What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 150 added, 185 removed, 159 unchanged (68% of the section changed)

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HCI Group, Inc.

is a Florida-based InsurTech company that, through its subsidiaries, is engaged in property and casualty insurance, reinsurance, real estate and information technology.

Based on our organizational structure, revenue sources, and evaluation of financial and operating performances by management, we manage the following operations:

Insurance Operations

is a Florida-based InsurTech company with operations in property 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:

HCPCI Insurance Operations

Property and casualty insurance

Reinsurance and other auxiliary operations

Property and casualty insurance

Information technology

Real Estate Operations

Other Operations

Information technology

Other auxiliary operations

For the three months ended September 30 , 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 71.1 % and 95.2 %, respectively, of total revenues of all operating segments.

For the nine months ended September 30, 2020 and 2019, revenues from insurance operations before intracompany elimination represented 86.2 % and 9 5 .

0 %, respectively, of total revenues of all operating segments.

At September 30 , 20 20 and December 31, 201 9 , insurance operations’ total assets represented 8 3.0 % and 85.

5 %, respectively, of the combined assets of all operating segments.

Holding company operations

For the three months March 31, 2021 and 2020, revenues from HCPCI insurance operations before intracompany elimination represented 77.7% and 79.3%, respectively, and revenues from TypTap Group represented 17.2% and 15.6%, respectively, of total revenues of all operating segments.

At March 31, 2021 and December 31, 2020, HCPCI insurance operations’ total assets represented 62.2% and 68.9%, respectively, and TypTap Group’s total assets represented 23.9% and 16.7%, respectively, of the combined 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.

Insurance Operations

HCPCI Insurance Operations

Property and Casualty Insurance

Our insurance business is operated through two insurance subsidiaries:

Homeowners Choice Property & Casualty Insurance Company, Inc.

(“HCPCI”), our principal operating subsidiary, and TypTap Insurance Company (“TypTap”).

We provide various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance.

We are authorized to write residential property and casualty insurance in the states of Arkansas, California, Florida, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas.

Currently, Florida is our primary market.

In February 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”).

Under the agreement, HCPCI offered short-term replacement policies for all policies cancelled by Anchor as of April 1, 2020.

The replacement policies had substantially the same terms and rates as the cancelled polices and will expire on the same dates the cancelled policies would have expired had they not been cancelled.

Upon expiration of the replacement policies, HCPCI may offer renewals to those policyholders at its own rates and terms but has no obligation to do so.

In connection with the agreement, we received $30,000,000 on February 13, 2020 representing an estimate of unearned premium on policies to be replaced.

TypTap has been the primary source of our organic growth in gross written premium since 2018.

TypTap’s policies in force have increased from 6,721 in January 2018 to 33,825 at September 30, 2020.

TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida.

In October 2020, TypTap began applying to offer homeowners coverage in other states.

In addition to the expansion in TypTap business, we expect the Anchor transaction will contribute to our future growth.

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 Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas.

Currently, Florida is HCPCI’s primary market.

Effective January 2021, HCPCI began providing 69.5% quota share reinsurance on all in-force, new and renewal policies issued by United Property & Casualty Insurance Company, a subsidiary of United Insurance Holdings Corporation (“United”).

The policies were issued in the states of Connecticut, New Jersey, Massachusetts and Rhode Island.

Annual premiums from the assumed business approximate $125,000,000.

In exchange, HCPCI paid United an allowance of $4,400,000 towards 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.

Other auxiliary operations

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd.

We selectively retain risk in Claddaugh, reducing the cost of third-party reinsurance.

Claddaugh fully collateralizes its exposure to our insurance subsidiaries by depositing funds into a trust account.

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.

Property and Casualty Insurance

Our subsidiary TTIG currently has four subsidiaries:

TypTap Insurance Company (“TypTap”), TypTap Management Company, Exzeo USA, INC., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India.

TTIG is 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.

TypTap, TTIG’s insurance subsidiary, has been the primary source of our organic growth in gross written premium since 2018.

TypTap’s policies in force have increased from 6,721 in January 2018 to 42,489 at March 31, 2021.

TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida.

As of April 15, 2021, TypTap has been approved to offer homeowners coverage in 12 states outside of Florida.

In addition to the expansion in TypTap business, we also expect future growth from the United policies assigned to TypTap Group through the renewal rights agreement acquired by HCI.

