HCI Group, Inc. 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2021. Unless the context requires otherwise, as used in this Form 10-Q, the terms “HCI,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in whole dollars unless specified otherwise. Forward-Looking Statements In addition to historical information, this quarterly report contains forward-looking statements as defined under federal securities laws. Such statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. Typically, forward-looking statements can be identified by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions. The important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited to the effects of governmental regulation; changes in insurance regulations; the frequency and extent of claims; uncertainties inherent in reserve estimates; catastrophic events; changes in the demand for, pricing of, availability of or collectability of reinsurance; restrictions on our ability to change premium rates; increased rate pressure on premiums; the severity and impact of the novel coronavirus (“COVID-19”) pandemic; and other risks and uncertainties detailed herein and from time to time in our SEC reports. OVERVIEW – General HCI Group, Inc. 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: a) HCPCI Insurance Operations ▪ Property and casualty insurance ▪ Reinsurance and other auxiliary operations b) TypTap Group ▪ Property and casualty insurance ▪ Information technology c) Real Estate Operations d) Other Operations ▪ Holding company operations For the three months ended 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%, 47 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. HCPCI Insurance Operations Property and Casualty Insurance 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”) in the states of Connecticut, New Jersey, Massachusetts and Rhode Island. 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. 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. We selectively retain risk in Claddaugh, reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services. TypTap Group 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 2016. 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 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. 48 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 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 Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes. Properties used in operations consist of one Tampa office building and a secondary insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida. Other Operations 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 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. 49 RESULTS OF OPERATIONS 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 June 30, June 30, 2021 2020 2021 2020 Revenue Gross premiums earned $ 139,440 $ 107,803 $ 270,382 $ 200,168 Premiums ceded (46,436 ) (34,354 ) (89,535 ) (65,073 ) Net premiums earned 93,004 73,449 180,847 135,095 Net investment income 2,635 1,604 7,229 1,412 Net realized investment gains (losses) 2,607 1,435 3,720 (809 ) Net unrealized investment gains (losses) 1,489 2,884 1,220 (1,921 ) Credit losses on investments — (87 ) — (526 ) Policy fee income 992 847 1,962 1,676 Other income 777 585 1,400 1,170 Total revenue 101,504 80,717 196,378 136,097 Expenses Losses and loss adjustment expenses 55,917 39,843 101,668 67,921 Policy acquisition and other underwriting expenses 23,169 12,991 46,234 24,817 General and administrative personnel expenses 10,546 9,731 20,196 18,098 Interest expense 2,000 3,020 4,079 5,990 Loss on repurchases of convertible senior notes — 150 — 150 Other operating expenses 4,775 3,159 9,002 6,641 Total expenses 96,407 68,894 181,179 123,617 Income before income taxes 5,097 11,823 15,199 12,480 Income tax expense 1,267 2,887 4,524 2,997 Net income 3,830 8,936 10,675 9,483 Net income attributable to noncontrolling interests (1,913 ) — (2,610 ) — Net income after noncontrolling interests $ 1,917 $ 8,936 $ 8,065 $ 9,483 Ratios to Net Premiums Earned: Loss Ratio 60.12 % 54.25 % 56.22 % 50.28 % Expense Ratio 43.54 % 39.55 % 43.97 % 41.23 % Combined Ratio 103.66 % 93.80 % 100.19 % 91.51 % Ratios to Gross Premiums Earned: Loss Ratio 40.10 % 36.96 % 37.60 % 33.93 % Expense Ratio 29.04 % 26.95 % 29.41 % 27.82 % Combined Ratio 69.14 % 63.91 % 67.01 % 61.75 % Earnings Per Share Data: Basic $ 0.25 $ 1.16 $ 1.02 $ 1.23 Diluted $ 0.24 $ 1.08 $ 0.98 $ 1.23 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. 50 Revenue 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 $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 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 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 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 June 30, 2021 2020 Net Premiums Written $ 138,542 $ 137,527 Increase in Unearned Premiums (45,538 ) (64,078 ) Net Premiums Earned $ 93,004 $ 73,449 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. 51 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. Expenses 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. Losses and loss adjustment expenses for TypTap were $16,440,000 versus $8,398,000 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 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 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. 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 $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. Ratios: 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. 52 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 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 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. Revenue 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. 53 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 June 30, 2021 2020 Net Premiums Written $ 221,291 $ 183,326 Increase in Unearned Premiums (40,444 ) (48,231 ) Net Premiums Earned $ 180,847 $ 135,095 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. Expenses 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. 54 Interest Expense for the six months ended June 30, 2021 and 2020 was approximately $ 4 , 079 , 000 and $5,990,000, 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 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. Ratios: 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. 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 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 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, 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. 55 LIQUIDITY AND CAPITAL RESOURCES Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by our insurance subsidiaries from premiums written and investment income. We may consider raising additional capital through debt and equity offerings to support our growth and future investment opportunities. Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. With the exception of litigated claims, substantially all of our losses and loss adjustment expenses are fully settled and paid within 100 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses. We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position. In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions. Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases The following table summarizes the principal and interest payment obligations of our indebtedness at June 30, 2021: Maturity Date Interest Payment Due Date 4.25% Convertible senior notes March 2037 March 1 and September 1 3.75% Callable promissory note Through September 2036 1 st day of each month 4.55% Promissory note Through August 2036 1 st day of each month 3.90% Promissory note Through April 2032 1 st day of each month Finance leases Through August 2023 Various Revolving credit facility Through December 2023 January 1, April 1, July 1, October 1 See Note 11 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q. Limited Partnership Investments Our limited partnership investments consist of five private equity funds managed by their general partners. Three of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances. 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. 56 Real Estate Investment s Real estate has long been a significant component of our overall investment portfolio. It diversifies our portfolio and helps offset the volatility of other higher-risk investments. Thus, we may consider increasing our real estate investment portfolio should an opportunity arise. We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. FMKT Mel JV’s real estate portfolio consists of outparcels for ground lease or sale. We have the option to take full ownership of these outparcels by acquiring the remaining 10% interest. Alternatively, we may sell these outparcels and allocate the profits from the sale before liquidating FMKT Mel JV. Sources and Uses of Cash Cash Flows for the 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 $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 $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. Investments The main objective of our investment policy is to maximize our after-tax investment income with a reasonable level of risk given the current financial market. Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities. 57 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. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition. To maximize the gains from fixed-maturity investments in a low interest rate environment, we have decreased our holdings in fixed-maturity securities since the beginning of 2020. In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations. OFF-BALANCE SHEET ARRANGEMENTS As of 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. See Note 21 -- “Commitments and Contingencies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q and Contractual Obligations and Commitment below for additional information. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments to develop amounts reflected and disclosed in our financial statements. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. We base our estimates on various assumptions and actuarial data we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates. We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective provisions, deferred income taxes, stock-based compensation expense, acquired intangible assets, warrants, and redeemable noncontrolling interest involve our most significant judgments and estimates material to our consolidated financial statements. Reserves for Losses and Loss Adjustment Expenses Our liability for losses and loss adjustment expense (“Reserves”) is specific to property insurance, which is our insurance division’s only line of business. The Reserves include both case reserves on reported claims and our reserves for incurred but not reported (“IBNR”) losses. At each period end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are adjusted. The IBNR represents our estimate of the ultimate cost of all claims that have occurred but have not been reported to us, and in some cases may not yet be known to the insured, and future development of reported claims. Estimating the IBNR component of our Reserves involves considerable judgment on the part of management. At 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 June 30, 2021, $36,469,000 of the $49,566,000 in reserves for known cases relates to claims incurred during prior years. 58 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 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. As part of the process, we review historical data and consider various factors, including known and anticipated regulatory and legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and loss adjustment expenses. Adjustments are reflected in the results of operations in the period in which they are made, and the liabilities may deviate substantially from prior estimates. Economic Impact of Reinsurance Contracts with Retrospective Provisions Two of our reinsurance contracts include retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with accounting principles generally accepted in 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. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term. For the three months ended 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. For restricted stock with service based vesting conditions, fair value is determined by the market price of the stock on the grant date. Compensation expense is then recognized ratably over the requisite or derived service period of the award. Restricted stock awards with market based vesting conditions require the use of a Monte Carlo simulation model with the assistance of a third-party valuation specialist to estimate the fair value and derived service period of the award. We then recognize the compensation expense ratably over this derived service period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility or derived service periods. We develop our estimates based on historical data and market information. 59 Acquired Intangible Assets Acquired intangible assets represent the fair value of consideration we paid and are estimated to pay in exchange for the renewal rights and non-compete intangible assets acquired from the seller. In the renewal rights transaction, we purchased the right, but not the obligation, to offer homeowners insurance coverage to all current policyholders of the seller in certain states on the agreed-upon policy replacement date. The renewal rights agreement also contains a non-compete clause whereby the seller agrees not to offer homeowners insurance policies in these states through a specified date. We record intangible assets based on the fair value of the consideration we paid and are estimated to pay to the seller as provided in the renewal rights agreement with the seller. We engaged a third-party valuation specialist to assist with the allocation of the renewal rights and non-compete intangible assets acquired. Intangible assets are amortized over their estimated useful lives. Intangible assets are evaluated periodically to ensure that there is no impairment to carrying value and no change required in the amortization period. Warrants and Redeemable Noncontrolling Interest In the capital investment transaction completed by TTIG with a fund associated with 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 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 For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to our Notes to Unaudited Consolidated Financial Statements. 60