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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 01, 2013
Jun. 29, 2012
Document and Entity Information [Abstract]
Entity Registrant Name Homeowners Choice, Inc.
Entity Central Index Key 0001400810
Document Type 10-K
Document Period End Date Dec 31, 2012
Amendment Flag false
Document Fiscal Year Focus 2012
Document Fiscal Period Focus FY
Current Fiscal Year End Date --12-31
Entity Filer Category Accelerated Filer
Trading Symbol HCI
Entity Well-known Seasoned Issuer No
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Public Float $ 137,935,846
Entity Common Stock, Shares Outstanding 10,907,144
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets
Fixed-maturity securities, available-for-sale, at fair value $ 35,953 $ 35,788
Equity securities, available-for-sale, at fair value 8,876 4,061
Time deposits 12,427
Other investments 16,087 6,483
Total investments 60,916 58,759
Cash and cash equivalents 230,214 100,355
Accrued interest and dividends receivable 375 408
Premiums and reinsurance receivable 10,642 13,909
Prepaid reinsurance premiums 9,112 14,169
Deferred policy acquisition costs 10,032 12,321
Property and equipment, net 10,853 10,499
Goodwill 161
Deferred income taxes 3,848 2,368
Other assets 2,296 1,869
Total assets 338,288 214,818
Liabilities and Stockholders' Equity
Losses and loss adjustment expenses 41,168 27,424
Unearned premiums 154,249 108,677
Advance premiums 4,029 2,132
Assumed reinsurance balances payable 1,377
Accrued expenses 3,041 3,478
Dividends payable 42 218
Income taxes payable 8,813 4,956
Other liabilities 4,316 4,103
Total liabilities 217,035 150,988
Stockholders' equity:
Preferred stock      
Common stock, (no par value, 40,000,000 shares authorized, 10,877,537 and 6,202,485 shares issued and outstanding in 2012 and 2011, respectively)      
Additional paid-in capital 63,875 29,636
Retained income 55,758 33,986
Accumulated other comprehensive income 1,620 208
Total stockholders' equity 121,253 63,830
Total liabilities and stockholders' equity 338,288 214,818
7% Series A Cumulative Convertible Preferred Stock
Stockholders' equity:
Preferred stock      
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Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Preferred stock, no par value      
Preferred stock, authorized 18,500,000 18,500,000
Preferred stock, issued 0 0
Preferred stock, outstanding 0 0
Common stock, no par value      
Common stock, authorized 40,000,000 40,000,000
Common stock, issued 10,877,537 6,202,485
Common stock, outstanding 10,877,537 6,202,485
7% Series A Cumulative Convertible Preferred Stock
Preferred stock, liquidation preference, per share $ 10 $ 10
Preferred stock, no par value      
Preferred stock, authorized 1,500,000 1,500,000
Preferred stock, issued 241,182 1,247,700
Preferred stock, outstanding 241,182 1,247,700
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Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue
Gross premiums earned $ 233,607 $ 143,606 $ 119,757
Premiums ceded (75,939) (55,525) (57,322)
Net premiums earned 157,668 88,081 62,435
Net investment income 980 2,061 1,962
Policy fee income 2,538 1,438 1,464
Realized investment gains 276 290 2,003
Gain on bargain purchase 179 936
Other 1,424 1,003 751
Total revenue 163,065 93,809 68,615
Expenses
Losses and loss adjustment expenses 66,310 48,243 37,667
Policy acquisition and other underwriting expenses 25,930 18,129 14,878
Goodwill impairment loss 161
Other operating expenses 21,084 11,032 7,484
Total expenses 113,485 77,404 60,029
Income before income taxes 49,580 16,405 8,586
Income taxes 19,423 6,441 3,164
Net income 30,157 9,964 5,422
Preferred stock dividends (322) (815)
Income available to common stockholders $ 29,835 $ 9,149 $ 5,422
Basic earnings per common share $ 3.45 $ 1.49 $ 0.88
Diluted earnings per common share $ 3.02 $ 1.34 $ 0.81
Dividends per common share $ 0.88 $ 0.53 $ 0.3
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Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Consolidated Statements of Comprehensive Income [Abstract]
Net income $ 30,157 $ 9,964 $ 5,422
Change in unrealized gain on investments:
Unrealized gain arising during the period 2,571 674 2,431
Call and repayment losses charged to investment income 3 23
Reclassification adjustment for realized gains (276) (290) (2,003)
Net change in unrealized gain 2,298 407 428
Deferred income taxes on above change (886) (157) (164)
Total other comprehensive income 1,412 250 264
Comprehensive income $ 31,569 $ 10,214 $ 5,686
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Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Preferred Stock
Common Stock
Additional Paid In Capital
Retained Income
Accumulated Other Comprehensive Income
Beginning Balance at Dec. 31, 2009 $ 45,378       $ 21,164 $ 24,520 $ (306)
Beginning Balance, shares at Dec. 31, 2009    6,456,635
Net income 5,422 5,422
Change in unrealized loss on available-for-sale securities, net of income taxes 264 264
Exercise of common stock options, shares 260,000
Exercise of common stock options, value 650 650
Excess tax benefit from stock options exercised 301 301
Common stock dividends (1,877) (1,877)
Repurchases and retirement of common stock, shares (511,239)
Repurchases and retirement of common stock, value (3,596) (3,596)
Stock-based compensation 87 87
Ending Balance at Dec. 31, 2010 46,629       18,606 28,065 (42)
Ending Balance, shares at Dec. 31, 2010    6,205,396
Net income 9,964 9,964
Change in unrealized loss on available-for-sale securities, net of income taxes 250 250
Exercise of common stock options, shares 245,883
Exercise of common stock options, value 564 564
Issuance of common stock / Proceeds from sale of preferred stock, Share 1,247,700
Proceeds from sale of preferred stock (net of offering costs of $1,170), value 11,307 11,307
Excess tax benefit from stock options exercised 265 265
Common stock dividends (3,229) (3,229)
Preferred stock dividends (814) (814)
Repurchases and retirement of common stock, shares (248,794)
Repurchases and retirement of common stock, value (1,887) (1,887)
Warrants issued in connection with assumption transaction 754 754
Stock-based compensation 27 27
Ending Balance at Dec. 31, 2011 63,830       29,636 33,986 208
Ending Balance, shares at Dec. 31, 2011 1,247,700 6,202,485
Net income 30,157 30,157
Change in unrealized loss on available-for-sale securities, net of income taxes 1,412 1,412
Exercise of common stock options, shares 267,408
Exercise of common stock options, value 283 283
Issuance of common stock / Proceeds from sale of preferred stock, Share 1,840,000
Exercise of common stock warrants, shares 1,314,806
Exercise of common stock warrants, value 11,869 11,869
Excess tax benefit from stock options exercised 1,161 1,161
Conversion of preferred stock to common stock, Share (1,006,518) 1,006,518
Issuance of restricted stock, Shares 246,320
Issuance of common stock (net of offering costs of $220) 20,082 20,082
Common stock dividends (8,063) (8,063)
Preferred stock dividends (322) (322)
Stock-based compensation 844 844
Ending Balance at Dec. 31, 2012 $ 121,253       $ 63,875 $ 55,758 $ 1,620
Ending Balance, shares at Dec. 31, 2012 241,182 10,877,537
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Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Preferred stock offering costs $ 220 $ 1,170
Preferred Stock
Preferred stock offering costs 220 1,170
Additional Paid In Capital
Preferred stock offering costs $ 220 $ 1,170
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Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities:
Net income $ 30,157 $ 9,964 $ 5,422
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation 844 27 87
Net amortization of premiums on investments in fixed maturity securities 279 195 (28)
Depreciation and amortization 1,591 576 178
Deferred income taxes (benefit) (2,366) (1,984) 1,690
Net realized investment gains (276) (290) (2,003)
Gain on bargain purchase (179) (936)
Goodwill impairment loss 161
Foreign currency remeasurement loss 23
Changes in operating assets and liabilities:
Premiums and reinsurance receivable 3,267 (8,061) 18,576
Advance premiums 1,897 1,018 401
Prepaid reinsurance premiums 5,057 3,618 (10,582)
Accrued interest and dividends receivable 33 (228) (4)
Other assets (803) 82 (99)
Assumed reinsurance balances payable 1,377
Deferred policy acquisition costs 2,289 (2,914) 1,089
Losses and loss adjustment expenses 13,744 5,278 2,968
Unearned premiums 45,572 43,643 (3,475)
Income taxes payable 3,857 4,646 143
Accrued expenses and other liabilities (258) 1,399 1,768
Net cash provided by operating activities 106,266 56,033 16,131
Cash flows from investing activities:
Cash consideration paid for acquired business, net of cash acquired (8,157) (5,309)
Purchase of property and equipment (1,196) (3,144) (7,534)
Purchase of other investments (1,600) (205)
Purchase of fixed maturity securities (10,128) (31,170) (31,921)
Purchase of equity securities (6,410) (6,625) (5,384)
Proceeds from sales of fixed-maturity securities 8,991 24,904 29,116
Proceeds from calls repayments and maturities of fixed-maturity securities 3,127 1,327
Proceeds from sales of equity securities 1,735 1,665 4,515
Decrease in short-term investments, net 11,521
Decrease (increase) in time deposits, net 12,427 1,606 (526)
Net cash used in investing activities (1,211) (16,951) (213)
Cash flows from financing activities:
Net proceeds from the issuance of common stock 20,082
Net proceeds from the issuance of preferred stock 11,307
Proceeds from the exercise of common stock options 283 564 650
Proceeds from the exercise of common stock warrants 11,869
Cash dividends paid (8,561) (3,825) (1,877)
Repurchases of common stock (1,887) (3,596)
Debt issuance costs paid (35)
Excess tax benefit from common stock options exercised 1,161 265 301
Net cash provided by (used in) financing activities 24,799 6,424 (4,522)
Effect of exchange rate changes on cash 5
Net increase in cash and cash equivalents 129,859 45,506 11,396
Cash and cash equivalents at beginning of year 100,355 54,849 43,453
Cash and cash equivalents at end of year 230,214 100,355 54,849
Supplemental disclosure of cash flow information:
Cash paid for income taxes 16,710 3,451 790
Non-cash investing and financing activities:
Unrealized gain on investments in available-for-sale securities, net of tax 1,412 250 264
Common stock warrants issued for outside services 754
Transfer of securities held-to-maturity to securities available-for-sale 1,900
Series A Preferred Stock
Conversion of Stock [Line Items]
Conversion of Series A Preferred Stock to common stock $ 9,121
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2012
Summary of Significant Accounting Policies [Abstract]
Summary of Significant Accounting Policies

Note 1 — Summary of Significant Accounting Policies

The accompanying consolidated financial statements of Homeowners Choice, Inc. (“HCI” or the “Company”) include the accounts of HCI, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), HCI’s property and casualty insurance company, and certain other insurance and non-insurance subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Through its subsidiaries, the Company is primarily engaged in the property and casualty insurance business. HCPCI is authorized to underwrite homeowners’ property and casualty insurance in the State of Florida. HCPCI’s operations are supported by the following HCI subsidiaries:

 

   

Homeowners Choice Managers, Inc. (“HCM”) – acts as managing general agent and provides marketing, underwriting, claims settlement, accounting and financial services to HCPCI;

 

   

Southern Administration, Inc. – provides policy administration services to HCPCI; and

 

   

Claddaugh Casualty Insurance Company, Ltd. – participates in the reinsurance program to HCPCI.