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 Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products or services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors.

These products include SAMS TM , Harmony, AtlasViewer and ClaimColony ® .

Real Estate Operations

1 unchanged sentence

Properties used in operations consist of one Tampa office building and a secondary insurance operations site in Ocala, Florida.

Our investment properties include one full-service restaurant, retail shopping centers, one office building, two marinas, and undeveloped land near our headquarters in Tampa, Florida.

In July 2020, the property in Tampa, Florida where our headquarters is located was acquired by the Florida Department of Transportation (“FDOT”) exercising the power of eminent domain for a highway expansion project.

See Note 9 -- “Property and Equipment, Net” to our unaudited consolidated financial statement s under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.

Other Operations

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 devices.

These products include SAMS TM , Harmony, and ClaimColony ® .

Impact of COVID-19 on Our Business

As of the date of this filing, the COVID-19 pandemic is likely to continue causing significant economic disruption and negatively affect almost every industry directly or indirectly.

The long-term impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows is difficult to predict (also see Risks and Uncertainties Caused by COVID-19 in Note 1 -- “Nature of Operations” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q) as this global health crisis is still evolving.

The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the containment measures, the extent and severity of the impact on our patrons and business partners, and the size and effectiveness of the state and federal government’s relief programs, of which we expect more to follow.

With the use of our existing technologies and infrastructure, a majority of our workforce can work from home without significant disruptions to our operations.

At present, we have no plan to reduce our workforce.

At September 30, 2020, the impact on our financial statements of COVOD-19 consists primarily of unrealized losses on our portfolio of investment securities and material losses from limited partnership investments.

However, we may experience further material economic impacts in other areas of our business, such as in our real estate operations, in future periods.

Holding company operations

Activities of our holding company, HCI group, Inc., plus other companies that do not meet the quantitative and qualitative for a reportable segment comprise the operations of this segment.

Recent Events

On October 16, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on December 18, 2020 to stockholders of record on November 20, 2020.

On April 28, 2021, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on June 18, 2021 to stockholders of record on May 21, 2021.

On February 26, 2021, TTIG completed its investment transaction with a fund associated with Centerbridge Partners, L.P.

Under the agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $0.001 par value, at a price of $10 per share for total proceeds of $100,000,000.

Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option.

Cash dividend rates are $0.50 per share in Year 1, $0.60 per share in Year 2, $0.75 per share in Year 3, and $0.95 per share in Year 4 and thereafter.

The rates for paid-in-kind dividends are $0.60 per share in Year 1 and $0.70 per share in Year 2.

The holders of the Series A Preferred Stock have the right to convert the stock at any time into shares of TTIG’S common stock with an initial conversion rate of 1 to 1.

The conversion rate will be adjusted under certain conditions.

Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon 1) a qualified public offering of TTIG’s common stock with gross proceeds of not less than $250,000,000 with a price per share at least equal to 150% of the original purchase price of the Series A Preferred share, or 2) at the election of requisite holders of a majority of the Series A Preferred Stock, whichever comes first.

The holders of Series A Preferred Stock also have redemption rights and liquidation preference.

In connection with the transaction, the lead investor was granted warrants to purchase 750,000 shares of HCI’s common stock with an exercise price of $54.40 per share.

The warrants were immediately exercisable and will expire on the fourth anniversary of the date of issuance.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019 (dollar amounts in thousands, except per share amounts):

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020 (dollar amounts in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30,

Gross premiums earned

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Net premiums earned

Net investment income

Net investment income (loss)

Net realized investment gains (losses)

Net unrealized investment gains (losses)

Net unrealized investment losses

Credit losses on investments

Policy fee income

Gain on involuntary conversion

Total revenue

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Interest expense

Loss on repurchase of convertible senior notes

Loss on extinguishment of debt

Other operating expenses

2 unchanged sentences

Income tax expense

Net income attributable to noncontrolling interests

Net income attributable to HCI

Ratios to Net Premiums Earned:

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Earnings Per Share Data:

Comparison of the Three Months ended September 30 , 2020 to the Three Months ended September 30 , 2019

Our results of operations for the three months ended September 30, 2020 reflect income available to common stockholders of approximately $15,390,000 or $1.70 earnings per diluted common share, compared with approximately $5,853,000, or $0.73 earnings per diluted common share, for the three months ended September 30, 2019.

