What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 144 added, 96 removed, 213 unchanged (53% of the section changed)

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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.

For the three months ended June 30, 2021 and 2020, revenues from HCPCI insurance operations before intracompany elimination represented 77.6% and 86.6%, respectively, and revenues from TypTap Group represented 20.3% and 11.1%, respectively, of total revenues of all operating segments.

For the six months ended June 30, 2021 and 2020, revenues from HCPCI insurance operations before intracompany elimination represented 77.8% and 83.8%, respectively, and revenues from TypTap Group represented 18.9% and 12.8%,

respectively, of total revenues of all operating segments.

At June 30 , 20 2 1 and December 31, 20 20 , HCPCI insurance operations’ total assets represented 61.4 % and 68.9 %, respectively, and T ypTap Group ’s total assets represented 25.4 % and 16.7%, respectively, of the combined assets of all operating segments.

See Note 1 4 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

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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 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 June 2021 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in those states from June 1, 2021 through May 31, 2022.

Under the new agreement, HCPCI assumes 50% of the business and pays United a ceding commission of 24% of premium.

Annual premiums from the total assumed business approximate $120,000,000.

HCPCI will receive 50% of the total premiums.

Reinsurance and other auxiliary operations

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

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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 January 2018 to 42,489 at March 31, 2021.

TypTap’s policies in force have increased from 6,721 in January 2018 to 44,585 at June 30, 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.

As of July 26, 2021, TypTap has been approved to offer homeowners coverage in 15 states outside of Florida.

In addition to the expansion in TypTap business, we also expect 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 $60,000,000 of annual premiums and pays a ceding commission of 24% of premium .

Information Technology

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Recent Events

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.

On July 7, 2021, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on September 17, 2021 to stockholders of record on August 20, 2021.

RESULTS OF OPERATIONS

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):

The following table summarizes our results of operations for the three and six months ended June 30, 2021 and 2020 (dollar amounts in thousands, except per share amounts):

Three Months Ended

Six Months Ended

Gross premiums earned

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Net premiums earned

Net investment income (loss)

Net investment income

Net realized investment gains (losses)

Net unrealized investment losses

Net unrealized investment gains (losses)

Credit losses on investments

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Interest expense

Loss on repurchases of convertible senior notes

Other operating expenses

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Net income attributable to noncontrolling interests

Net income attributable to HCI

Net income after noncontrolling interests

Ratios to Net Premiums Earned:

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Earnings Per Share Data:

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.

Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020

Our results of operations for the three months ended June 30, 2021 reflect net income of approximately $3,830,000 or $0.24 diluted earnings per share, compared with approximately $8,936,000 or $1.08 diluted earnings per share, for the three months ended June 30, 2020.

The quarter-over-quarter decrease in net income was primarily due to a $16,074,000 increase in losses and loss adjustment expenses, a $10,178,000 increase in policy acquisition and other underwriting expenses, and a $1,616,000 increase in other operating expenses, offset by an increase in net premiums earned of $19,555,000, an $895,000 increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses), and a $1,020,000 decrease in interest expense.

Gross Premiums Earned on a consolidated basis for the three months ended June 30, 2021 and 2020 were approximately $139,440,000 and $107,803,000, respectively.

HCPCI gross premiums earned were $100,440,000 for the three months ended June 30, 2021 compared to $89,423,000 for the three months ended June 30, 2020.

The increase included $23,707,000 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.

TypTap’s gross premiums earned were $39,000,000 versus $18,380,000 for the same comparative periods with the increase 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 June 1, 2021.

Premiums Ceded for the three months ended June 30, 2021 and 2020 were approximately $46,436,000 and $34,354,000, respectively, representing 33.3% and 31.9%, respectively, of gross premiums earned.

The $12,082,000 increase was 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 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.

For the three months ended June 30, 2021, premiums ceded included a decrease of $3,575,000 related to retrospective provisions compared with a decrease of $3,240,000 for the three months ended June 30, 2020.

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

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 for the three months ended June 30, 2021 and 2020 totaled approximately $138,542,000 and $137,527,000, respectively.

Net premiums 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 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):

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 150,000 policies in force at June 30, 2021 (excluding policies assumed from United) as compared with approximately 164,000 policies in force at June 30, 2020.

Net Premiums Earned for the three months ended June 30, 2021 and 2020 were approximately $93,004,000 and $73,449,000, 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 June 30, 2021 and 2020 (amounts in thousands):

Three Months Ended

Net Premiums Written

Decrease in Unearned Premiums

Increase in Unearned Premiums

Net Premiums Earned

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.

Net Investment Income for the three months ended June 30, 2021 and 2020 was approximately $2,635,000 and $1,604,000, respectively.

The $1,031,000 increase was primarily attributable to a $2,074,000 increase in income from limited partnership and real estate investments, offset by an $859,000 decrease in 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 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.

Net Realized Investment Gains for the three months ended June 30 , 2021 and 2020 were approximately $ 2 , 607 , 000 and $1,435,000, respectively.

The $ 1 , 172 , 000 increase was primarily attributable to net gains from selling equity securities.