In addition, while not material to the consolidated financial statements, HCI has various subsidiaries primarily engaged in the businesses of owning and leasing real estate, operating marina facilities and one restaurant and developing software.

Prior to November 2011, nearly all of the Company’s customers were obtained through participation in a “take-out program” with Citizens Property Insurance Corporation (“Citizens”), a Florida state supported insurer. The customers were obtained in nine separate assumption transactions which took place from July 2007 through November 2012. The Company is required to offer renewals on the policies acquired for a period of three years subsequent to the initial expiration of the assumed policies. During the first full year after assumption, such renewals are required to have rates that are equivalent to or less than the rates charged by Citizens. In November 2011, the Company completed an assumption transaction with HomeWise Insurance Company, Inc. (“HomeWise”) through which the Company assumed the Florida policies of HomeWise. Substantially all of the Company’s premium revenue since inception comes from these assumptions.

Acquisition Accounting. The Company accounts for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired. In the event the net assets acquired exceed the purchase price, the Company will recognize a gain on bargain purchase.

 

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Material estimates that are particularly susceptible to significant change in the near term are related to losses and loss adjustment expenses.

Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less than three months to be cash and cash equivalents. At December 31, 2012 and 2011, cash and cash equivalents consist of cash on deposit with financial institutions and securities brokerage firms.

Time Deposits. Time deposits consisted of certificates of deposit with original maturities ranging from one to five years.

Investments. Investments consist of fixed-maturity and equity securities. Fixed-maturity securities include debt securities and redeemable preferred stock. Securities may be classified as either trading, held to maturity or available-for-sale. The Company’s available-for-sale securities are carried at fair value. Temporary changes in the fair value of available-for-sale securities are excluded from income and reported in stockholders’ equity as a component of accumulated other comprehensive income, net of deferred income taxes. Realized investment gains and losses from sales are recorded on the trade date and are determined using the specific identification method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the estimated remaining term of the security. Gains and losses from call redemptions and repayments are charged to investment income.

The Company reviews all securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such review. When the fair value of any investment is lower than its cost, an assessment is made to determine whether the decline is temporary or other-than-temporary. If the decline is determined to be other-than-temporary, the investment is written down to fair value and an impairment charge is recognized in income in the period in which the Company makes such determination. For a debt security that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is recognized in income, while the impairment related to all other factors is recognized in other comprehensive income. The Company considers various factors in determining whether an individual security is other-than-temporarily impaired (see Note 3 – “Investments”).

 

Other investments consist primarily of real estate and the related assets purchased during 2011 and 2012 (see Note 3 – “Investments” and Note 5 – “Business Acquisitions”). Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is allocated over the estimated useful life of the asset using the straight-line method of depreciation. Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable.

Deferred policy acquisition costs. Deferred policy acquisition costs (“DAC”) for the year ended December 31, 2012 primarily represent commissions paid to outside agents at the time of collection of the policy premium, premium taxes, and commissions with respect to assumed reinsurance and are amortized over the life of the related policy in relation to the amount of gross premiums earned.

In addition to the foregoing expenses, DAC for the year ended December 31, 2011 included certain salaries and other policy acquisition expenses, which were deferred pursuant to the accounting standard then in effect (see Accounting Standards Update No. 2010-26 under Note 2 – “Recent Accounting Pronouncements” to the consolidated financial statements). The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned.

DAC is reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of the disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.

Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building 39 years; computer hardware and software 3 years; office and furniture equipment 3 to 7 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.

Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether the assets can be recovered from undiscounted future cash flows. Recoverability of long-lived assets is dependent upon, among other things, the Company’s ability to maintain profitability, so as to be able to meet its obligations when they become due. In the opinion of management, based upon current information and projections, long-lived assets will be recovered over the period of benefit.

 

Losses and Loss Adjustment Expenses. Reserves for losses and loss adjustment expenses (“LAE”) are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such reserves are determined based on the assessment of claims reported and the development of pending claims. These reserves are based on individual case estimates for the reported losses and LAE and estimates of such amounts that are incurred but not reported. Changes in the estimated liability are charged or credited to income as the losses and LAE are settled.

The estimates of unpaid losses and LAE are subject to trends in claim severity and frequency and are continually reviewed. As part of the process, the Company reviews historical data and considers 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 LAE. 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.

Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of well-known and rated reinsurers to secure its annual reinsurance coverage, which becomes effective June 1 st each year. We purchase reinsurance each year taking into consideration maximum projected losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.

Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

Policy Fees. Policy fees represent nonrefundable fees for insurance coverage, which are intended to reimburse a portion of the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is written.

 

Premium-Based Assessments. From time to time, the Company may be assessed by the state guaranty association. The assessments are intended to be used for the payment of covered claims of insolvent insurance entities. The assessments are generally based on a percentage of premiums written during or following the year of insolvency. Liabilities are recognized when the assessments are probable to be imposed on the premiums on which they are expected to be based and the amounts can be reasonably estimated. The Company is permitted by Florida statutes to recover the entire amount of assessments from in-force and future policyholders through policy surcharges. U.S. GAAP provides that the Company should record an asset based on the amount of written or obligated-to-write premiums and limited to the amounts recoverable over the life of the in-force policies.

Foreign Currency. The functional currency of the Company’s Indian subsidiary is the U.S. dollar. As such, the monetary assets and liabilities of this subsidiary are remeasured into U.S. dollars at the exchange rate in effect on the balance sheet date. Non-monetary assets and liabilities are remeasured using historical rates. Expenses recorded in the local currency are remeasured at the prevailing exchange rate. Exchange gains and losses resulting from these remeasurements are included in the results of operations.

Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than fifty percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2012, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements.

 

Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 2012 and 2011. Fair value for securities are based on the framework for measuring fair value established by U.S. GAAP (see Note 3 – “Investments”).

Stock-Based Compensation. The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards is amortized over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company’s restricted stock awards include both service and market conditions. As a result, certain restricted stock grants are expensed over the derived service period for each separately vesting tranche.

Basic and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP requires the inclusion of restricted stock as participating securities since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted-average participating securities by the sum of total weighted-average common shares and participating securities (the “two-class method”). Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as participating equities. Potentially dilutive securities at December 31, 2012 consisted of stock options and the 7.0% Series A cumulative convertible preferred stock issued March 25, 2011 (see Note 11 – Stockholders’ Equity).

Reclassifications. Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

 

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Recent Accounting Pronouncements
12 Months Ended
Dec. 31, 2012
Recent Accounting Pronouncements [Abstract]
Recent Accounting Pronouncements

Note 2 — Recent Accounting Pronouncements

Accounting Standards Update No. 2013-02. In February 2013, the FASB issued Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for public entities for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-01. In January 2013, the FASB issued Accounting Standards Update No. 2013-01 (“ASU 2013-01”), Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2012-02. In July 2012, the FASB issued Accounting Standard Update No. 2012-12 (“ASU 2012-12”), Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of ASU 2012-02 is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in ASU 2012-12 are effective for annual and interim impairment tests performed for the fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

Accounting Standards Update No. 2011-11. In December 2011, the FASB issued Accounting Standards Update No. 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose information about offsetting and related arrangements of financial and derivative instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2010-26. In October 2010, the FASB issued Accounting Standards Update No. 2010-26 (“ASU 2010-26”), Financial Services – Insurance (ASC Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of the amendments in ASU 2010-26 is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments in ASU 2010-26 specify which costs should be capitalized. The amendments in ASU 2010-26 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and can be applied prospectively upon adoption. Retrospective or prospective application is permitted. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company adopted ASU 2010-26 effective January 1, 2012 on a prospective basis. As such, the Company recognized additional amortization expense of $1.2 million with a corresponding decrease in deferred acquisition costs as of the date of adoption. This one-time adjustment reduced our net income for the year ended December 31, 2012 by approximately $741,000, or $0.08 earnings per diluted common share. In addition, certain direct marketing, compensation, and other administrative costs are no longer deferred. Rather, such costs are expensed as incurred beginning January 1, 2012.

 

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Investments
12 Months Ended
Dec. 31, 2012
Investments [Abstract]
Investments

Note 3 — Investments

The Company holds investments in fixed-maturity securities as well as equity securities, which are classified as available-for-sale. At December 31, 2012 and 2011, the amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows (in thousands):

 

                                 
    Amortized     Gross
Unrealized
    Gross
Unrealized
    Estimated
Fair
 
    Cost     Gain     Loss     Value  

As of December 31, 2012

                               

Fixed-maturity securities

                               

U.S. Treasury and U.S. government agencies

  $ 1,359       88       —         1,447  

Corporate bonds

    10,298       572       (10     10,860  

Commercial mortgage-backed securities

    10,708       936       —         11,644  

State, municipalities, and political subdivisions

    10,152       914       —         11,066  

Redeemable preferred stock

    919       18       (1     936  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 33,436       2,528       (11     35,953  
   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 8,756       303       (183     8,876  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

As of December 31, 2011

                               

Fixed-maturity securities

                               

U.S. Treasury and U.S. government agencies

  $ 509       47       —         556  

Corporate bonds

    10,199       58       (417     9,840  

Commercial mortgage-backed securities

    10,574       314       (14     10,874  

State, municipalities, and political subdivisions

    9,982       393       (3     10,372  

Redeemable preferred stock

    1,144       12       (10     1,146  

Other

    2,883       117       —         3,000  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 35,291       941       (444     35,788  
   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 4,220       121       (280     4,061  
   

 

 

   

 

 

   

 

 

   

 

 

 

The scheduled maturities of fixed-maturity securities at December 31, 2012 and 2011 are as follows (in thousands):

 

                                 
    December 31,  
    2012     2011  
          Estimated           Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  

Available-for-sale

                               

Due in one year or less

  $ 1,258       1,264       1,009       1,010  

Due after one year through five years

    8,387       8,728       10,523       10,169  

Due after five years through ten years

    8,045       8,612       6,835       7,075  

Due after ten years

    5,038       5,705       6,350       6,660  

Commercial mortgage-backed securities

    10,708       11,644       10,574       10,874  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 33,436       35,953       35,291       35,788  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):

 

                         
          Gross
Realized
    Gross
Realized
 
    Proceeds     Gains     Losses  

Year ended December 31, 2012

                       

Fixed-maturity securities

  $ 8,991       421       (6
   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 1,735       91       (230
   

 

 

   

 

 

   

 

 

 
       

Year ended December 31, 2011

                       

Fixed-maturity securities

  $ 24,904       545       (96
   

 

 

   

 

 

   

 

 

 

Equity securities*

  $ 1,665       121       (280
   

 

 

   

 

 

   

 

 

 
       

Year ended December 31, 2010

                       

Fixed-maturity securities

  $ 29,116       1,828       (17
   

 

 

   

 

 

   

 

 

 

Equity securities*

  $ 4,515       369       (177
   

 

 

   

 

 

   

 

 

 

 

* Amounts reported for the year ended December 31, 2011 and 2010 include the gross realized gains and losses from equity option contracts. During the years ended December 31, 2011 and 2010, the Company entered into equity contracts for exchange traded call and put options to meet certain investment objectives. With respect to these option contracts, the Company received net proceeds of $89,000 and $391,000, respectively, and realized gains of $49,000 and $327,000, respectively, during the years ended December 31, 2011 and 2010. Such gains are included in the realized investment gains in the Consolidated Statements of Income. There were no open option contracts at December 31, 2011 and 2010.

 

Other-than-temporary Impairment (“OTTI”)

The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:

 

   

the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or income;

 

   

the length of time and the extent to which the market value of the security has been below its cost or amortized cost;

 

   

general market conditions and industry or sector specific factors;

 

   

nonpayment by the issuer of its contractually obligated interest and principal payments; and

 

   

the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.