The quarter-over-quarter increase in net income was primarily due to a gain on involuntary conversion of $36,969,000 and a net increase in net premiums earned of $8,029,000, offset by a decrease in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $884,000, an increase in losses and loss adjustment expenses of $24,416,000, an increase in policy acquisition and underwriting expenses of $3,222,000, and increased payroll costs of $1,920,000.

Of the $24,416,000 increase in losses and loss adjustment expenses, $17,700,000 related to Hurricane Sally.

Gross Premiums Earned for the three months ended September 30, 2020 and 2019 were approximately $106,694,000 and $86,002,000, respectively.

The quarter-over-quarter increase was primarily attributable to the policies transitioned from Anchor and increased policies in force from the growth in TypTap’s business.

Gross premiums earned related to the Anchor policies were approximately $9,300,000 for the quarter.

Premiums Ceded for the three months ended September 30, 2020 and 2019 were approximately $44,231,000 and $31,568,000, respectively, representing 41.5% and 36.7%, respectively, of gross premiums earned.

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Our results of operations for the three months ended March 31, 2021 reflect income available to common stockholders of approximately $6,148,000 or $0.75 diluted earnings per share, compared with approximately $547,000, or $0.07 diluted earnings per share, for the three months ended March 31, 2020.

The quarter-over-quarter increase in net income was primarily due to an increase in net premiums earned of $26,197,000, a $12,679,000 increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses), offset by a $17,673,000 increase in losses and loss adjustment expenses and a $11,239,000 increase in policy acquisition and other underwriting expenses.

Gross Premiums Earned on a consolidated basis for the three months ended March 31, 2021 and 2020 were approximately $130,942,000 and $92,365,000, respectively.

HCPCI gross premiums earned were $102,131,000 for the three months ended March 31, 2021 compared to $75,770,000 for the three months ended March 31, 2020.

The increase included $20,650,000 of gross premiums earned from the United insurance policies assumed.

TypTap’s gross premiums earned were $28,811,000 versus $16,595,000 for the same comparative periods with the increase due to a greater number of policies in force from the growth in TypTap’s business.

Premiums Ceded for the three months ended March 31, 2021 and 2020 were approximately $43,099,000 and $30,719,000, respectively, representing 32.9% and 33.3%, respectively, of gross premiums earned.

The $12,380,000 increase was primarily attributable to increased reinsurance costs effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

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The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.

For the three months ended September 30, 2020, premiums ceded included a decrease of approximately $4,680,000 related to retrospective provisions compared with a net reduction of approximately $2,520,000 for the three months ended September 30, 2019.

For the three months ended March 31, 2021, premiums ceded included a decrease of $4,680,000 related to retrospective provisions compared with a net reduction of $2,520,000 for the three months ended March 31, 2020.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended September 30, 2020 and 2019 totaled approximately $72,220,000 and $65,763,000, respectively.

Net Premiums Written for the three months ended March 31, 2021 and 2020 totaled approximately $82,749,000 and $45,799,000, respectively.

Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

The increase in 2020 resulted from an increase in gross premiums written from the growth of TypTap business and the transition of policies from Anchor.

We had approximately 157,000 policies in force at September 30, 2020 as compared with approximately 125,000 policies in force at September 30, 2019.

Net Premiums Earned for the three months ended September 30, 2020 and 2019 were approximately $62,463,000 and $54,434,000, respectively, and reflect the gross 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 three months ended September 30, 2020 and 201 9 (amounts in thousands):

The increase in 2021 resulted from an increase in gross premiums written from the transition of policies from Anchor, the United insurance policies assumed and the growth of TypTap business.

We had approximately 154,000 policies in force at March 31, 2021 as compared with approximately 133,000 policies in force at March 31, 2020.

Net Premiums Earned for the three months ended March 31, 2021 and 2020 were approximately $87,843,000 and $61,646,000, respectively, and reflect the gross 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 three months ended March 31, 2021 and 20 20 (amounts in thousands):

Three Months Ended

September 30,

Net Premiums Written

Increase in Unearned Premiums

Decrease in Unearned Premiums

Net Premiums Earned

Net Investment Income for the three months ended September 30, 2020 and 2019 was approximately $1,832,000 and $3,621,000, respectively.

