ended
of
of
Impact of Reinsurance Contracts with Retrospective Provisions" under "Critical
Accounting Policies and Estimates."
Net Premiums Written for the nine months ended
totaled approximately
earlier.
Net Premiums Earned for the nine months ended
approximately
premiums earned less reinsurance costs as described above.
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months endedSeptember 30, 2021 and 2020 (amounts in thousands): Nine Months Ended September 30, 2021 2020 Net Premiums Written$ 339,980 $ 255,546 Increase in Unearned Premiums (64,901 ) (57,988 ) Net Premiums Earned$ 275,079 $ 197,558 59
--------------------------------------------------------------------------------
Net Investment Income for the nine months ended
approximately
was primarily attributable to losses from limited partnership investments in
2020 due to the economic effects of the COVID-19 pandemic and a net gain of
Co. See Net Investment Income (loss) under Note 5 -- "Investments" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q.
Net Unrealized Investment Losses for the nine months ended
and 2020 were approximately
was primarily due to the sales of equity securities with aggregate net gains
during the nine months ended
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
2020, respectively. The increase was attributable to additional losses
associated with the growth in TypTap's business during 2021 and was offset by
lower 2021 losses at HCPCI when compared with 2020. TypTap experienced an
additional
combined losses from hurricanes Henri and Ida. HCPCI 2021 losses for the nine
months were comparatively lower due to 2020 losses of
Sally,
Casualty Insurance Company
assumed from United, and
Hurricane Sally. Both companies recorded additional losses during the nine
months totaling a combined
Storm Eta, a fourth quarter 2020 event. See "Reserves for Losses and Loss
Adjustment Expenses" under "Critical Accounting Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the nine months ended
consolidated basis, respectively. Policy acquisition expenses for HCPCI
insurance operations were
2021
increase was due to amortization of increased costs associated with the policies
assumed from United.
versus
attributable to amortization of increased commission costs related to the growth
of TypTap's policies in force over the past 12 months and the policies assumed
from United.
General and Administrative Personnel Expenses for the nine months ended
respectively. The period-over-period increase of
attributable to higher stock-based compensation expense, an increase in the
headcount of temporary and full-time employees, and merit increases for
non-executive employees effective in late
60
--------------------------------------------------------------------------------
Interest Expense for the nine months ended
approximately
from the early adoption of ASC 2020-06 "Debt - Debt with Conversion and Other
Options and Derivatives and Hedging - Contracts in Entity's own Equity." As
described in Note 2 -- "Summary of Significant Accounting Policies" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q, 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
interest expense no longer includes amounts representing the amortization of the
discount.
Income Tax Expense for the nine months ended
approximately
foreign income taxes resulting in an effective tax rate of 33.2% for 2021 and
26.9% for 2020. The increase in the effective tax rate was primarily due to the
non-deductibility of certain executive compensation.
Ratios:
The loss ratio applicable to the nine months ended
and loss adjustment expenses incurred related to net premiums earned) was 59.7%
compared with 60.6% for the nine months ended
was primarily due to an increase in net premiums earned.
The expense ratio applicable to the nine months ended
44.6% compared with 43.7% for the nine months ended
increase in our 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 is the measure of overall underwriting profitability before
other income. Our combined ratio for the nine months ended
was 104.3% compared with 104.3% for the nine months ended
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 nine months ended
compared with 67.2% for the nine months 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 as hurricanes and tropical storms affecting
through November 30th
during the period
our reinsurance treaty year typically effective
variation in the cost of our 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
year.
61
--------------------------------------------------------------------------------
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 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. With the
exception of litigated claims, substantially all of our losses and loss
adjustment expenses are fully settled and paid within 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, Senior Notes, Promissory Notes, and Finance Leases
The following table summarizes the principal and interest payment obligations of
our indebtedness at
Maturity Date Interest Payment Due Date
4.25% Convertible senior March 2037 March 1 and September 1
notes
3.75% Callable Through September 2036 1st day of each month
promissory note
4.55% Promissory note Through August 2036 1st day of each month
3.90% Promissory note Through April 2032 1st day of each month
Finance leases Through October 2024 Various
Revolving credit Through December 2023 January 1, April 1, July 1, October 1
facility
See Note 11 -- "Long-Term Debt" to our unaudited consolidated financial
statements under Item 1 of this Quarterly Report on Form 10-Q.