Securities with gross unrealized loss positions at December 31, 2012 and 2011, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows (in thousands):

 

                                                 
    Less Than Twelve Months     Twelve Months or
Greater
    Total  
As of December 31, 2012   Gross
Unrealized
Loss
    Estimated
Fair

Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
 
             

Fixed-maturity securities

                                               

Corporate bonds

  $ (2     444       (8     981       (10     1,425  

Redeemable preferred stock

    (1     66       —         —         (1     66  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    (3     510       (8     981       (11     1,491  

Equity securities

    (136     3,019       (47     201       (183     3,220  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ (139     3,529       (55     1,182       (194     4,711  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                 
    Less Than Twelve Months     Twelve Months or
Greater
    Total  
As of December 31, 2011   Gross
Unrealized
Loss
    Estimated
Fair

Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
 
             

Fixed-maturity securities

                                               

Corporate bonds

  $ (417     5,112       —         —         (417     5,112  

States, municipalities and political subdivisions

    (3     2,449       —         —         (3     2,449  

Commercial mortgage-backed securities

    (14     612       —         —         (14     612  

Redeemable preferred stock

    (10     232       —         —         (10     232  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    (444     8,405       —         —         (444     8,405  

Equity securities

    (191     2,464       (89     87       (280     2,551  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ (635     10,869       (89     87       (724     10,956  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost. Because the decline in fair value is attributable to changes in interest rates or market conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at December 31, 2012 and 2011.

Other Investments

Other investments consist primarily of real estate and the related assets and operations of the marina acquired in 2011 and the real estate and related assets of the marina and restaurant facilities acquired in April 2012 (see Note 5 – Business Acquisitions). Operating activities related to the Company’s real estate investments include leasing of office and retail space to tenants, wet and dry boat storage, a restaurant, and fuel services with respect to marina clients and recreational boaters.

Other investments consist of the following as of December 31, 2012 and 2011 (in thousands):

 

                 
    December 31,  
    2012     2011  

Land

  $ 10,993       4,438  

Land improvements

    1,326       283  

Building

    2,869       1,418  

Other

    1,238       404  
   

 

 

   

 

 

 

Total, at cost

    16,426       6,543  

Less: accumulated depreciation and amortization

    (339     (60
   

 

 

   

 

 

 

Other investments

  $ 16,087       6,483  
   

 

 

   

 

 

 

 

Depreciation and amortization expense under other investments was $279,000 and $60,000, respectively, for the years ended December 31, 2012 and 2011.

Net investment income, by source, is summarized as follows (in thousands):

 

                         
    Years Ended December 31,  
    2012     2011     2010  

Available-for-sale securities

  $ 1,806       1,494       1,112  

Time deposits

    357       538       530  

Other investments

    (1,334     (96     —    

Cash and cash equivalents

    151       125       226  

Short-term investments

    —         —         94  
   

 

 

   

 

 

   

 

 

 
    $ 980       2,061       1,962  
   

 

 

   

 

 

   

 

 

 

At December 31, 2012, deposits at two national banks totaled $208.9 million, representing 90.7% of the Company’s cash and cash equivalents. In addition, at December 31, 2011, cash and cash equivalents included $62.8 million on deposit at one national bank. At December 31, 2012 and 2011, the Company also had an aggregate of $23.0 million and $18.0 million, respectively, in money market funds at two custodial firms.

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Fair Value Measurements
12 Months Ended
Dec. 31, 2012
Fair Value Measurements [Abstract]
Fair Value Measurements

Note 4 — Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets.

Level 2 – Other inputs that are observable for the asset, either directly or indirectly.

Level 3 – Inputs that are unobservable.

Cash and cash equivalents:

Cash and cash equivalents primarily consist of money market funds. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.

 

Available-for-sale securities:

Estimated fair values of the Company’s available-for-sale securities are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not available, fair values are measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange.

The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values.

Time deposits:

Time deposits consisted of certificates of deposit. Their carrying value approximated fair value due to the short maturity of these investments.

 

Assets Measured at Estimated Fair Value on a Recurring Basis:

The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis as of December 31, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

 

                                 
    Fair Value Measurements Using        
    (Level 1)     (Level 2)     (Level 3)     Total  

As of December 31, 2012

                               

Cash and cash equivalents

  $ 230,214       —         —         230,214  
   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-maturity securities:

                               

U.S. Treasury and U.S. government agencies

    583       864       —         1,447  

Corporate bonds

    10,860       —         —         10,860  

Commercial mortgage-backed securities

    —         11,644       —         11,644  

State, municipalities, and political subdivisions

    11,066       —         —         11,066  

Redeemable preferred stock

    936       —         —         936  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    23,445       12,508       —         35,953  

Equity securities

    8,876       —         —         8,876  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

    32,321       12,508       —         44,829  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 262,535       12,508           —         275,043  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    Fair Value Measurements Using        
    (Level 1)     (Level 2)     (Level 3)     Total  

As of December 31, 2011

                               

Cash and cash equivalents

  $ 100,355       —         —         100,355  
   

 

 

   

 

 

   

 

 

   

 

 

 

Time deposits

    —         —         12,427       12,427  
   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-maturity securities:

                               

U.S. Treasury and U.S. government agencies

    556       —         —         556  

Corporate bonds

    9,840       —         —         9,840  

Commercial mortgage-backed securities

    —         10,874       —         10,874  

State, municipalities, and political subdivisions

    10,372       —         —         10,372  

Redeemable preferred stock

    1,146       —         —         1,146  

Other

    2,735       265       —         3,000  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    24,649       11,139       —         35,788  

Equity securities

    4,061       —         —         4,061  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

    28,710       11,139       —         39,849  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 129,065       11,139       12,427       152,631  
   

 

 

   

 

 

   

 

 

   

 

 

 

Assets Measured at Estimated Fair Value on a Nonrecurring Basis:

The Company used a discounted cash flow method which relies on Level 3 inputs in valuing goodwill at November 30, 2012. The Company did not identify the existence of goodwill and, as a result, goodwill was eliminated resulting in an impairment loss of $161,000 for the year ended December 31, 2012.

There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2012 and 2011.

 

With respect to the Company’s business acquisitions completed in 2012 and 2011 (see Note 5 – “Business Acquisitions”), all assets acquired, aside from cash which was valued based on Level 1 measurements, and liabilities assumed were valued based on Level 3 measurements. Property, plant and equipment acquired in April 2012 was valued based on an external appraisal using the sales comparison approach and other unobservable inputs. The carrying amounts of all other acquired assets and assumed liabilities approximated their fair values at the acquisition date. Property, plant and equipment related to the April 2011 acquisition was valued based on an external appraisal using the sales comparison approach and other unobservable inputs. The environmental liability was valued based on third party estimates to complete the site assessment and remediation plan. The November 2011 acquisition was valued using the market approach and other unobservable inputs. The carrying amounts of all other assets and liabilities approximated their fair values at the acquisition date.

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Business Acquisitions
12 Months Ended
Dec. 31, 2012
Business Acquisitions [Abstract]
Business Acquisition

Note 5 — Business Acquisitions

The Company completed three acquisitions during the years ended December 31, 2012 and 2011.

2012 Acquisition

Effective April 2, 2012, the Company, through its subsidiary, HCI Holdings LLC, acquired the assets and operations of John’s Pass Marina, Inc. and Rice Family Holdings LLLP. The real estate consists primarily of ten acres of waterfront property and land improvements, which include a waterfront restaurant and a marina facility purchased for approximately $8.2 million. Operating activities at acquisition include the restaurant as well as wet boat storage for approximately 13 clients, and fuel services with respect to marina clients and recreational boaters. The Treasure Island, Florida real estate and operations were acquired to further strengthen and diversify the Company’s investment portfolio.

The fair value of the net assets acquired was approximately $8.3 million, which exceeded the $8.2 million purchase price. As a result, the Company recognized a gain on bargain purchase in the amount of $179,000 ($119,000 net of tax), which is included in operations for the year ended December 31, 2012. The recorded gain is subject to adjustment as the Company will continue to evaluate the purchase price allocation during the measurement period. The following table summarizes the Company’s preliminary allocation of the net consideration paid to the fair value of the assets acquired, identifiable intangible assets acquired and liabilities assumed at April 2, 2012 (in thousands):

 

         

Property, plant and equipment

  $ 8,280  

Other assets

    56  

Cash

    9  

Deferred tax liability

    (60
   

 

 

 

Fair value of net assets acquired

    8,285  

Gain on bargain purchase, net of tax of $60

    (119
   

 

 

 

Cash consideration paid

  $ 8,166  
   

 

 

 

 

For the year ended December 31, 2012, the effects of the acquisition was not material to the Company’s consolidated financial statements and basic and diluted earnings per share and, as such, pro forma information has not been presented. The acquired assets are included in other investments of the consolidated balance sheet. For the year ended December 31, 2012, the acquired business contributed approximately $4.5 million in revenues and $698,000 of net loss inclusive of the net gain on bargain purchase.

2011 Acquisition

Effective April 20, 2011, the Company, through its subsidiary, TV Investment Holdings LLC, acquired the assets and operations of Tierra Verde Marina Holdings (“TVMH”). The real estate consists primarily of land, land improvements, retail buildings, and a marina facility. Operating activities at acquisition include leasing of office and retail space to 11 tenants, wet and dry boat storage for approximately 150 clients, and fuel services with respect to marina clients and other recreational boaters. The Tierra Verde, Florida real estate and operations were purchased for $5.1 million through a foreclosure sale conducted by the Pinellas County Clerk of the Circuit Court. The Company’s primary reason for the acquisition was to strengthen its investment portfolio through diversification and quality of assets owned.

The fair value of the net assets acquired was approximately $5.7 million, which exceeded the $5.1 million purchase price. As a result, the Company recognized a gain on bargain purchase in the amount of $936,000 ($575,000 net of tax), which is included in operations for the year ended December 31, 2011. There were no intangibles acquired with respect to this acquisition. The acquired assets are included in other investments of the consolidated balance sheet.

Effective November 18, 2011, the Company, through its subsidiary, HCI Technical Resources Inc., acquired Unthink Technologies Private Ltd. (“Unthink”), a software development company located in India, for $199,000 in cash. The fair value of the net assets acquired was $38,000. The Company recorded $161,000 of goodwill in connection with this acquisition. The goodwill, which is attributable to the workforce of the acquired business, was not deductible for tax purposes. Management believes this acquisition will provide the Company with additional system design expertise that strengthens the Company’s ability to develop, enhance and maintain software applications for our insurance operations.

 

The following table summarizes the Company’s allocation of the net consideration paid to the fair value of the assets acquired and liabilities assumed at April 20, 2011 for the acquisition of TVMH and at November 18, 2011 for the acquisition of Unthink (in thousands):

 

                         
    TVMH     Unthink     Total  
       

Property, plant and equipment

  $ 6,338       66       6,404  

Other assets

    132       15       147  

Environmental liability (Note 13)

    (150     —         (150

Deferred tax liability

    (361     —         (361

Other liabilities

    (274     (43     (317
   

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

    5,685       38       5,723  

Gain on bargain purchase, net of tax of $361

    (575     —         (575

Goodwill

    —         161       161  
   

 

 

   

 

 

   

 

 

 

Cash consideration paid

  $ 5,110       199       5,309  
   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2011, the effects of the acquisitions were not material to the Company’s consolidated financial statements and basic and diluted earnings per share and, as such, pro forma information has not been presented.