The $1,789,000 decrease was primarily attributable to lower interest income from fixed-maturity securities and cash equivalent instruments.

Net Unrealized Investment gains for the three months ended September 30, 2020 and 2019 were approximately $1,340,000 and $642,000, respectively, reflecting an increase in the fair value of equity securities resulting from an improved economic outlook since the shock caused by COVID-19.

Gain on Involuntary Conversion for the three months ended September 30, 2020 was approximately $36,969,000.

This one-time gain resulted from the aforementioned transaction with the FDOT.

See Note 9 -- “Property and Equipment, Net” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Our Losses and Loss Adjustment Expenses amounted to approximately $51,743,000 and $27,327,000 for the three months ended September 30, 2020 and 2019, respectively.

The $24,416,000 increase primarily resulted from $17,700,000 of reserves net of reinsurance recoverable for Hurricane Sally, losses from other weather-related events in the quarter, the increase in gross premiums earned, and change in premium mix, offset by a reduction in loss reserves related to 2019 and 2018 loss years.

Net Investment Income for the three months ended March 31, 2021 was approximately $4,594,000 versus a net investment loss of approximately $192,000 for the three months ended March 31, 2020.

The $4,786,000 increase was primarily attributable to losses from limited partner investments in 2020 due to the economic effects of the COVID-19 pandemic and a net gain of $2,790,000 recognized in 2021 for a legal settlement received from The Kroger 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 Realized Investment Gains for the three months ended March 31, 2021 were approximately $1,113,000 versus net realized investment loss of approximately $2,244,000 for the three months ended March 31, 2020.

The $3,357,000 increase was primarily attributable to losses generated in 2020 from investment portfolio rebalancing efforts.

Net Unrealized Investment losses for the three months ended March 31, 2021 were approximately $269,000 versus the net unrealized investment loss of approximately $4,805,000 for the three months ended March 31, 2020.

The net unrealized investment loss for the three months ended March 31, 2020 was primarily attributable to the negative economic effects of the COVID-19 pandemic.

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $45,751,000 and $28,078,000 for the three months ended March 31,2021 and 2020, respectively.

HCPCI losses and loss adjustment expenses were $33,439,000 for the three months ended March 31, 2021 compared to $21,838,000 for the three months ended March 31, 2020.

The increase was primarily due to $10,945,000 of losses attributable to the United policies assumed.

Losses and loss adjustment expenses for TypTap were $12,312,000 versus $6,240,000 for the same comparative periods.

The increase was attributable to the greater number of TypTap policies in force.

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 September 30, 2020 and 2019 were approximately $14,210,000 and $10,988,000, 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.

The $3,222,000 increase was primarily attributable to higher agent commission rates, property inspection costs associated with the organic growth of TypTap business, and $605,000 of amortized transition costs related to Anchor policies.

General and Administrative Personnel Expenses for the three months ended September 30, 2020 and 2019 were approximately $9,871,000 and $7,951,000, respectively.

Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and employee benefit costs.

Policy Acquisition and Other Underwriting Expenses for the three months ended March 31, 2021 and 2020 were approximately $23,065,000 and $11,826,000 on a 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 $17,571,000 for the three months ended March 31, 2021 compared to $8,497,000 for the three months ended March 31, 2020.

The increase was due to amortization of increased costs associated with the policies assumed from United.

TypTap Group policy acquisition expenses were $5,678,000 versus $3,491,000 for the same comparative periods, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months.

General and Administrative Personnel Expenses for the three months ended March 31, 2021 and 2020 were approximately $9,650,000 and $8,367,000, 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 $1,920,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2020, and lower capitalized and recoverable payroll costs.

Income Tax Expense for the three months ended September 30, 2020 and 2019 was approximately $ 6,146,000 and $ 1,866 ,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 28.5 % for 20 20 and 2 4.2 % for 2019 .

The in crease in the effective tax rate was primarily due to the non-deductibility of certain executive compensation .

The loss ratio applicable to the three months ended September 30, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 82.8% compared with 50.2% for the three months ended September 30, 2019.

The period-over-period increase of $1,283,000 was primarily attributable to higher stock-based compensation expense, an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2021, and was offset by higher capitalized and recoverable payroll costs.

Interest Expense for the three months ended March 31, 2021 and 2020 was approximately $2,079,000 and $2,970,000, respectively.