Net Unrealized Investment Gains for the three months ended June 30, 2021 and 2020 were approximately $1,489,000 and $2,884,000, respectively.

The decrease was primarily due to the sales of equity securities with aggregate net gains during the quarter.

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $55,917,000 and $39,843,000 for the three months ended June 30, 2021 and 2020, respectively.

HCPCI losses and loss adjustment expenses were $39,641,000 for the three months ended June 30, 2021 compared to $31,445,000 for the three months ended June 30, 2020.

The increase was primarily due to $12,564,000 of losses attributable to the United policies assumed.

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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 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.

Policy Acquisition and Other Underwriting Expenses for the three months ended June 30, 2021 and 2020 were approximately $23,169,000 and $12,991,000 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 $15,470,000 for the three months ended June 30, 2021 compared to $9,936,000 for the three months ended June 30, 2020.

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

TypTap Group policy acquisition expenses were $7,574,000 versus $3,083,000 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.

General and Administrative Personnel Expenses for the three months ended June 30, 2021 and 2020 were approximately $10,546,000 and $9,731,000, respectively.

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

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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 $1,283,000 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 period-over-period increase of $815,000 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 a reversal of accrued employee bonuses.

Income Tax Expense for the three months ended June 30, 2021 and 2020 was approximately $1,267,000 and $2,887,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.9% for 2021 and 24.4% for 2020.

The loss ratio applicable to the three months ended June 30, 2021 (losses and loss adjustment expenses incurred related to net premiums earned) was 60.1% compared with 54.2% for the three months ended June 30, 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 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 expense ratio applicable to the three months ended June 30 , 2021 (defined as underwriting expenses, general and administrative personnel expenses , interest and other operating expenses related to net premiums earned) was 43.6 % compared with 39.6 % for the three months ended June 30 , 2020 .

The in crease 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 (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 March 31, 2021 was 97.0% compared with 88.8% for the three months ended March 31, 2020.

Our combined ratio for the three months ended June 30, 2021 was 103.7% compared with 93.8% for the three months ended June 30, 2020.

The increase in 2021 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 March 31, 2021 was 65.1% compared with 59.3% for the three months ended March 31, 2020.

The combined ratio to gross premiums earned for the three months ended June 30, 2021 was 69.1% compared with 63.9% for the three months ended June 30, 2020.

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

Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020

Our results of operations for the six months ended June 30, 2021 reflect net income of approximately $10,675,000 or $0.98 diluted earnings per share, compared with approximately $9,483,000 or $1.23 diluted earnings per share, for the six months ended June 30, 2020.

The period-over-period increase in net income was primarily due to an increase in net premiums earned of $45,752,000, a $14,013,000 increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses), offset by a $33,747,000 increase in losses and loss adjustment expenses and a $21,417,000 increase in policy acquisition and other underwriting expenses.

Gross Premiums Earned on a consolidated basis for the six months ended June 30, 2021 and 2020 were approximately $270,382,000 and $200,168,000, respectively.

HCPCI gross premiums earned were $202,571,000 for the six months ended June 30, 2021 compared to $165,193,000 for the six months ended June 30, 2020.

The increase included $44,357,000 of gross premiums earned from the United insurance policies assumed.

TypTap’s gross premiums earned were $67,811,000 versus $34,975,000 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 six months ended June 30, 2021 and 2020 were approximately $89,535,000 and $65,073,000, respectively, representing 33.1% and 32.5%, respectively, of gross premiums earned.

The $24,462,000 increase was primarily attributable to higher reinsurance costs for the 2021 contract year due to 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 six months ended June 30, 2021, premiums ceded included a decrease of $8,255,000 related to retrospective provisions compared with a net reduction of $5,760,000 for the six months ended June 30, 2020.

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

Net Premiums Written for the six months ended June 30, 2021 and 2020 totaled approximately $221,291,000 and $183,326,000, respectively.

The $37,965,000 increase in 2021 resulted primarily from the factors described earlier.

Net Premiums Earned for the six months ended June 30, 2021 and 2020 were approximately 180 , 847 , 000 and $ 135,095,000 , 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 six months ended June 30, 2021 and 2020 (amounts in thousands):

Six Months Ended

Net Premiums Written

Increase in Unearned Premiums

Net Premiums Earned

Net Investment Income for the six months ended June 30, 2021 and 2020 was approximately $7,229,000 and $1,412,000, respectively.

The $5,817,000 increase 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 $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 Unrealized Investment Gains for the six months ended June 30, 2021 were approximately $1,220,000 versus net unrealized losses of $1,921,000 for the six months ended June 30, 2020.

The net unrealized investment loss for the six months ended June 30, 2020 reflects a deterioration in the fair value of equity securities caused by the COVID-19 pandemic.

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $101,668,000 and $67,921,000 for the six months ended June 30, 2021 and 2020, respectively.

HCPCI losses and loss adjustment expenses were $73,080,000 for the six months ended June 30, 2021 compared to $53,283,000 for the six months ended June 30, 2020.

The increase was primarily due to $23,509,000 of losses attributable to the United policies assumed.

Losses and loss adjustment expenses for TypTap were $28,752,000 versus $14,638,000 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 six months ended June 30, 2021 and 2020 were approximately $46,234,000 and $24,817,000 on a consolidated basis, respectively.