For the year ended December 31, 2011, the acquired businesses contributed approximately $1.9 million in revenues and $0.4 million of net income inclusive of the net gain on bargain purchase. Based on an impairment test performed in November 2012, the Company eliminated the entire $161,000 of goodwill.

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Property and Equipment, net
12 Months Ended
Dec. 31, 2012
Property and Equipment, net [Abstract]
Property and Equipment, net

Note 6 — Property and Equipment, net

Property and equipment, net consists of the following (in thousands):

 

                 
    December 31,  
    2012     2011  

Land

  $ 1,241       1,241  

Building

    5,955       5,883  

Computer hardware and software

    1,089       729  

Office and furniture and equipment

    1,131       778  

Tenant and leasehold improvements

    2,767       2,418  

Other

    251       184  
   

 

 

   

 

 

 

Total, at cost

    12,434       11,233  

Less: accumulated depreciation and amortization

    (1,581     (734
   

 

 

   

 

 

 

Property and equipment, net

  $ 10,853       10,499  
   

 

 

   

 

 

 

Depreciation and amortization expense under property and equipment was $848,000, $466,000 and $178,000, respectively, for the years ended December 31, 2012, 2011 and 2010.

 

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Reinsurance
12 Months Ended
Dec. 31, 2012
Reinsurance [Abstract]
Reinsurance

Note 7 — Reinsurance

The Company cedes a portion of its homeowners insurance exposure to other entities under reinsurance agreements called catastrophe excess of loss reinsurance treaties. The Company remains liable with respect to claims payments in the event that any of the reinsurers are unable to meet their obligations under the reinsurance agreements. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of well-known and rated reinsurers to secure its annual reinsurance coverage, which becomes effective June 1 st each year. We purchase reinsurance each year taking into consideration maximum projected losses and reinsurance market conditions.

The impact of the catastrophe excess of loss reinsurance treaties on premiums written and earned is as follows (in thousands):

 

                         
    Years Ended December 31,  
    2012     2011     2010  

Premiums Written:

                       

Direct

  $ 205,839       125,145       114,599  

Assumed

    73,340       62,104       1,683  
   

 

 

   

 

 

   

 

 

 

Gross written

    279,179       187,249       116,282  

Ceded

    (75,939     (55,525     (57,322
   

 

 

   

 

 

   

 

 

 

Net premiums written

  $ 203,240       131,724       58,960  
   

 

 

   

 

 

   

 

 

 
       

Premiums Earned:

                       

Direct

  $ 168,937       119,756       104,621  

Assumed

    64,670       23,850       15,136  
   

 

 

   

 

 

   

 

 

 

Gross earned

    233,607       143,606       119,757  

Ceded

    (75,939     (55,525     (57,322
   

 

 

   

 

 

   

 

 

 

Net premiums earned

  $ 157,668       88,081       62,435  
   

 

 

   

 

 

   

 

 

 

During the years ended December 31, 2012, 2011 and 2010, there were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred. Prepaid reinsurance premiums related to 31 reinsurers at December 31, 2012 and 18 reinsurers at December 31, 2011, respectively. There were no amounts receivable with respect to reinsurers at December 31, 2012 and 2011. Thus, there were no concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums as of December 31, 2012 and 2011. The percentages of assumed premiums earned to net premiums earned for the years ended December 31, 2012, 2011 and 2010 were 41.0%, 27.1% and 24.2%, respectively.

 

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Losses and Loss Adjustment Expenses
12 Months Ended
Dec. 31, 2012
Losses and Loss Adjustment Expenses [Abstract]
Losses and Loss Adjustment Expenses

Note 8 — Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses (“LAE”) is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred, but not reported.

Activity in the liability for unpaid losses and LAE is summarized as follows (in thousands):

 

                         
    Years Ended December 31,  
    2012     2011     2010  
       

Balance, beginning of year

  $ 27,424       22,146       19,178  
   

 

 

   

 

 

   

 

 

 

Incurred related to:

                       

Current year

    66,425       43,613       38,446  

Prior years

    (115     4,630       (779
   

 

 

   

 

 

   

 

 

 

Total incurred

    66,310       48,243       37,667  
   

 

 

   

 

 

   

 

 

 

Paid related to:

                       

Current year

    (36,914     (26,132     (24,218

Prior years

    (15,652     (16,833     (10,481
   

 

 

   

 

 

   

 

 

 

Total paid

    (52,566     (42,965     (34,699
   

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ 41,168       27,424       22,146  
   

 

 

   

 

 

   

 

 

 

The significant increase from 2011 to 2012 is primarily due to the increase in policy base as a result of the HomeWise assumption in November 2011 and the Citizens assumption in November 2012.

The Company writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, the Company believes that such an event would not be so material as to disrupt the overall normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.

 

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Income Taxes
12 Months Ended
Dec. 31, 2012
Income Taxes [Abstract]
Income Taxes

Note 9 — Income Taxes

A summary of income tax expense is as follows (in thousands):

 

                         
    Years Ended December 31,  
    2012     2011     2010  

Current:

                       

Federal

  $ 18,484       7,220       1,238  

State

    3,168       1,196       236  

Foreign

    137       9       —    
   

 

 

   

 

 

   

 

 

 

Total current taxes

    21,789       8,425       1,474  
   

 

 

   

 

 

   

 

 

 
       

Deferred:

                       

Federal

    (1,986     (1,715     1,449  

State

    (380     (269     241  
   

 

 

   

 

 

   

 

 

 

Total deferred taxes

    (2,366     (1,984     1,690  
   

 

 

   

 

 

   

 

 

 

Income taxes

  $ 19,423       6,441       3,164  
   

 

 

   

 

 

   

 

 

 

The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):

 

                                                 
    Years Ended December 31,  
    2012     2011     2010  
    Amount     %     Amount     %     Amount     %  

Income taxes at statutory rate

  $ 17,353       35.0       5,785       35.0       3,005       35.0  

Increase (decrease) in income taxes resulting from :

                                               

State income taxes, net of federal tax benefits

    1,799       3.6       599       3.6       313       3.6  

Stock-based compensation

    —         0.0       7       0.0       13       0.2  

Other

    271       0.6       50       0.7       (167     (1.9
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

  $ 19,423       39.2       6,441       39.3       3,164       36.9  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. The tax years ending December 31, 2011, 2010, and 2009 remain subject to examination by our major taxing jurisdictions. The Company elected to classify, if any, interest and penalties arising from uncertain tax positions as income tax expense as permitted by current accounting standards.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Significant components of our net deferred income tax asset are as follows (in thousands):

 

                 
    December 31,  
    2012     2011  

Deferred tax assets:

               

Unearned premiums

  $ 9,149       6,768  

Losses and loss adjustment expenses

    1,116       756  

Organizational costs

    106       118  

Stock-based compensation

    394       252  

Accrued expenses

    40       466  

Deferred expenses

    72       —    
   

 

 

   

 

 

 

Total deferred tax assets

    10,877       8,360  
   

 

 

   

 

 

 
     

Deferred tax liabilities:

               

Property and equipment

    (1,519     (943

Deferred policy acquisition costs

    (4,027     (4,870

Unrealized net gain on securities available-for-sale

    (1,017     (131

Prepaid expenses

    (225     —    

Unearned brokerage income

    (105     —    

Other

    (136     (48
   

 

 

   

 

 

 

Total deferred tax liabilities

    (7,029     (5,992
   

 

 

   

 

 

 

Net deferred tax assets

  $ 3,848       2,368  
   

 

 

   

 

 

 

A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. As a result, the Company did not have a valuation allowance established as of December 31, 2012 or 2011.

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Earnings Per Share
12 Months Ended
Dec. 31, 2012
Earnings Per Share [Abstract]
Earnings Per Share

Note 10 — Earnings Per Share

U.S. GAAP requires the Company to use the two-class method in computing basic earnings per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities effect the computation of both basic and diluted earnings per share during periods of net income.

 

A summary of the numerator and denominator of the basic and fully diluted earnings per common share is presented below (dollars and shares in thousands, except per share amounts):

 

                         
    Income     Shares     Per Share  
    (Numerator)     (Denominator)     Amount  

Year Ended December 31, 2012

                       
       

Net income

  $ 30,157                  

Less: Preferred stock dividends

    (322                

Less: Income attributable to participating securities

    (488                
   

 

 

                 
       

Basic Earnings Per Share:

                       

Income allocated to common stockholders

    29,347       8,497     $ 3.45  
                   

 

 

 
       

Effect of Dilutive Securities:

                       

Stock options

    —         220          

Convertible preferred stock

    322       655          

Warrants

    —         441          
   

 

 

   

 

 

         

Diluted Earnings Per Share:

                       

Income available to common stockholders and assumed conversions

  $ 29,669       9,813     $ 3.02  
   

 

 

   

 

 

   

 

 

 
       

Year Ended December 31, 2011

                       
       

Net income

  $ 9,964                  

Less: Preferred stock dividends

    (815                
   

 

 

                 
       

Basic Earnings Per Share:

                       

Income available to common stockholders

    9,149       6,132     $ 1.49  
                   

 

 

 
       

Effect of Dilutive Securities:

                       

Stock options

    —         352          

Convertible preferred stock

    815       961          
   

 

 

   

 

 

         

Diluted Earnings Per Share:

                       

Income available to common stockholders and assumed conversions

  $ 9,964       7,445     $ 1.34  
   

 

 

   

 

 

   

 

 

 
       

Year Ended December 31, 2010

                       
       

Net income

  $ 5,422                  

Less: Preferred stock dividends

    —                    
   

 

 

                 
       

Basic Earnings Per Share:

                       

Income available to common stockholders

    5,422       6,179     $ 0.88  
                   

 

 

 
       

Effect of Dilutive Securities:

                       

Stock options

    —         495          
   

 

 

   

 

 

         
       

Diluted Earnings Per Share:

                       

Income available to common stockholders and assumed conversions

  $ 5,422       6,674     $ 0.81  
   

 

 

   

 

 

   

 

 

 

 

For the years ended December 31, 2011 and 2010, 2,738,335 and 1,738,335 warrants to purchase 1,405,001 and 905,001 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the exercise price of $9.10 exceeded the average market price of the Company’s common stock. See Note 11 – “Stockholders’ Equity” for a summary of warrant activity over the last three years. On September 26, 2012, the Company’s Board of Directors fixed October 27, 2012 as the cancellation date for the IPO warrants. As such, the record holders of the IPO warrants had no further rights under the warrants on and after October 27, 2012. There were no preferred shares outstanding in 2010.

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Stockholders' Equity
12 Months Ended
Dec. 31, 2012
Stockholders' Equity [Abstract]
Stockholders' Equity

Note 11 — Stockholders’ Equity

Common Stock

On April 19, 2012, the Company entered into an underwriting agreement (the “Underwriting Agreement”) pursuant to which the Company agreed to sell 1,600,000 shares of the Company’s common stock, no par value per share (the “Common Stock”), for $11.75 per share, less a 6.0% underwriting commission. Under the terms of the Underwriting Agreement, the Company granted the underwriter an option to purchase up to an additional 240,000 shares of Common Stock at the public offering price, less a 6.0% underwriting commission, within 45 days from the date of the Underwriting Agreement to cover over-allotments, if any. The offering was made pursuant to the Company’s effective registration statement on Form S-3, as amended (Registration Statement No. 333-180322), and the Prospectus Supplement dated April 19, 2012. On April 23, 2012, the underwriter elected to fully exercise its overallotment option. The closing of the sale of an aggregate of 1,840,000 shares of Common Stock occurred on April 25, 2012. The offering resulted in aggregate gross proceeds to the Company of approximately $21.6 million and net proceeds of approximately $20.1 million after underwriting commissions and offering expenses.