The decrease resulted 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 January 1, 2021.

As a result, interest expense no longer includes amounts representing the amortization of the discount.

Income Tax Expense for the three months ended March 31, 2021 and 2020 was approximately $3,257,000 and $110,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 32.2% for 2021 and 16.7% for 2020.

The increase in the effective tax rate was primarily due to the derecognition of deferred tax assets attributable to unvested restricted stock that was cancelled in February 2021, offset by a slight decrease in the non-deductibility of certain executive compensation.

The loss ratio applicable to the three months ended March 31, 2021 (losses and loss adjustment expenses incurred related to net premiums earned) was 52.1% compared with 45.6% for the three months ended March 31, 2020.

The increase was primarily due to the increase in losses and loss adjustment expenses, offset in part by the increase in net premiums earned.

The expense ratio applicable to the three months ended September 30, 2020 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 49.2% compared with 45.8% for the three months ended September 30, 2019.

The expense ratio applicable to the three months ended March 31, 2021 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 44.9% compared with 43.2% for the three months ended March 1, 2020.

The 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.

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 September 30, 2020 was 132.0% compared with 96.0% for the three months ended September 30, 2019.

Our combined ratio for the three months ended March 31, 2021 was 97.0% compared with 88.8% for the three months ended March 31, 2020.

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 September 30, 2020 was 77.3% compared with 60.8% for the three months ended September 30, 2019.

The combined ratio to gross premiums earned for the three months ended March 31, 2021 was 65.1% compared with 59.3% for the three months ended March 31, 2020.

The increase in 2021 was attributable to the factors described above.

Comparison of the Nine Months ended September 30, 2020 to the Nine Months ended September 30, 2019

Our results of operations for the nine months ended September 30, 2020 reflect income available to common stockholders of approximately $24,873,000, or $3.03 earnings per diluted common share, compared with approximately $20,144,000, or $2.49 earnings per diluted common share, for the nine months ended September 30, 2019.

The period-over-period increase was primarily due to an increase in gross premiums earned of $54,948,000 and a $36,969,000 gain on involuntary conversion, offset by a $15,006,000 increase in reinsurance costs, a net decrease in income from our investment portfolio of $15,820,000, an increase in losses and loss adjustment expenses of $41,048,000, an increase in policy acquisition and other underwriting expense of $8,289,000, and an increase in general and administrative personnel expenses of $4,656,000.

Gross Premiums Earned for the nine months ended September 30, 2020 and 2019 were approximately $306,862,000 and $251,914,000, respectively.

The $54,948,000 increase in 2020 compared with the corresponding period in 2019 was primarily attributable to a net increase in policies in force as described earlier.

Premiums Ceded for the nine months ended September 30, 2020 and 2019 were approximately $109,304,000 and $94,298,000, respectively, representing 35.6% and 37.4%, respectively, of gross premiums earned.

The $15,006,000 increase was primarily attributable to increased reinsurance cost per coverage limit effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

For the nine months ended September 30, 2020, premiums ceded included a reduction of approximately $10,440,000 related to retrospective provisions.

For the nine months ended September 30, 2019, premiums ceded included a net reduction of approximately $4,258,000 related to retrospective provisions.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the nine months ended September 30, 2020 and 2019 totaled approximately $255,546,000 and $204,084,000, respectively.

The $51,462,000 increase in 2020 resulted primarily from the factors described earlier.

Net Premiums Earned for the nine months ended September 30, 2020 and 2019 were approximately $197,558,000 and $157,616,000, respectively, and reflect gross 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 ended September 30, 2020 and 2019 (amounts in thousands):

Nine Months Ended

September 30,

Net Premiums Written

Increase in Unearned Premiums

Net Premiums Earned

Net Investment Income for the nine months ended September 30, 2020 and 2019 was approximately $3,244,000 and $11,125,000, respectively.

The $7,881,000 decrease was primarily attributable to a loss of $2,058,000 from limited partnership investments in 2020 as opposed to income of $1,308,000 in 2019.

In addition, interest income from cash, cash equivalents, fixed-maturity securities, and short-term investments was lower by $4,041,000 in 2020 compared with 2019 due to a lowering of investment yields, particularly on cash.

Net Unrealized Investment Losses for the nine months ended September 30, 2020 were approximately $581,000 versus net unrealized investment gains of approximately $7,261,000 for the nine months ended September 30, 2019, reflecting a deterioration in the fair value of equity securities caused by COVID-19 pandemic.