Limited Partnership Investments
Our limited partnership investments consist of six private equity funds managed
by their general partners. Four of these funds have unexpired capital
commitments which are callable at the discretion of the fund's general partner
for funding new investments or expenses of the fund. Although capital
commitments for two of the remaining funds have expired, the general partners
may request additional funds under certain circumstances. At
there was an aggregate unfunded capital balance of
Partnership Investments under Note 5 -- "Investments" to our unaudited
consolidated financial statements under Item 1 of this Quarterly Report on Form
10-Q for additional information.
62
--------------------------------------------------------------------------------
Real Estate Investments
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 investments. Thus, we may consider increasing our real estate
investment portfolio should an opportunity arise.
We currently have a 90% equity interest in
liability company for which we are not the primary beneficiary. FMKT Mel JV's
real estate portfolio consists of outparcels for ground lease or sale. We have
the option to take full ownership of these outparcels by acquiring the remaining
10% interest. Alternatively, we may sell these outparcels and allocate the
profits from the sale before liquidating FMKT Mel JV.
Sources and Uses of Cash
Cash Flows for the Nine Months Ended
Net cash provided by operating activities for the nine months ended
30, 2021
received from net premiums written, reinsurance recoveries (of approximately
adjustment expenses and interest payments. Net cash provided by investing
activities of
fixed-maturity and equity securities of
redemptions and maturities of fixed-maturity securities of
distributions received from limited partnership investments of
offset by the purchases of fixed-maturity and equity securities of
and the purchases of property and equipment of
financing activities totaled
net cash dividend payments, net repayment of our revolving credit facility of
Cash Flows for the Nine Months Ended
Net cash provided by operating activities for the nine months ended
30, 2020
received from net premiums written, reinsurance recoveries (of approximately
disbursed for operating expenses, losses and loss adjustment expenses and
interest payments. Due to the inclusion of the cash receipt from Anchor, net
cash provided by operating activities was higher than usual. Net cash provided
by investing activities of
sales of fixed-maturity and equity securities of
redemptions and maturities of fixed-maturity securities of
eminent domain, offset by the purchases of fixed-maturity and equity securities
of
partnership investments of
equipment of
promissory notes,
repurchase our 4.25% convertible senior notes, and
repurchases, and net repayment of our revolving credit facility of
offset by 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.
63
--------------------------------------------------------------------------------
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. To maximize the gains
from fixed-maturity investments in a low interest rate environment, we have
decreased our holdings in fixed-maturity securities since the beginning of 2020.
In the future, we may alter our investment policy as 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 financial statements but are required to be disclosed in the notes to the
financial statements. See Note 21 -- "Commitments and Contingencies" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q and Contractual Obligations and Commitment below for
additional information.
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 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, 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
Our liability for losses and loss adjustment expense ("Reserves") is specific to
property insurance, which is our insurance division's only line of business. The
Reserves include both case reserves on reported claims and our reserves for
incurred but not reported ("IBNR") losses. At each period end date, the balance
of our Reserves is based on our best estimate of the ultimate cost of each claim
for those known cases and the IBNR loss reserves are estimated based primarily
on our historical experience. Changes in the estimated liability are charged or
credited to operations as the losses and loss adjustment expenses are adjusted.
The IBNR represents our estimate of the ultimate cost of all claims that have
occurred but have not been reported to us, and in some cases may not yet be
known to the insured, and future development of reported claims. Estimating the
IBNR component of our Reserves involves considerable judgment on the part of
management. At
have reserved for losses and loss adjustment expenses is attributable to our
estimate of IBNR. The remaining
been reported but not yet fully settled in which case we have established a
reserve based on currently available information and our best estimate of the
cost to settle each claim. At
in reserves for known cases relates to claims incurred during prior years.