Policy acquisition expenses for HCPCI insurance operations were $33,041,000 for the six months ended June 30, 2021 compared to $18,299,000 for the six months ended June 30, 2020.

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

TypTap Group policy acquisition expenses were $13,252,000 versus $6,574,000 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 six months ended June 30, 2021 and 2020 were approximately $20,196,000 and $18,098,000, respectively.

The period-over-period increase of $2,098,000 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 a reversal of accrued employee bonuses.

Interest Expense for the six months ended June 30, 2021 and 2020 was approximately $ 4 , 079 , 000 and $5,990,000, respectively.

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 six months ended June 30, 2021 and 2020 was approximately $4,524,000 and $2,997,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 29.8% for 2021 and 24.0% for 2020.

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

The loss ratio applicable to the six months ended June 30, 2021 (losses and loss adjustment expenses incurred related to net premiums earned) was 56.2% compared with 50.3% for the six months ended June 30, 2020.

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

The expense ratio applicable to the six months ended June 30, 2021 was 44.0% compared with 41.2% for the six months ended June 30, 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 and the decrease in interest expense.

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

Our combined ratio for the six months ended June 30, 2021 was 100.2% compared with 91.5% for the six months ended June 30, 2020.

The increase was attributable to the factors described above.

The combined ratio to gross premiums earned for the six months ended June 30, 2021 was 67.0% compared with 61.8% for the six months ended June 30, 2020.

The increase 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

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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.

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

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

The following table summarizes the principal and interest payment obligations of our indebtedness at June 30, 2021:

Maturity Date

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

At June 30, 2021, there was an aggregate unfunded capital balance of $9,302,000.

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 Investments

Real Estate Investment s

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 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.

Cash Flows for the Six Months Ended June 30, 2021

Net cash provided by operating activities for the six months ended June 30, 2021 was approximately $95,647,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $23,775,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $37,805,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $71,191,000, the proceeds from redemptions and maturities of fixed-maturity securities of $16,677,000, and distributions received from limited partnership investments of $2,653,000, offset by the purchases of fixed-maturity and equity securities of $51,378,000, and the purchases of property and equipment of $1,275,000.

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.

Net cash provided by financing activities totaled $61,538,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $6,452,000 of net cash dividend payments, net repayment of our revolving credit facility of $23,750,000, and $1,308,000 used in share repurchases.

Cash Flows for the Six Months Ended June 30, 2020

Net cash provided by operating activities for the six months ended June 30, 2020 was approximately $109,988,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $32,597,000) and $28,745,000 of net cash receipts 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 $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.

Net cash provided by investing activities of $85,995,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $90,641,000, and the proceeds from redemptions and maturities of fixed-maturity securities of $52,594,000, offset by the purchases of fixed-maturity and equity securities of $48,673,000, the purchase of real estate investments of $2,522,000, limited partnership investments of $1,470,000, and the purchases of property and equipment of $5,349,000.

Net cash used in financing activities totaled $2,686,000, which consisted of $9,496,000 used to repay a 3.95% promissory note, $6,162,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, and $6,467,000 used in our share repurchases, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000 and draws from our revolving credit facility of $14,000,000.

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

At June 30 2021 , we had $ 91,338,000 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 March 31, 2021, we had unexpired capital commitments for limited partnerships in which we hold interests.

As of June 30, 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.

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

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.

At June 30, 2021, $154,219,000 of the total $203,785,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

The remaining $49,566,000 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 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.

At June 30, 2021, $36,469,000 of the $49,566,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves de creased from $ 212,169,000 at December 31, 20 20 to $ 203,785,000 at June 30 , 2021 .

The $ 8 ,384,000 de crease is comprised of reductions in our Reserves of $ 22,222,000 specific to Hurricane Irma , Hurricane Michael and Hurricane Sally, and reductions in our non-catastrophe Reserves of $ 36,730,000 for 20 20 and $ 15,059,000 for 201 9 and prior loss years , offset by $ 65,627,000 in reserves established for the 202 1 loss year .

The Reserves established for 20 2 1 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of June 30 , 2021 .

The decrease of $74,011,000 specific to our 20 20 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 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.

Based on all information known to us, we consider our Reserves at June 30, 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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Economic Impact of Reinsurance Contracts with Retrospective Provisions

One of our reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero.

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 the United States of America, we will recognize an asset in the period in which the absence of loss experience obligates the reinsurer to pay cash or other consideration under the contract.

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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 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.

For the three months ended June 30, 2021 and 2020, we accrued benefits of $3,575,000 and $3,240,000, respectively.

For the six months ended June 30, 2021 and 2020, we accrued benefits of $8,255,000 and $5,760,000, respectively.

The accrual of benefits was recognized as a reduction in ceded premiums.

As of June 30, 2021, we had $455,000 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 2021, we collected $18,720,000 of premium refund from a reinsurer for the reinsurance contract that ended May 31, 2021.

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.

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.

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, 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.

We develop our estimates based on historical data and market information.

Acquired Intangible Assets

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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.

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

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

For the six months ended June 30, 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