Gain on Involuntary Conversion for the nine months ended September 30, 2020 was approximately $36,969,000, resulting from the transaction described earlier.

Our Losses and Loss Adjustment Expenses amounted to approximately $119,664,000 and $78,616,000 for the nine months ended September 30, 2020 and 2019, respectively.

The $41,048,000 increase was primarily attributable to the increase in gross premiums earned, change in premium mix and reserves for Hurricane Sally and other weather-related losses, offset by lower prior year development.

Losses after reinsurance recoverable for Hurricane Sally approximated $17,700,000.

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 September 30, 2020 and 2019 were approximately $39,027,000 and $30,738,000, respectively.

The $8,289,000 increase was primarily attributable to the factors described earlier.

General and Administrative Personnel Expenses for the nine months ended September 30, 2020 and 2019 were approximately $27,969,000 and $23,313,000, respectively.

The period-over-period increase of $4,656,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, merit increases for non-executive employees, and lower capitalized and recoverable payroll costs.

Interest Expense for the nine months ended September 30, 2020 and 2019 was approximately $8,846,000 and $10,128,000, respectively.

The decrease resulted from the repayment of our 3.875% Convertible Senior Notes in March 2019.

Income Tax Expense for the nine months ended September 30, 2020 and 2019 was approximately $9,143,000 and $7,173,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 26.9% for 2020 and 26.3% for 2019.

The loss ratio applicable to the nine months ended September 30, 2020 was 60.6% compared with 49.9% for the nine months ended September 30, 2019.

The expense ratio applicable to the nine months ended September 30, 2020 was 43.7% compared with 46.5% for the nine months ended September 30, 2019.

The decrease in our expense ratio was primarily attributable to the increase in net premiums earned.

The combined ratio is the measure of overall underwriting profitability before other income.

Our combined ratio for the nine months ended September 30, 2020 was 104.3% compared with 96.4% for the nine months ended September 30, 2019.

The increase was attributable to the increase in losses and loss adjustment expenses, offset by the increase in net premiums earned as described above.

The combined ratio to gross premiums earned for the nine months ended September 30, 2020 was 67.2% compared with 60.3% for the nine months ended September 30, 2019.

The increase in 2020 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 Florida typically occur during the period from June 1 through November 30 each year.

Also, with our reinsurance treaty year typically effective June 1 each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1 each year.

Our insurance business is seasonal as hurricanes and tropical storms affecting Florida, our primary market, typically occur during the period from June 1 st through November 30 th of each year.

Winter storms in the northeast usually occur during the period between December 1 st and March 31 st of each year.

Also, with our reinsurance treaty year typically effective June 1 st of each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1 st of each year.

LIQUIDITY AND CAPITAL RESOURCES

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We may consider raising additional capital through debt and equity offerings to support our growth and future investment opportunities.

Our insurance subsidiar ies require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses.

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.

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This period of time varies by the circumstances surrounding each claim.

Substantially all of our losses and loss adjustment expenses are fully settled and paid within 100 days of the claim receipt date.

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.

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Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases

The following table summarizes the principal and interest payment obligations of our indebtedness at September 30, 2020:

The following table summarizes the principal and interest payment obligations of our indebtedness at March 31, 2021:

Maturity Date

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See Note 11 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Share Repurchase Plan

On March 13, 2020, the Board approved a plan for 2020, effective March 16, 2020, to repurchase up to $20,000,000 of common shares under which we may purchase shares of common stock in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws.

See Note 19 -- “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for more information.

Limited Partnership Investments

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Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances.

At September 30, 2020, there was an aggregate unfunded capital balance of $12,178,000.

At March 31, 2021, there was an aggregate unfunded capital balance of $9,861,000.

See Limited 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.

Real Estate Investment s

Real Estate Investments

Real estate has long been a significant component of our overall investment portfolio.

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Sources and Uses of Cash

Cash Flows for the Nine Months Ended September 30, 2020

Net cash provided by operating activities for the nine months ended September 30, 2020 was approximately $77,530,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $39,624,000) and $27,092,000 of net cash receipts from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Cash Flows for the Three Months Ended March 31, 2021

Net cash provided by operating activities for the three months ended March 31, 2021 was approximately $36,140,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $13,543,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $19,141,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $34,378,000, the proceeds from redemptions and maturities of fixed-maturity securities of $12,486,000, and distributions received from limited partnership investments of $1,546,000, offset by the purchases of fixed-maturity and equity securities of $28,391,000, and the purchases of property and equipment of $697,000.