64
--------------------------------------------------------------------------------
Our Reserves decreased from
Reserves of
reductions in our non-catastrophe Reserves of
established for the 2021 loss year and additional reserves of
Hurricane Sally and Tropical Storm Eta. The Reserves established for 2021 claims
is primarily driven by an allowance for those claims that have been incurred but
not reported to the company as of
settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at
2021
date including losses yet to be reported to us. However, these estimates are
continually reviewed by management as they are subject to significant
variability and may be impacted by trends in claim severity and frequency or
unusual exposures that have not yet been identified. As part of the process, we
review historical data and consider various factors, including known and
anticipated regulatory and legal developments, changes in social attitudes,
inflation and economic conditions. As experience develops and other data becomes
available, these estimates are revised, as required, resulting in increases or
decreases to the existing unpaid losses and loss adjustment expenses.
Adjustments are reflected in the results of operations in the period in which
they are made, and the liabilities may deviate substantially from prior
estimates.
Economic Impact of Reinsurance Contracts with Retrospective Provisions
Two of our reinsurance contracts include retrospective provisions that adjust
premiums in the event losses are minimal or zero. In accordance with accounting
principles generally accepted in
an asset in the period 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.
For the three months ended
2021
The accrual of benefits was recognized as a reduction in ceded premiums.
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
collected
contract that ended
We believe the credit risk associated with the collectability of 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.
Stock-Based Compensation Expense
We account for stock-based compensation using a recognition method based on fair
value. 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 or derived
service periods. We develop our estimates based on historical data and market
information.
65
--------------------------------------------------------------------------------
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 transaction,
we purchased the right, but not the obligation, to offer homeowners insurance
coverage to all current policyholders of the seller in certain states on the
agreed-upon policy replacement date. The renewal rights agreement also contains
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 agreement 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. Intangible assets are
amortized over their estimated useful lives. Intangible assets are evaluated
periodically to ensure that there is no impairment to carrying value and no
change required in the amortization period.
Warrants and Redeemable Noncontrolling Interest
In the capital investment transaction completed by TTIG with a fund associated
with
A Preferred Stock and HCI issued warrants to purchase 750,000 shares of HCI
common stock, in exchange for proceeds of
expected term 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 18 -- "Redeemable Noncontrolling Interest" to our unaudited
consolidated financial statements under Item 1 of this Quarterly Report on Form
10-Q for additional information.
The above and other accounting estimates and their related risks that we
consider to be our critical accounting estimates are more fully described in our
Annual Report on Form 10-K, which we filed with the
the nine months ended
changes with respect to any of our critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, see Note 3 to
our Notes to Unaudited Consolidated Financial Statements.
66
--------------------------------------------------------------------------------
LEMONADE, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Aflac Incorporated to Webcast 2021 Financial Analysts Briefing
Advisor News
- Study asks: How do different generations approach retirement?
- LTC: A critical component of retirement planning
- Middle-class households face worsening cost pressures
- Metlife study finds less than half of US workforce holistically healthy
- Invigorating client relationships with AI coaching
More Advisor NewsAnnuity News
- Trademark Application for “INSPIRING YOUR FINANCIAL FUTURE” Filed by Great-West Life & Annuity Insurance Company: Great-West Life & Annuity Insurance Company
- Jackson Financial ramps up reinsurance strategy to grow annuity sales
- Insurer to cut dozens of jobs after making splashy CT relocation
- AM Best Comments on Credit Ratings of Teachers Insurance and Annuity Association of America Following Agreement to Acquire Schroders, plc.
- Crypto meets annuities: what to know about bitcoin-linked FIAs
More Annuity NewsHealth/Employee Benefits News
- New Multiple Myeloma Findings from Brown University Warren Alpert Medical School Described (A Call for Compassion: How You Can Help Get Multiple Myeloma Added to the Social Security Administration’s Compassionate Allowances List): Oncology – Multiple Myeloma
- New Hampshire Built Its Health Insurance Stability Before the Storm And That Choice Paid Off – Roger Sevigny
- The new frontier in obesity care for seniors
- 30 DAYS, $1.8 MILLION AND ZERO BILLS PASSED: KDP STATEMENT ON WASTEFUL GOP-LED GENERAL ASSEMBLY
- New Vaccines Findings from University of California Riverside Outlined (Emergency Department Survey of Vaccination Knowledge, Vaccination Coverage, and Willingness To Receive Vaccines In an Emergency Department Among Underserved Populations – …): Immunization – Vaccines
More Health/Employee Benefits NewsLife Insurance News