 

Effective March 18, 2009, the Company’s Board of Directors authorized a plan to repurchase up to $3.0 million (inclusive of commissions) of the Company’s common shares. The repurchase plan allowed the Company to repurchase shares from time to time through March 19, 2010. This repurchase plan was supplemented in December 2009 upon approval by the Board of Directors to extend the repurchase authority by an additional $3.0 million and continue until the repurchase plan is terminated by the Company or the maximum number of dollars has been expended. During the year ended December 31, 2010, the Company repurchased and retired a total of 311,239 shares at an average price of $7.00 per share and a total cost, inclusive of fees and commissions, of $2,196,392, or $7.06 per share. During the year ended December 31, 2011, the Company repurchased and retired a total of 83,594 shares at an average price of $8.23 per share and a total cost, inclusive of fees and commissions, of $693,000, or $8.29 per share.

As of March 28, 2011, the maximum amount designated for repurchases under this plan was expended and the share repurchase program was terminated.

Common Stock Warrants

A summary of the warrants is presented below:

 

                 
    Number Of
Warrants
Outstanding
    Number of Common
Shares Issuable Upon
Conversion of
Warrants Outstanding
 
     

Warrants issued with IPO units

    1,666,668       833,334  

Warrants issued to the Company’s placement agents net of forfeitures and repurchases

    72,000       72,000  
   

 

 

   

 

 

 

Warrants outstanding at December 31, 2009

    1,738,668       905,334  

Placement agent warrants repurchased by the Company at a price of $1.20 per warrant in January 2010

    (333     (333
   

 

 

   

 

 

 

Warrants outstanding at December 31, 2010

    1,738,335       905,001  

Warrants issued in 2011*

    1,000,000       500,000  
   

 

 

   

 

 

 

Warrants outstanding at December 31, 2011

    2,738,335       1,405,001  

Exercise of warrants issued with IPO units

    (1,608,528     (804,260

Exercise of warrants issued in 2011

    (1,000,000     (500,000

Adjustment for fractional shares

    —         (4

Forfeiture of placement agent warrants

    (5,000     (5,000

Cashless exercise of placement agent warrants

    (66,667     (66,667

Cancellation of warrants issued with IPO units

    (58,140     (29,070
   

 

 

   

 

 

 

Warrants outstanding at December 31, 2012

    —         —    
   

 

 

   

 

 

 

 

* In connection with the HomeWise assumption transaction in November 2011, the Company issued 1,000,000 warrants, which were exercisable to purchase 500,000 shares of the Company’s common stock at a per share exercise price of $9.10.

 

The warrants issued prior to 2011 could be exercised at an exercise price equal to $9.10 per share on or before July 30, 2013. At any time after January 30, 2009 and before the expiration of the warrants, the Company at its option could cancel the warrants in whole or in part, provided that the closing price per share of the Company’s common stock had exceeded $11.38 for at least ten trading days within any period of twenty consecutive trading days, including the last trading day of the period. The placement agents also had the option to effect a cashless exercise in which the warrants would be exchanged for the number of shares which is equal to the intrinsic value of the warrant divided by the current value of the underlying shares. On September 26, 2012, the Company announced its Board of Directors had fixed October 27, 2012 as the cancellation date for the IPO warrants. As such, the record holders of the IPO warrants have no further rights under the warrants on and after October 27, 2012.

During 2012, 10,546 shares of common stock were issued upon the cashless exercise of 66,667 placement agent warrants in February. As of December 31, 2012, there are no placement agent warrants outstanding.

The Company did not grant any warrants in 2012 and 2010. The fair value of the warrants issued in 2011 was estimated on the date of issuance using the following assumptions and the Black-Scholes option pricing model:

 

         

Expected dividend yield

    5.0

Expected volatility

    52

Risk-free interest rate

    0.23

Expected life (in years)

    1.75  

Per share grant date fair value of warrants issued

  $ 0.754  

The $754,000 aggregate value of the warrants was deferred and is being amortized over the expected policy term of the policies assumed in the transaction. The warrants, the issuance of which is not registered or required to be registered under the Securities Act of 1933, were exercisable for a term beginning on November 1, 2011 and ending on July 31, 2013 unless cancelled earlier at the Company’s option under the terms specified by the warrant agreement. Effective December 31, 2012, 500,000 shares of common stock were issued upon the exercise of 1,000,000 warrants. As of December 31, 2012, there were no warrants outstanding.

The aggregate intrinsic value of warrants exercised during the year ended December 31, 2012 was $15.1 million.

Preferred Stock

In March 2011, the Company designated 1,500,000 shares of the Company’s preferred stock as Series A cumulative convertible preferred stock (“Series A Preferred”).

 

On March 25, 2011, the Company closed its preferred stock offering under which a total of 1,247,700 shares of its Series A Preferred were sold for gross proceeds of approximately $12.5 million and net proceeds after offering costs of approximately $11.3 million. Dividends on the Series A Preferred are cumulative from the date of original issue and accrue on the last day of each month, at an annual rate of 7.0% of the $10 liquidation preference per share, equivalent to a fixed annual amount of $0.70 per share. Accrued but unpaid dividends accumulate and earn additional dividends at 7.0%, compounded monthly.

Shareholders of Series A Preferred may convert all or any portion of their shares, at their option, at any time, into shares of the Company’s common stock at an initial conversion rate of one share of common stock for each share of Series A Preferred, which is equivalent to an initial conversion price of $10 per share; provided, however, that the Company may terminate this conversion right on or after March 31, 2014, if for at least twenty trading days within any period of thirty consecutive trading days, the market price of the Company’s common stock exceeds the conversion price of the Series A Preferred by more than 20% and the Company’s common stock is then traded on the New York Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, or the NYSE Amex. Under certain circumstances, the Company will be required to adjust the conversion rate. The initial conversion price of $10 per share is subject to proportionate adjustment in the event of stock splits, reverse stock splits, stock dividends, or similar changes with respect to the Company’s common stock.

During the year ended December 31, 2012, holders of 1,006,518 shares of Series A Preferred converted their Series A Preferred shares to 1,006,518 shares of common stock. There were no preferred stock conversions during the year ended December 31, 2011. As of December 31, 2012, 241,182 shares of Series A Preferred remain outstanding.

Shareholders of record of the Company’s Series A Preferred at the close of business on a date for determining shareholders entitled to dividends will be entitled to receive the dividends payable on their Series A Preferred shares on the corresponding dividend payment date notwithstanding the conversion of such Series A Preferred shares before the dividend payment date. The Series A Preferred terms include a provision requiring such shareholders to pay an amount equal to the amount of the dividend payable. That requirement has been permanently waived by the Company.

Holders of the Series A Preferred shares generally have no voting rights, except under limited circumstances, and holders are entitled to receive cumulative preferential dividends when and as declared by the Company’s Board of Directors.

In addition, the Company is authorized to issue up to an additional 18,500,000 shares of preferred stock, no par value. The authorized but unissued and undesignated preferred stock may be issued in one or more series and the shares of each series shall have such rights as determined by the Company’s Board of Directors subject to the rights of the holders of the Series A Preferred.

 

On December 11, 2012, the Company’s Board of Directors declared a cash dividend on its Series A Preferred shares in the amount of $0.05833 per share for each of the months of December 2012, January 2013, and February 2013. The December 2012 dividend was paid on January 28, 2013 to shareholders of record at the close of business on January 2, 2013. The January 2013 dividend was paid on February 27, 2013 to shareholders of record at the close of business on February 1, 2013. The February 2013 dividend is payable on March 27, 2013 to shareholders of record at the close of business on March 1, 2013.

Stock Option and Incentive Plan

The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP.

The Company’s 2007 Stock Option and Incentive Plan (“2007 Plan”) provided for granting of stock-based compensation to employees, directors, consultants, and advisors of the Company. Under the 2007 Plan, an aggregate of 6,000,000 shares of the Company’s common stock could be granted, including through the grant of stock options and restricted stock. On April 20, 2012, the Company’s Board of Directors adopted, subject to shareholder approval, the 2012 Omnibus Incentive Plan (the “2012 Plan”). The 2012 Plan was approved by the Company’s shareholders effective as of May 24, 2012, at which time the 2007 Plan was terminated and the remaining 4,604,800 shares reserved for future issuance under the 2007 Plan were cancelled. The aggregate number of shares of the Company’s common stock reserved and available for issuance pursuant to awards granted under the 2012 Plan is 5,000,000 of which only 4,000,000 shares may be issued upon the exercise of incentive stock options. At December 31, 2012, 46,320 shares have been granted under the 2012 Plan and 4,953,680 shares are available for grant under the 2012 Plan.

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Stock-Based Compensation
12 Months Ended
Dec. 31, 2012
Stock-Based Compensation [Abstract]
Stock-Based Compensation

Note 12 — Stock-Based Compensation

Stock Options

Outstanding stock options granted under the 2007 Plan vest over periods ranging from immediately vested to five years and are exercisable over the contractual term of ten years.

 

A summary of the activity in the Company’s 2007 Plan for the years ended December 31, 2012, 2011 and 2010 is as follows (dollars in thousands, except per share amounts):

 

                                 
    Number of
Options
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
         

Outstanding at December 31, 2009

    1,130,000     $ 2.66                  

Exercised

    (260,000   $ 2.50                  
   

 

 

                         

Outstanding at December 31, 2010

    870,000     $ 2.71       6.5 years     $ 4,675  

Issued

    30,000     $ 6.30                  

Forfeited

    (24,800   $ 2.50                  

Exercised

    (255,200   $ 2.50                  
   

 

 

                         

Outstanding at December 31, 2011

    620,000     $ 2.97       5.7 years     $ 3,122  

Exercised

    (340,000   $ 3.03                  
   

 

 

                         

Outstanding at December 31, 2012

    280,000     $ 2.91       4.9 years     $ 5,007  
   

 

 

                         

Exercisable at December 31, 2012

    260,000     $ 2.65       4.6 years     $ 4,717  
   

 

 

                         

The following table summarizes information about options granted, exercised, and the fair value of vested options for the years ended December 31, 2012, 2011 and 2010:

 

                         
    2012     2011     2010  

Options granted

    —         —         30,000  

Weighted-average grant-date fair value

    n/a       n/a     $ 1.70  
       

Options exercised

    340,000       255,200       260,000  

Total intrinsic value of exercised options

  $ 3,648,000     $ 1,184,000     $ 1,097,000  

Tax benefits realized

  $ 1,161,000     $ 265,000     $ 301,000  
       

Total fair value of vested options

  $ 22,000     $ 76,000     $ 196,000  

During the year ended December 31, 2012, a total of 340,000 options were exercised of which 227,003 options were net settled by surrender of 72,592 shares. During the year ended December 31, 2011, a total of 255,200 options were exercised, which includes 30,000 options exercised and net settled by surrender of 9,317 shares. Compensation expense recognized for the years ended December 31, 2012, 2011 and 2010 totaled approximately $68,000, $27,000 and $87,000, respectively. At December 31, 2012, there was approximately $25,000 of unrecognized compensation expense related to nonvested stock options granted under the plan. The Company expects to recognize the remaining compensation expense over a weighted-average period of 16 months. Deferred tax benefits related to stock options for the years ended December 31, 2012, 2011 and 2010 were immaterial.