Net cash provided by financing activities totaled $66,784,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $2,793,000 of net cash dividend payments, and net repayment of our revolving credit facility of $23,750,000.

Cash Flows for the Three Months Ended March 31, 2020

Net cash provided by operating activities for the three months ended March 31, 2020 was approximately $55,403,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $14,884,000) and $30,000,000 of advanced premiums from Anchor less cash 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 $133,800,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $96,669,000, the proceeds from redemptions and maturities of fixed-maturity securities of $60,870,000, and $44,000,000 of compensation received for the property taken by the power of eminent domain, offset by the purchases of fixed-maturity and equity securities of $57,375,000, the purchase of real estate investments of $3,052,000, limited partnership investments of $2,951,000, and the purchases of property and equipment of $5,928,000.

Net cash used in financing activities totaled $28,151,000, which consisted of $16,533,000 used to repay 3.95% and 4% promissory notes, $9,279,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, $6,499,000 used in our share repurchases, and net repayment of our revolving credit facility of $1,000,000, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000.

Cash Flows for the Nine Months Ended September 30, 2019

Net cash provided by operating activities for the nine months ended September 30, 2019 was approximately $38,094,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $74,355,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $44,511,000 was primarily due to the proceeds from redemptions and maturities of fixed-maturity securities of $50,738,000, the proceeds from sales of fixed-maturity and equity securities of $39,570,000, and the proceeds from sales and maturities of short-term and other investments of $66,902,000, offset by the purchases of fixed-maturity and equity securities of $98,633,000, the purchase of real estate investments of $10,475,000, limited partnership investments of $1,899,000, and the purchases of property and equipment of $2,166,000.

Net cash used in financing activities totaled $107,439,000, which was primarily due to the repayments of long-term debt of $90,980,000, $9,599,000 of net cash dividend payments, and $16,214,000 used in our share repurchases, offset by $9,750,000 of borrowings from revolving credit facility.

Net cash provided by investing activities of $23,923,000 was primarily due to the proceeds from redemptions and maturities of fixed maturity securities of $27,914,000, and the proceeds from sales of fixed-maturity and equity securities of $13,056,000, offset by the purchases of fixed-maturity and equity securities of $13,637,000, the purchase of real estate investments of $2,452,000, limited partnership investments of $919,000, and the purchases of property and equipment of $353,000.

Net cash provided by financing activities totaled $8,585,000, which was primarily due to $14,000,000 of borrowings from our revolving credit facility and the proceeds from issuance of a 3.90% promissory note of $10,000,000, offset by repayments of long-term debt of $9,160,000, and $3,095,000 of net cash dividend payments.

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 September 30, 2020 , we had $ 135,445,000 of fixed-maturity and equity investments, which are carried at fair value.

At March 31, 2021, we had $110,002,000 of fixed-maturity and equity investments, which are carried at fair value.

Changes in the general interest rate environment affect the returns available on new fixed-maturity investments.

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OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2020, we had unexpired capital commitments for limited partnerships in which we hold interests.

As of March 31, 2021, we had unexpired capital commitments for limited partnerships in which we hold interests.

Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements.

See Note 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.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of September 30, 2020 (amounts in thousands):

Payment Due by Period

Operating leases (1)

Service agreement (1)

Unfunded capital commitments (2)

Revolving credit facility

Long-term debt obligations (3)

Represents leases for office space in Tampa and Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment and storage space.

Liabilities related to our India operations were converted from Indian Rupees to U.S.

dollars using the September 30, 2020 exchange rate.

Represents the unfunded balance of capital commitments under the subscription agreements related to limited partnerships in which we hold interests.

Amounts represent principal and interest payments over the lives of various long-term debt obligations.

See Note 12 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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, and stock-based compensation expense involve our most significant judgments and estimates material to our consolidated financial statements.

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

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Estimating the IBNR component of our Reserves involves considerable judgment on the part of management.