 

No options were granted during the years ended December 31, 2012 and 2010. In 2011, 30,000 options were granted on August 26, 2011, with fair value estimated on the date of grant using the following assumptions and the Black-Scholes option pricing model:

 

         

Expected dividend yield

    6.3

Expected volatility

    53.3

Risk-free interest rate

    0.97

Expected life (in years)

    5.00  

Restricted Stock Awards

During 2012, the Company granted restricted stock awards to certain executive officers and employees in connection with their service to the Company. The terms of the Company’s restricted stock grants include both service and market-based conditions. The fair value of the awards with market-based conditions is determined using a Monte Carlo simulation method which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect to the awards with only service-based conditions is based on the value of the Company’s stock on the grant date.

Information with respect to nonvested restricted stock awards, which were granted in April and May 2012 under the 2007 Plan and in December 2012 under the 2012 Plan, is as follows:

 

                 
    Number of
Restricted
Stock
Awards
    Weighted
Average
Grant Date
Fair Value
 
     

Nonvested at December 31, 2011

    —         —    

Granted

    246,320     $ 14.54  
   

 

 

         

Nonvested at December 31, 2012

    246,320     $ 14.54  
   

 

 

         

The Company recognized compensation expense of $776,000 in the year ended December 31, 2012. At December 31, 2012, there was approximately $2.8 million of total unrecognized compensation expense related to nonvested restricted stock arrangements granted under the Company’s 2007 Plan and 2012 Plan. For the year ended December 31, 2012, the Company recognized deferred tax benefits of approximately $299,000 related to restricted stock awards.

The Company expects to recognize the remaining compensation expense over a weighted-average period of 30 months. No restricted stock was granted during the years ended December 31, 2011 and 2010. The following presents assumptions used in a Monte Carlo simulation model to determine the fair value of the awards with market-based conditions:

 

     

Expected dividends per share

  $0.80

Expected volatility

  36.7 – 50.0%

Risk-free interest rate

  0.1 – 1.2%

Estimated cost of capital

  11.9 – 12.1%

Expected life (in years)

  6.00
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Commitments and Contingencies
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies [Abstract]
Commitments and Contingencies

Note 13 — Commitments and Contingencies

Lease Commitments

In November 2012, the Company entered into an agreement to lease a 15,000 square feet of office space in Noida, India. The lease has an initial term of nine years commencing January 15, 2013 with monthly rental payments of approximately $10,200 plus applicable service tax for the first year. Thereafter the monthly rental payment will increase by five percent every year. The Company is entitled to terminate the lease 36 months after the commencement date by providing 3 months’ written notice to the landlord.

The Company leased office space in Noida, India effective with the Company’s acquisition of Unthink in November 2011. This non-cancelable lease, which was assumed by the Company at acquisition, required the Company to pay base rent of approximately $3,200 per month throughout the lease term which will expire on June 2, 2013.

Minimum future rental payments under operating leases after December 31, 2012 are as follows (in thousands):

 

         

Year

  Amount  

2013

  $ 139  

2014

    129  

2015

    136  

2016

    142  

2017

    150  

Thereafter

    676  
   

 

 

 

Total minimum future payments

  $ 1,372  
   

 

 

 

Rental expense under all facility leases was $527,000, $239,000 and $191,000, respectively, during the years ended December 31, 2012, 2011 and 2010. Included in each year was expense related to the Company’s former corporate headquarters.

Service Agreement

In connection with the lease for new office space in India as described in the lease commitments above, the Company signed a long-term contract with the landlord to receive maintenance and facility services. The agreement has the same initial term of nine years with monthly payments of approximately $1,800 plus applicable service tax for the first year. Thereafter the monthly payment will increase by five percent every year. The Company is also entitled to terminate the agreement 36 months after the commencement date by providing 3 months’ written notice to the landlord.

Minimum future payments under the service agreement after December 31, 2012 are as follows (in thousands):

 

         

Year

  Amount  

2013

  $ 22  

2014

    23  

2015

    25  

2016

    25  

2017

    27  

Thereafter

    122  
   

 

 

 

Total minimum future payments

  $ 244  
   

 

 

 

Rental Income

The Company owns real estate which consists of 3.5 acres of land, a building with gross area of 122,000 square feet, and a four-level parking garage. This facility is used by the Company and its subsidiaries. In addition, the Company leases space to non-affiliates.

Expected annual rental income due under non-cancellable operating leases for all properties and other investments owned at December 31, 2012 are as follows (in thousands):

 

         

Year

  Amount  

2013

  $ 1,102  

2014

    815  

2015

    591  

2016

    347  

2017

    27  
   

 

 

 

Total

  $ 2,882  
   

 

 

 

Regulatory Assessments

 

  a) Regular Insurance Assessments and Surcharges

As a direct premium writer in the state of Florida, the Company is subject to mandatory assessments by Citizens and mandatory surcharges by the Florida Hurricane Catastrophe Fund (FHCF). These assessments and surcharges are paid based on a percentage of the Company’s direct written premium by line of business. For the years ended December 31, 2012, 2011 and 2010, HCPCI paid assessments to FHCF amounting to $2,517,000, $1,592,000 and $987,000, respectively. Additionally, HCPCI paid assessments to Citizens of $1,936,000, $1,604,000 and $1,382,000, respectively, for the years ended December 31, 2012, 2011 and 2010. These assessments are recorded as a surcharge in premium billings to insureds. As of December 31, 2012, 2011 and 2010, the surcharge rate in effect for FHCF was 1.3%, 1.3% and 1.0%, respectively. As of December 31, 2012, 2011 and 2010, the surcharge rate in effect for Citizens was 1.0%, 1.0% and 1.4%, respectively.

 

  b) Guaranty Fund

The Florida Insurance Guaranty Association may assess the Company to provide for the payment of covered claims of insolvent insurance entities. The assessments are generally based on a percentage of premiums written as of the end of the prior year in which the assessment is levied. Although the Company is permitted by Florida statutes to recover the entire amount of assessments from existing and future policyholders through policy surcharges, liabilities are recognized when the assessments are probable to be imposed on the premiums on which they are expected to be based and the amounts can be reasonably estimated. During 2012, the Company paid $1.1 million of guaranty fund assessments, $482,000 of which was recognized as an asset recoverable from policyholders. The balance of $657,000 was charged to expense in 2012. However, the entire amount of $1.1 million is expected to be recovered from policyholders over a twelve-month period beginning February 2013. The amount recovered in excess of $482,000 will be credited to expense. The Company has filed with the Florida Office of Insurance Regulation to enable HCPCI to recover the full amount of this assessment from its policyholders. At December 31, 2012, the Company did not provide for a liability related to guaranty fund assessments.

Environmental Matters

In connection with the Company’s April 20, 2011 acquisition of the real estate located in Pinellas County, Florida (see Note 5 – “Business Acquisitions”), the Company assumed the liability to complete a site assessment and remediation of environmental contamination that resulted from a petroleum release at the marina site in late 2009. The Company and its environmental consultants have assumed the remedial action work plan developed by prior management and its environmental consultant, which consists of completing the site assessment, performing soil excavation, and installing wells for collection of groundwater and soil samples throughout the monitoring phase of the project. At acquisition, the Company recorded a liability of $150,000 with respect to the planned remedial action. Such liability was determined based on reasonably estimable costs of completing the actions defined in the existing ongoing work plan. As of December 31, 2012, a total of $53,000 has been expended with respect to the site assessment and the remaining $97,000 accrued at acquisition is included in other liabilities in the accompanying consolidated balance sheets. Although the Company has accrued all reasonably estimable costs of completing the actions defined in the current ongoing work plan, it is possible that additional testing and additional environmental monitoring and remediation will be required in the near future as part of the Company’s ongoing discussions with the Florida Department of Health, the agency contracted by the Florida Department of Environmental Protection to administer cases of petroleum contamination in Pinellas County, in which case additional expenses could significantly exceed the current estimated liability. However, based on information known at December 31, 2012, the Company does not expect that such additional expenses would have a material adverse effect on the liquidity or financial condition of the Company.

Litigation

The Company is party to claims and legal actions arising routinely in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or liquidity.

 

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Quarterly Results of Operations (Unaudited)
12 Months Ended
Dec. 31, 2012
Quarterly Results of Operations (Unaudited) [Abstract]
Quarterly Results of Operations (Unaudited)

Note 14 – Quarterly Results of Operations (Unaudited)

The tables below summarize unaudited quarterly results of operations for 2012, 2011 and 2010 (in thousands, except per share data).

 

                                 
    Three Months Ended  
    03/31/12     06/30/12     09/30/12     12/31/12  

Net premiums earned

  $ 40,431       37,070       30,603       49,564  

Total revenue

    41,652       38,855       31,481       51,077  

Losses and loss adjustment expenses

    19,168       16,197       15,017       15,928  

Policy acquisition and other underwriting expenses

    6,836       6,243       6,611       6,240  

Total expenses

    30,271       26,846       26,356       30,012  

Income before income taxes

    11,381       12,009       5,125       21,065  

Net income

    6,968       7,262       2,826       13,101  

Net income available to common stockholders

    6,787       7,199       2,784       13,065  

Earnings per share:

                               

Basic

  $ 1.07     $ 0.85     $ 0.30     $ 1.27  

Diluted

  $ 0.88     $ 0.74     $ 0.27     $ 1.19  

 

                                 
    Three Months Ended  
    03/31/11     06/30/11     09/30/11     12/31/11  

Net premiums earned

  $ 16,674       17,044       18,530       35,833  

Total revenue

    18,049       19,481       19,713       36,566  

Losses and loss adjustment expenses

    10,403       10,523       10,431       16,886  

Policy acquisition and other underwriting expenses

    4,263       2,780       3,529       7,557  

Total expenses

    16,794       15,660       16,407       28,543  

Income before income taxes

    1,255       3,821       3,306       8,023  

Net income

    793       2,301       2,074       4,796  

Net income available to common stockholders

    776       1,940       1,856       4,578  

Earnings per share:

                               

Basic

  $ 0.13     $ 0.32     $ 0.30     $ 0.74  

Diluted

  $ 0.12     $ 0.30     $ 0.27     $ 0.62  

 

                                 
    Three Months Ended  
    03/31/10     06/30/10     09/30/10     12/31/10  

Net premiums earned

  $ 16,241       15,645       15,084       15,465  

Total revenue

    16,987       17,411       17,072       17,145  

Losses and loss adjustment expenses

    9,813       10,863       8,783       8,208  

Policy acquisition and other underwriting expenses

    4,292       2,668       3,730       4,188  

Total expenses

    15,801       15,417       14,534       14,277  

Income before income taxes

    1,186       1,994       2,538       2,868  

Net income

    698       1,282       1,657       1,785  

Net income available to common stockholders

    698       1,282       1,657       1,785  

Earnings per share:

                               

Basic

  $ 0.11     $ 0.21     $ 0.27     $ 0.29  

Diluted

  $ 0.10     $ 0.19     $ 0.25     $ 0.27  

 

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Regulatory Requirements and Restrictions
12 Months Ended
Dec. 31, 2012
Regulatory Requirements and Restrictions [Abstract]
Regulatory Requirements and Restrictions

Note 15 — Regulatory Requirements and Restrictions

The Florida Insurance Code (the “Code”) requires HCPCI to maintain capital and surplus equal to the greater of 10% of its liabilities or a statutory minimum as defined in the Code. At December 31, 2012, HCPCI is required to maintain a minimum capital and surplus of $19.7 million. At December 31, 2012, 2011 and 2010, HCPCI’s statutory capital and surplus was $69.8 million, $46.5 million and $31.1 million, respectively. HCPCI had a statutory net income of $13.2 for the year ended December 31, 2012 and a statutory net loss of $4.3 million and $2.3 million for the years ended December 31, 2011 and 2010, respectively. Statutory surplus differs from stockholders’ equity reported in accordance with U.S. GAAP primarily because policy acquisition costs are expensed when incurred. In addition, the recognition of deferred tax assets is based on different recoverability assumptions.

Since inception, HCPCI has maintained a cash deposit with the Insurance Commissioner of the state of Florida, in the amount of $300,000, to meet regulatory requirements.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated capital and surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the Florida Office of Insurance Regulation if the dividend or distribution would exceed the larger of (1) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward, (2) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (3) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three year carry forward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. At December 31, 2012, 2011 and 2010, no dividends are available to be paid by HCPCI.

The Bermuda Monetary Authority requires Claddaugh to maintain minimum capital and surplus of $2.0 million. At December 31, 2012, 2011 and 2010, Claddaugh’s statutory capital and surplus was $10.3 million, $8.8 million and $4.5 million, respectively. Claddaugh’s statutory net profit was $4.8 million, $4.3 million and $4.9 million, respectively, for the years ended December 31, 2012, 2011 and 2010. During the years ended December 31, 2012, 2011 and 2010, Claddaugh paid its parent, HCI, cash dividends of $6.0 million, $0 million and $4.8 million, respectively.

 

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Related Party Transactions
12 Months Ended
Dec. 31, 2012
Related Party Transactions [Abstract]
Related Party Transactions

Note 16 — Related Party Transactions

On June 1, 2012, Claddaugh Casualty Insurance Company, Ltd. (“Claddaugh”), the Company’s Bermuda-based captive reinsurer, entered into a reinsurance treaty with Moksha Re SPC Ltd. and multiple capital partners (“Moksha”) whereby a portion of the business assumed from the Company’s insurance subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), is ceded by Claddaugh to Moksha. With respect to the 2012-2013 treaty year, which covers the period from June 1, 2012 through May 31, 2013, Moksha assumed $13.8 million of the total covered exposure for approximately $4.0 million in premiums, a rate which management believes to be competitive with market rates available to Claddaugh. The $4.0 million premium was fully paid by Claddaugh in June 2012. Moksha capital partners deposited an aggregate of $9.8 million into a trust account along with the $4.0 million premium paid by Claddaugh to fully collateralize Moksha’s exposure. Trust assets may be withdrawn by HCPCI, the trust beneficiary, in the event amounts are due under the 2012-2013 Moksha reinsurance agreement. Among the Moksha capital partner participants, the Company’s chief executive officer and the Company’s vice president of investor relations contributed $700,000 and $200,000, respectively. In addition, members of the chief executive officer’s immediate family contributed $942,500. The remaining capital partner participants, who are multiple parties unrelated to the Company, contributed the balance of $7,960,000.

One of the Company’s directors is a partner at a law firm that manages certain of the Company’s corporate legal matters. Fees incurred with respect to this law firm for the years ended December 31, 2012, 2011 and 2010 were approximately $335,000, $232,000 and $266,000, respectively.

During 2010, 2011, and 2012, the Company leased office space under an operating lease agreement with one director. The lease required annual base rental payments of approximately $150,000. The lease was terminated in December 2012 and the total payments during 2012 were $179,000. Lease payments on this property for each of the years ended December 31, 2011 and 2010 totaled $160,000.

 

Effective April 4, 2011, the Company repurchased and retired a total of 80,000 shares of the Company’s common stock at a price of $8.00 per share for a total cost of $640,000. Such shares were repurchased under a stock purchase agreement with one of the Company’s directors at a price below the $8.20 market value of the Company’s common stock on the date of the transaction. Such repurchases were not part of a publicly announced plan or program.

Effective June 27, 2011, the Company repurchased and retired a total of 85,200 shares of the Company’s common stock at a price of $6.50 per share for a total cost of $553,800. Such shares were repurchased under a stock purchase agreement with the Company’s former Chief Executive Officer at a price below the $6.96 market value of the Company’s common stock on the date of the transaction. Such repurchases were not part of a publicly announced plan or program.

One of the Company’s directors received a consulting fee and software license fees for development and use of the Company’s premium administration application software. Under this arrangement, the Company incurred fees of $181,000 and $359,000 for the years ended December 31, 2011 and 2010, respectively. Effective June 30, 2011, all rights to the software license were assigned to the Company in exchange for a one-time payment of $50,000. Such payment was made to the Company’s director who developed and licensed the software to the Company. The related software license and consulting agreements were terminated coincident with this exchange.

 

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Condensed Financial Information of Homeowners Choice, Inc.
12 Months Ended
Dec. 31, 2012
Condensed Financial Information of Homeowners Choice, Inc [Abstract]
Condensed Financial Information of Homeowners Choice, Inc

Note 17 — Condensed Financial Information of Homeowners Choice, Inc.

Condensed financial information of Homeowners Choice, Inc. is as follows:

Balance Sheets

 

                 
    December 31,  
    2012     2011  
    (in thousands)  

Assets

               

Cash and cash equivalents

  $ 6,317       1  

Investment in subsidiaries

    140,563       88,421  

Property and equipment, net

    1,293       950  

Income tax receivable

    2,379       —    

Deferred income taxes

    —         348  

Other assets

    916       1,428  
   

 

 

   

 

 

 

Total assets

  $ 151,468       91,148  
   

 

 

   

 

 

 
     

Liabilities and Stockholders’ Equity

               

Accrued expenses and other liabilities

  $ 727       1,778  

Income taxes payable

    —         1,605  

Deferred income taxes

    415       —    

Dividends payable

    42       218  

Due to related parties

    29,031       23,717  
   

 

 

   

 

 

 

Total liabilities

    30,215       27,318  
   

 

 

   

 

 

 

Total stockholders’ equity

    121,253       63,830  
   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 151,468       91,148  
   

 

 

   

 

 

 

Statements of Income

 

                         
    
    Years Ended December 31,  
    2012     2011     2010  
    (in thousands)  
       

Net investment income

  $ 8       75       80  

Other income

    144       66       45  

Operating expenses

    (2,812     (2,428     (1,427
   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit and equity in income of subsidiaries

    (2,660     (2,287     (1,302

Income tax benefit

    750       846       485  
   

 

 

   

 

 

   

 

 

 

Net loss before equity in income of subsidiaries

    (1,910     (1,441     (817

Equity in income of subsidiaries

    32,067       11,405       6,239  
   

 

 

   

 

 

   

 

 

 
       

Net income

  $ 30,157       9,964       5,422  
   

 

 

   

 

 

   

 

 

 

Statements of Cash Flows

 

                         
    Years Ended December 31,  
    2012     2011     2010  
    (in thousands)  

Cash flows from operating activities:

                       

Net income

  $ 30,157       9,964       5,422  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Stock-based compensation

    237       27       87  

Depreciation and amortization

    788       214       84  

Equity in income of subsidiaries

    (32,067     (11,405     (6,239

Deferred income taxes

    763       (83     136  

Changes in operating assets and liabilities:

                       

Income taxes receivable

    (2,379     —         674  

Other assets

    84       (348     (226

Accrued expenses and other liabilities

    (1,051     1,488       38  

Income taxes payable

    (1,605     (1,957     3,562  

Due to related parties

    5,314       10,489       6,267  
   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    241       8,389       9,805  
   

 

 

   

 

 

   

 

 

 
       

Cash flows from investing activities:

                       

Purchases of short-term investments

    —         —         (80

Redemption of short-term investments

    —         2,074       —    

Purchases of property and equipment

    (668     (900     (44

Dividends received from subsidiary

    6,000       —         4,800  

Investment in subsidiaries

    (24,056     (16,400     (9,889
   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (18,724     (15,226     (5,213
   

 

 

   

 

 

   

 

 

 
       

Cash flows from financing activities:

                       

Net proceeds from the issuance of common stock

    20,082       —         —    

Repurchases of common stock

    —         (1,887     (3,596

Dividends paid to stockholders

    (8,561     (3,827     (1,877

Proceeds from exercise of stock options

    283       564       650  

Proceeds from exercise of stock warrants

    11,869       —         —    

Proceeds from sale of preferred stock, net of costs

    —         11,307       —    

Debt issuance costs paid

    (35     —         —    

Excess tax benefits from stock options exercised

    1,161       265       301  
   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    24,799       6,422       (4,522
   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    6,316       (415     70  

Cash and cash equivalents at beginning of year

    1       416       346  
   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

  $ 6,317       1       416  
   

 

 

   

 

 

   

 

 

 

 

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Subsequent Events
12 Months Ended
Dec. 31, 2012
Subsequent Events [Abstract]
Subsequent Events

Note 18 — Subsequent Events

On February 28, 2013, the Company purchased real estate in Ocala, Florida for a total purchase price of $2.0 million. The real estate consists of 1.6 acres of land and a vacant office building with gross area of approximately 16,000 square feet. The facility will be used by the Company and its subsidiaries primarily in the event a catastrophic event impacts the Company’s home office and support operations.

On January 22, 2013, the Company’s Board of Directors declared a quarterly dividend of $0.225 per common share. The dividends are scheduled for payment on March 15, 2013 to stockholders of record on February 15, 2013.

On January 17, 2013, the Company completed the sale of unsecured senior notes in a public offering for an aggregate principal amount of $35 million. In addition, effective January 25, 2013, the Company received an aggregate principal amount of $5.3 million pursuant to the underwriters’ exercise of the over-allotment option. The offering was made pursuant to the Company’s effective registration statement on Form S-3, as amended (Registration Statement No. 333-185228) and the Prospectus Supplement dated January 10, 2013. The combined net proceeds after underwriting and issuance costs approximate $38.7 million. The notes, due in 2020, bear interest at a fixed annual rate of 8% which is payable quarterly. The notes may be redeemed, in whole or in part, at any time on and after January 30, 2016 and rank on parity with all of the Company’s other existing and future unsecured senior debts.

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Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2012
Summary of Significant Accounting Policies [Abstract]
Acquisition Accounting

Acquisition Accounting. The Company accounts for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired. In the event the net assets acquired exceed the purchase price, the Company will recognize a gain on bargain purchase.

Use of Estimates

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Material estimates that are particularly susceptible to significant change in the near term are related to losses and loss adjustment expenses.

Cash and Cash Equivalents

Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less than three months to be cash and cash equivalents. At December 31, 2012 and 2011, cash and cash equivalents consist of cash on deposit with financial institutions and securities brokerage firms.

Time Deposits

Time Deposits. Time deposits consisted of certificates of deposit with original maturities ranging from one to five years.

Investments

Investments. Investments consist of fixed-maturity and equity securities. Fixed-maturity securities include debt securities and redeemable preferred stock. Securities may be classified as either trading, held to maturity or available-for-sale. The Company’s available-for-sale securities are carried at fair value. Temporary changes in the fair value of available-for-sale securities are excluded from income and reported in stockholders’ equity as a component of accumulated other comprehensive income, net of deferred income taxes. Realized investment gains and losses from sales are recorded on the trade date and are determined using the specific identification method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the estimated remaining term of the security. Gains and losses from call redemptions and repayments are charged to investment income.

The Company reviews all securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such review. When the fair value of any investment is lower than its cost, an assessment is made to determine whether the decline is temporary or other-than-temporary. If the decline is determined to be other-than-temporary, the investment is written down to fair value and an impairment charge is recognized in income in the period in which the Company makes such determination. For a debt security that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is recognized in income, while the impairment related to all other factors is recognized in other comprehensive income. The Company considers various factors in determining whether an individual security is other-than-temporarily impaired (see Note 3 – “Investments”).

 

Other investments consist primarily of real estate and the related assets purchased during 2011 and 2012 (see Note 3 – “Investments” and Note 5 – “Business Acquisitions”). Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is allocated over the estimated useful life of the asset using the straight-line method of depreciation. Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable.

Deferred policy acquisition costs

Deferred policy acquisition costs. Deferred policy acquisition costs (“DAC”) for the year ended December 31, 2012 primarily represent commissions paid to outside agents at the time of collection of the policy premium, premium taxes, and commissions with respect to assumed reinsurance and are amortized over the life of the related policy in relation to the amount of gross premiums earned.

In addition to the foregoing expenses, DAC for the year ended December 31, 2011 included certain salaries and other policy acquisition expenses, which were deferred pursuant to the accounting standard then in effect (see Accounting Standards Update No. 2010-26 under Note 2 – “Recent Accounting Pronouncements” to the consolidated financial statements). The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned.

DAC is reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of the disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.

Property and Equipment

Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building 39 years; computer hardware and software 3 years; office and furniture equipment 3 to 7 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether the assets can be recovered from undiscounted future cash flows. Recoverability of long-lived assets is dependent upon, among other things, the Company’s ability to maintain profitability, so as to be able to meet its obligations when they become due. In the opinion of management, based upon current information and projections, long-lived assets will be recovered over the period of benefit.

Losses and Loss Adjustment Expenses

Losses and Loss Adjustment Expenses. Reserves for losses and loss adjustment expenses (“LAE”) are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such reserves are determined based on the assessment of claims reported and the development of pending claims. These reserves are based on individual case estimates for the reported losses and LAE and estimates of such amounts that are incurred but not reported. Changes in the estimated liability are charged or credited to income as the losses and LAE are settled.

The estimates of unpaid losses and LAE are subject to trends in claim severity and frequency and are continually reviewed. As part of the process, the Company reviews historical data and considers 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 LAE. 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.

Reinsurance

Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of well-known and rated reinsurers to secure its annual reinsurance coverage, which becomes effective June 1 st each year. We purchase reinsurance each year taking into consideration maximum projected losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.

Premium Revenue

Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

Policy Fees

Policy Fees. Policy fees represent nonrefundable fees for insurance coverage, which are intended to reimburse a portion of the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is written.

Premium-Based Assessments

Premium-Based Assessments. From time to time, the Company may be assessed by the state guaranty association. The assessments are intended to be used for the payment of covered claims of insolvent insurance entities. The assessments are generally based on a percentage of premiums written during or following the year of insolvency. Liabilities are recognized when the assessments are probable to be imposed on the premiums on which they are expected to be based and the amounts can be reasonably estimated. The Company is permitted by Florida statutes to recover the entire amount of assessments from in-force and future policyholders through policy surcharges. U.S. GAAP provides that the Company should record an asset based on the amount of written or obligated-to-write premiums and limited to the amounts recoverable over the life of the in-force policies.

Foreign Currency

Foreign Currency. The functional currency of the Company’s Indian subsidiary is the U.S. dollar. As such, the monetary assets and liabilities of this subsidiary are remeasured into U.S. dollars at the exchange rate in effect on the balance sheet date. Non-monetary assets and liabilities are remeasured using historical rates. Expenses recorded in the local currency are remeasured at the prevailing exchange rate. Exchange gains and losses resulting from these remeasurements are included in the results of operations.

Income Taxes

Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than fifty percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2012, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements.

Fair Value of Financial Instruments

Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 2012 and 2011. Fair value for securities are based on the framework for measuring fair value established by U.S. GAAP (see Note 3 – “Investments”).

Stock-based Compensation

Stock-Based Compensation. The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards is amortized over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company’s restricted stock awards include both service and market conditions. As a result, certain restricted stock grants are expensed over the derived service period for each separately vesting tranche.

Basic and diluted earnings per common share

Basic and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP requires the inclusion of restricted stock as participating securities since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted-average participating securities by the sum of total weighted-average common shares and participating securities (the “two-class method”). Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as participating equities. Potentially dilutive securities at December 31, 2012 consisted of stock options and the 7.0% Series A cumulative convertible preferred stock issued March 25, 2011 (see Note 11 – Stockholders’ Equity).

Reclassifications

Reclassifications. Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

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Investments (Tables)
12 Months Ended
Dec. 31, 2012
Investments [Abstract]
Summary of amortized cost, gross unrealized gains and losses, and estimated fair value available-for-sale securities
                                 
    Amortized     Gross
Unrealized
    Gross
Unrealized
    Estimated
Fair
 
    Cost     Gain     Loss     Value  

As of December 31, 2012

                               

Fixed-maturity securities

                               

U.S. Treasury and U.S. government agencies

  $ 1,359       88       —         1,447  

Corporate bonds

    10,298       572       (10     10,860  

Commercial mortgage-backed securities

    10,708       936       —         11,644  

State, municipalities, and political subdivisions

    10,152       914       —         11,066  

Redeemable preferred stock

    919       18       (1     936  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 33,436       2,528       (11     35,953  
   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 8,756       303       (183     8,876  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

As of December 31, 2011

                               

Fixed-maturity securities

                               

U.S. Treasury and U.S. government agencies

  $ 509       47       —         556  

Corporate bonds

    10,199       58       (417     9,840  

Commercial mortgage-backed securities

    10,574       314       (14     10,874  

State, municipalities, and political subdivisions

    9,982       393       (3     10,372  

Redeemable preferred stock

    1,144       12       (10     1,146  

Other

    2,883       117       —         3,000  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 35,291       941       (444     35,788  
   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 4,220       121       (280     4,061  
   

 

 

   

 

 

   

 

 

   

 

 

 
Scheduled maturities of fixed-maturity securities
                                 
    December 31,  
    2012     2011  
          Estimated           Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  

Available-for-sale

                               

Due in one year or less

  $ 1,258       1,264       1,009       1,010  

Due after one year through five years

    8,387       8,728       10,523       10,169  

Due after five years through ten years

    8,045       8,612       6,835       7,075  

Due after ten years

    5,038       5,705       6,350       6,660  

Commercial mortgage-backed securities

    10,708       11,644       10,574       10,874  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 33,436       35,953       35,291       35,788  
   

 

 

   

 

 

   

 

 

   

 

 

 
Summary of proceeds received and gross realized gains and losses from sales of available for sale securities
                         
          Gross
Realized
    Gross
Realized
 
    Proceeds     Gains     Losses  

Year ended December 31, 2012

                       

Fixed-maturity securities

  $ 8,991       421       (6
   

 

 

   

 

 

   

 

 

 

Equity securities

  $ 1,735       91       (230
   

 

 

   

 

 

   

 

 

 
       

Year ended December 31, 2011

                       

Fixed-maturity securities

  $ 24,904       545       (96
   

 

 

   

 

 

   

 

 

 

Equity securities*

  $ 1,665       121       (280
   

 

 

   

 

 

   

 

 

 
       

Year ended December 31, 2010

                       

Fixed-maturity securities

  $ 29,116       1,828       (17
   

 

 

   

 

 

   

 

 

 

Equity securities*

  $ 4,515       369       (177
   

 

 

   

 

 

   

 

 

 

 

* Amounts reported for the year ended December 31, 2011 and 2010 include the gross realized gains and losses from equity option contracts. During the years ended December 31, 2011 and 2010, the Company entered into equity contracts for exchange traded call and put options to meet certain investment objectives. With respect to these option contracts, the Company received net proceeds of $89,000 and $391,000, respectively, and realized gains of $49,000 and $327,000, respectively, during the years ended December 31, 2011 and 2010. Such gains are included in the realized investment gains in the Consolidated Statements of Income. There were no open option contracts at December 31, 2011 and 2010.
Summary of securities with gross unrealized loss positions aggregated by investment category
                                                 
    Less Than Twelve Months     Twelve Months or
Greater
    Total  
As of December 31, 2012   Gross
Unrealized
Loss
    Estimated
Fair

Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
 
             

Fixed-maturity securities

                                               

Corporate bonds

  $ (2     444       (8     981       (10     1,425  

Redeemable preferred stock

    (1     66       —         —         (1     66  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    (3     510       (8     981       (11     1,491  

Equity securities

    (136     3,019       (47     201       (183     3,220  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ (139     3,529       (55     1,182       (194     4,711  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                 
    Less Than Twelve Months     Twelve Months or
Greater
    Total  
As of December 31, 2011   Gross
Unrealized
Loss
    Estimated
Fair

Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
    Gross
Unrealized
Loss
    Estimated
Fair
Value
 
             

Fixed-maturity securities

                                               

Corporate bonds

  $ (417     5,112       —         —         (417     5,112  

States, municipalities and political subdivisions

    (3     2,449       —         —         (3     2,449  

Commercial mortgage-backed securities

    (14     612       —         —         (14     612  

Redeemable preferred stock

    (10     232       —         —         (10     232  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    (444     8,405       —         —         (444     8,405  

Equity securities

    (191     2,464       (89     87       (280     2,551  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ (635     10,869       (89     87       (724     10,956  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Summary of other invested assets
                 
    December 31,  
    2012     2011  

Land

  $ 10,993       4,438  

Land improvements

    1,326       283  

Building

    2,869       1,418  

Other

    1,238       404  
   

 

 

   

 

 

 

Total, at cost

    16,426       6,543  

Less: accumulated depreciation and amortization

    (339     (60
   

 

 

   

 

 

 

Other investments

  $ 16,087       6,483  
   

 

 

   

 

 

 
Investment income summarized
                         
    Years Ended December 31,  
    2012     2011     2010  

Available-for-sale securities

  $ 1,806       1,494       1,112  

Time deposits

    357       538       530  

Other investments

    (1,334     (96     —    

Cash and cash equivalents

    151       125       226  

Short-term investments

    —         —         94  
   

 

 

   

 

 

   

 

 

 
    $ 980       2,061       1,962  
   

 

 

   

 

 

   

 

 

 
------=_NextPart_b12f361c_590e_48b8_bf4e_67efae64adb4 Content-Location: file:///C:/b12f361c_590e_48b8_bf4e_67efae64adb4/Worksheets/Sheet29.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Fair Value Measurements (Tables)
12 Months Ended
Dec. 31, 2012
Fair Value Measurements [Abstract]
Available-for-sale securities measured at fair value
                                 
    Fair Value Measurements Using        
    (Level 1)     (Level 2)     (Level 3)     Total  

As of December 31, 2012

                               

Cash and cash equivalents

  $ 230,214       —         —         230,214  
   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-maturity securities:

                               

U.S. Treasury and U.S. government agencies

    583       864       —         1,447  

Corporate bonds

    10,860       —         —         10,860  

Commercial mortgage-backed securities

    —         11,644       —         11,644  

State, municipalities, and political subdivisions

    11,066       —         —         11,066  

Redeemable preferred stock

    936       —         —         936  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

    23,445       12,508       —         35,953  

Equity securities

    8,876       —         —         8,876  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

    32,321       12,508       —         44,829  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 262,535       12,508           —         275,043  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    Fair Value Measurements Using        
    (Level 1)     (Level 2)     (Level 3)     Total  

As of December 31, 2011

                               

Cash and cash equivalents

  $ 100,355       —         —         100,355  
   

 

 

   

 

 

   

 

 

   

 

 

 

Time deposits

    —         —         12,427       12,427