At September 30, 2020, $165,274,000 of the total $219,345,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

At March 31, 20 2 1 , $ 160,050,000 of the total $ 205,773,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

The remaining $ 45,723,000 relates to known cases which have 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 September 30, 2020, $31,125,000 of the $54,071,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $214,697,000 at December 31, 2019 to $219,345,000 at September 30, 2020.

The $4,648,000 increase is comprised of $81,691,000 in reserves established for the 2020 loss year, of which $18,628,000 related to Hurricane Sally, offset by reductions in our Reserves of $43,328,000 specific to Hurricane Irma in 2017 and Hurricane Michael in 2018 and reductions in our non-catastrophe Reserves of $19,058,000 for 2019 and $14,657,000 for 2018 and prior loss years.

The $81,691,000 in Reserves established for 2020 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2020.

At March 31, 2021 , $ 36,311,000 of the $ 45,723,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $212,169,000 at December 31, 2020 to $205,773,000 at March 31, 2021.

The $6,396,000 decrease is comprised of reductions in our Reserves of $10,066,000 specific to Hurricane Irma and Hurricane Michael and reductions in our non-catastrophe Reserves of $23,045,000 for 2020 and $7,714,000 for 2019 and prior loss years, offset by $34,429,000 in reserves established for the 2021 loss year and Hurricane Sally.

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 March 31, 2021.

The decrease of $40,825,000 specific to our 2020 and prior loss-year reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at September 30, 2020 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us.

Based on all information known to us, we consider our Reserves at March 31, 2021 to be adequate to cover our claims for losses that have occurred as of that 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.

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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 September 30 , 2020 and 2019 , we accrued benefits of $ 4,680,000 and $ 2,520 ,000, respectively .

F or the three months ended September 30, 20 20 and 2019 , there was no a djustment in ceded premiums .

In combination, for the three months ended September 30 , 2020 and 2019 , we recognized decrease s i n ceded premiums of $ 4,680,000 a nd $ 2,520 ,000, respectively .

For the nine months ended September 30, 2020 and 2019, we accrued benefits of $10,440,000 and $3,824,000, respectively.

There was no adjustment in ceded premiums for the nine months ended September 30, 2020.

For the nine months ended September 30, 2019, we recognized a decrease in premiums ceded of $434,000.

In combination, for the nine months ended September 30, 2020 and 2019, we recognized decreases in ceded premiums of $10,440,000 and $4,258,000, respectively.

As of September 30, 2020, we had $6,240,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.

In June 2020, we received a $13,680,000 premium refund under the retrospective reinsurance contract that ended May 31, 2020.

Accrued benefits related to this expired contract were $9,480,000 at December 31, 2019.

For the three months ended March 31, 2021 and 2020, we accrued benefits of $4,680,000 and $2,520,000, respectively.

For the three months ended March 31, 2021 and 2020, there was no adjustment in ceded premiums.

In combination, for the three months ended March 31, 2021 and 2020, we recognized decreases in ceded premiums of $4,680,000 and $2,520,000, respectively.

As of March 31, 2021, we had $15,600,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.

We believe the credit risk associated with the 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.

Stock-Based Compensation Expense

We account for stock-based compensation using a recognition method based on fair value.

Stock-based compensation cost is estimated at the grant date based on the fair value of the award and compensation expense is recognized ratably over the requisite or derived service period of the award.

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, market information, and third-party specialist valuation, which can change significantly over time.

We use the Black-Scholes option-pricing model to estimate the fair value of stock option grants.

For stock-based compensation awards with service conditions, we recognize compensation expense using the straight-line amortization method over the requisite service period.

For stock-based compensation awards with market conditions, we use a Monte Carlo simulation model with assistance from a third-party valuation specialist to estimate the fair value and derived service periods of the awards, and we recognize compensation expense ratably over the derived service periods.

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 change required in the amortization period based on required accounting standards.

Warrants and Redeemable Noncontrolling Interest

In the capital investment transaction completed by TTIG with a fund associated with Centerbridge Partners, L.P., TTIG issued 10,000,000 total shares of Series A Preferred Stock and HCI issued warrants to purchase 750,000 shares of HCI common stock, in exchange for proceeds of $100,000,000.

Both the fair value and 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 SEC on March 12, 2021.

For the nine months ended September 30, 2020, there have been no material changes with respect to any of our critical accounting policies.

For the three months ended March 31, 2021, there have been no other material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis