• Filing Date: 2014-03-12
  • Form Type: 10-K
  • Description: Annual report
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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Mar. 03, 2014
Jun. 28, 2013
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2013    
Document Fiscal Year Focus 2013    
Document Fiscal Period Focus FY    
Entity Registrant Name HCI Group, Inc.    
Entity Central Index Key 0001400810    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   11,146,459  
Entity Public Float     $ 293,623,142
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Assets    
Fixed-maturity securities, available for sale, at fair value (amortized cost: $110,738 and $33,436, respectively) $ 112,151 $ 35,953
Equity securities, available for sale, at fair value (cost: $17,248 and $8,756, respectively) 17,649 8,876
Other investments 16,228 16,087
Total investments 146,028 60,916
Cash and cash equivalents 293,398 230,214
Accrued interest and dividends receivable 1,133 375
Premiums receivable 14,674 10,642
Prepaid reinsurance premiums 28,066 9,112
Deferred policy acquisition costs 14,071 10,032
Property and equipment, net 13,132 10,853
Deferred income taxes, net   3,848
Other assets 15,814 2,296
Total assets 526,316 338,288
Liabilities and Stockholders' Equity    
Losses and loss adjustment expenses 43,686 41,168
Unearned premiums 171,907 154,249
Advance premiums 4,504 4,029
Assumed reinsurance balances payable 4,660 1,377
Accrued expenses 4,032 3,041
Dividends payable 19 42
Income taxes payable 543 8,813
Deferred income taxes, net 2,740  
Long-term debt 126,932   
Other liabilities 6,772 4,316
Total liabilities 365,795 217,035
Commitments and contingencies (Note 18)      
Stockholders' equity:    
Preferred stock      
Common stock (no par value, 40,000,000 shares authorized, 10,939,268 and 10,877,537 shares issued and outstanding in 2013 and 2012, respectively)      
Additional paid-in capital 48,966 63,875
Retained income 110,441 55,758
Accumulated other comprehensive income, net of taxes 1,114 1,620
Total stockholders' equity 160,521 121,253
Total liabilities and stockholders' equity 526,316 338,288
7% Series A Cumulative Convertible Preferred Stock [Member]
   
Stockholders' equity:    
Preferred stock      
Series B Preferred Stock [Member]
   
Stockholders' equity:    
Preferred stock      
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Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Available-for-sale Debt securities, Amortized cost $ 110,738 $ 33,436
Available-for-sale Equity securities, Amortized cost $ 17,248 $ 8,756
Preferred stock, no par value      
Preferred stock, authorized 18,100,000 18,100,000
Preferred stock, issued      
Preferred stock, outstanding      
Common stock, no par value      
Common stock, shares authorized 40,000,000 40,000,000
Common stock, shares issued 10,939,268 10,877,537
Common stock, Outstanding 10,939,268 10,877,537
7% Series A Cumulative Convertible Preferred Stock [Member]
   
Preferred stock, liquidation preference, per share $ 10.00 $ 10.00
Preferred stock, no par value      
Preferred stock, authorized 1,500,000 1,500,000
Preferred stock, issued 110,684 241,182
Preferred stock, outstanding 110,684 241,182
Series B Preferred Stock [Member]
   
Preferred stock, no par value      
Preferred stock, authorized 400,000 400,000
Preferred stock, issued      
Preferred stock, outstanding      
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Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenue      
Gross premiums earned $ 337,113 $ 233,607 $ 143,606
Premiums ceded (102,865) (75,939) (55,525)
Net premiums earned 234,248 157,668 88,081
Net investment income 1,469 980 2,061
Policy fee income 3,098 2,538 1,438
Net realized investment gains 80 276 290
Gain on bargain purchase   179 936
Other 2,193 1,424 1,003
Total revenue 241,088 163,065 93,809
Expenses      
Losses and loss adjustment expenses 65,123 66,310 48,243
Policy acquisition and other underwriting expenses 31,619 25,930 18,129
Interest expense 3,607    
Goodwill impairment loss   161  
Other operating expenses 34,286 21,084 11,032
Total expenses 134,635 113,485 77,404
Income before income taxes 106,453 49,580 16,405
Income tax expense 40,891 19,423 6,441
Net income 65,562 30,157 9,964
Preferred stock dividends (104) (322) (815)
Income available to common stockholders $ 65,458 $ 29,835 $ 9,149
Basic earnings per common share $ 5.82 $ 3.45 $ 1.49
Diluted earnings per common share $ 5.63 $ 3.02 $ 1.34
Dividends per common share $ 0.95 $ 0.88 $ 0.53
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Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Statement Of Income And Comprehensive Income [Abstract]      
Net income $ 65,562 $ 30,157 $ 9,964
Change in unrealized (loss) gain on investments:      
Unrealized (loss) gain arising during the period (767) 2,571 674
Call and repayment losses charged to investment income 24 3 23
Reclassification adjustment for realized (loss) gain (80) (276) (290)
Net change in unrealized (loss) gain (823) 2,298 407
Deferred income taxes on above change 317 (886) (157)
Total other comprehensive (loss) income, net of income taxes (506) 1,412 250
Comprehensive income $ 65,056 $ 31,569 $ 10,214
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Consolidated Statement of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Series A Preferred Stock [Member]
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Income [Member]
Accumulated Other Comprehensive Income, Net of Tax [Member]
Beginning Balance at Dec. 31, 2010 $ 46,629       $ 18,606 $ 28,065 $ (42)
Beginning Balance, shares at Dec. 31, 2010     6,205,396      
Net income 9,964         9,964  
Total other comprehensive income, net of income taxes 250           250
Proceeds from sale of preferred stock (net of offering costs of $1,170) 11,307       11,307    
Exercise of common stock options, value 564       564    
Exercise of common stock options, shares 255,200   255,200      
Shares surrendered upon exercising common stock options     (9,317)      
Tax benefits on stock-based compensation 265       265    
Issuance of stock, shares   1,247,700        
Common stock dividends (3,229)         (3,229)  
Preferred stock dividends (814)         (814)  
Repurchase and retirement of common stock, value (1,887)       (1,887)    
Repurchase and retirement of common stock, shares     (248,794)      
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  
Total other comprehensive income, net of income taxes 1,412           1,412
Exercise of common stock options, value 283       283    
Exercise of common stock options, shares 340,000   340,000      
Shares surrendered upon exercising common stock options     (72,592)      
Exercise of common stock warrants, value 11,869       11,869    
Exercise of common stock warrants, shares     1,314,806      
Tax benefits on stock-based compensation 1,161       1,161    
Conversion of preferred stock to common stock, shares   (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    
Issuance of stock, shares     1,840,000      
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      
Net income 65,562        65,562  
Total other comprehensive income, net of income taxes (506)          (506)
Deferred taxes on debt discount (6,348)     (6,348)    
Tax benefits on stock-based compensation 1,060       1,060    
Conversion of preferred stock to common stock, shares   (130,498) 130,498      
Issuance of restricted stock, shares     612,000      
Forfeiture of restricted stock, shares     (29,670)      
Common stock dividends (10,775)         (10,775)  
Preferred stock dividends (104)         (104)  
Repurchase and retirement of common stock, value (963)       (963)    
Repurchase and retirement of common stock, shares     (28,346)      
Repurchase of common stock under prepaid forward contract, value (29,923)       (29,923)    
Repurchase of common stock under prepaid forward contract, shares     (622,751)      
Equity component on 3.875% convertible senior notes (net of offering costs of $557) 15,900       15,900    
Stock-based compensation 5,365       5,365    
Ending Balance at Dec. 31, 2013 $ 160,521       $ 48,966 $ 110,441 $ 1,114
Ending Balance, shares at Dec. 31, 2013   110,684 10,939,268      
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Consolidated Statement of Stockholders' Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended 12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2011
Series A Preferred Stock [Member]
Dec. 31, 2012
Common Stock [Member]
Dec. 31, 2012
Additional Paid-In Capital [Member]
Dec. 31, 2011
Additional Paid-In Capital [Member]
Dec. 31, 2013
Additional Paid-In Capital [Member]
Dec. 31, 2013
Additional Paid-In Capital [Member]
Convertible Debt [Member]
Stated interest rate on convertible senior notes             3.875%  
Offering costs for convertible senior notes               $ 557
Issuance of stock, offering costs $ 220 $ 1,170 $ 1,170 $ 220 $ 220 $ 1,170    
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Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities:      
Net income $ 65,562 $ 30,157 $ 9,964
Adjustments to reconcile net income to net cash provided by operating activities:      
Stock-based compensation 5,365 844 27
Net amortization of discounts and premiums on investments in fixed-maturity securities 336 279 195
Depreciation and amortization 2,103 1,591 576
Deferred income tax expense (benefit) 557 (2,366) (1,984)
Net realized investment gains (80) (276) (290)
Gain on bargain purchase   (179) (936)
Goodwill impairment loss   161  
Loss on sale of other investment 20    
Loss on disposal of other investment 6    
Foreign currency remeasurement loss 69 23  
Changes in operating assets and liabilities:      
Premiums and reinsurance receivable (4,032) 3,267 (8,061)
Advance premiums 475 1,897 1,018
Prepaid reinsurance premiums (18,954) 5,057 3,618
Accrued interest and dividends receivable (758) 33 (228)
Other assets (9,728) (803) 82
Assumed reinsurance balances payable 3,283 1,377  
Deferred policy acquisition costs (4,039) 2,289 (2,914)
Losses and loss adjustment expenses 2,518 13,744 5,278
Unearned premiums 17,658 45,572 43,643
Income taxes payable (8,270) 3,857 4,646
Accrued expenses and other liabilities 3,381 (258) 1,399
Net cash provided by operating activities 55,472 106,266 56,033
Cash flows from investing activities:      
Cash consideration paid for acquired business, net of cash acquired   (8,157) (5,309)
Purchase of property and equipment, net (3,433) (1,196) (3,144)
Purchase of other investments (565) (1,600) (205)
Purchase of fixed-maturity securities (82,907) (10,128) (31,170)
Purchase of equity securities (11,308) (6,410) (6,625)
Proceeds from sales of fixed-maturity securities 1,749 8,991 24,904
Proceeds from calls, repayments and maturities of fixed-maturity securities 3,607 3,127 1,327
Proceeds from sales of equity securities 2,809 1,735 1,665
Proceeds from sales of property and equipment 1    
Proceeds from sales of other investment 7    
Time deposits, net   12,427 1,606
Net cash used in investing activities (90,040) (1,211) (16,951)
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
Proceeds from the exercise of common stock warrants   11,869  
Proceeds from the issuance of long-term debt 143,250    
Cash dividends paid (10,902) (8,561) (3,825)
Repurchases of common stock (30,886)   (1,887)
Debt issuance costs (4,770) (35)  
Tax benefits on stock-based compensation 1,060 1,161 265
Net cash provided by financing activities 97,752 24,799 6,424
Effect of exchange rate changes on cash   5  
Net increase (decrease) in cash and cash equivalents 63,184 129,859 45,506
Cash and cash equivalents at beginning of year 230,214 100,355 54,849
Cash and cash equivalents at end of year 293,398 230,214 100,355
Supplemental disclosure of cash flow information:      
Cash paid for income taxes 47,435 16,710 3,451
Cash paid for interest 2,531    
Non-cash investing and financing activities:      
Unrealized (loss) gain on investments in available-for-sale securities, net of tax (506) 1,412 250
Common stock warrants issued for outside services     754
Series A Preferred Stock [Member]
     
Non-cash investing and financing activities:      
Conversion of Series A preferred stock to common stock $ 1,170 $ 9,121  
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Nature of Operations
12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Nature of Operations

Note 1— Nature of Operations

The accompanying consolidated financial statements of HCI Group, Inc. (“HCI” or the “Company”), formerly known as Homeowners Choice, Inc., include the accounts of HCI, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), HCI’s principal operating subsidiary, 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 various homeowners’ property and casualty insurance products 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.

As part of geographical expansion into other states, Homeowners Choice Assurance Company, Inc. (“HCA”) was organized to enter the Alabama property and casualty insurance market. HCA was approved and licensed by the Alabama Department of Insurance in August 2013. HCA did not commence underwriting during 2013.

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.

The Company reports its operations under one business segment.

The Company obtained a majority of its policies through participation in a “take-out program” with Citizens Property Insurance Corporation (“Citizens”), a Florida state supported insurer. Policies were obtained in ten separate assumption transactions with Citizens that took place from July 2007 through November 2013. 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. The Company’s premium revenue since inception comes from these assumptions and one additional assumption from HomeWise Insurance Company (“HomeWise”) in November 2011 through which the Company acquired the Florida policies of HomeWise.

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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

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 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 primarily related to losses and loss adjustment expenses, reinsurance with retrospective provisions, deferred income taxes, and stock-based compensation expense.

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, 2013 and 2012, cash and cash equivalents consist of cash on deposit with financial institutions and securities brokerage firms and also includes a $300 statutory deposit held by the State of Florida for the benefit of all policyholders.

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 net investment 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 first-in first-out (FIFO) 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”) 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 nor is it 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 4 — “Investments”).

Other investments consist primarily of real estate and the related assets purchased for investment purposes (see Note 4 — “Investments” and Note 6 — “Business Acquisitions”). Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is included in net investment income and 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”) primarily represent commissions paid to outside agents at the time of collection of the policy premium and premium taxes and are amortized over the life of the related policy in relation to the amount of gross premiums earned.

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, which is included in other operating expenses. 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 annually or 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.

 

Long-Term Debt. Long-term debt is generally classified as a liability and carried at amortized cost, net of any discount. At issuance, a debt instrument with embedded features such as conversion and redemption options is evaluated to determine whether bifurcation and derivative accounting is applicable. If such instrument is not subject to derivative accounting, it is further evaluated to determine if the Company is required to separately account for the liability and equity components.

To determine the carrying values of the liability and equity components at issuance, the Company measures the fair value of a similar liability, including any embedded features other than the conversion option, and assigns such value to the liability component. The liability component’s fair value is then subtracted from the initial proceeds to determine the carrying value of the debt instrument’s equity component, which is included in additional paid-in capital.

Any embedded feature other than the conversion option is evaluated at issuance to determine if it is probable that such embedded feature will be exercised. If the Company concludes that the exercisability of that embedded feature is not probable, the embedded feature is considered to be nonsubstantive and would not impact the initial measurement and expected life of the debt instrument’s liability component.

Transaction costs related to issuing a debt instrument that embodies both liability and equity components are allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs are recognized in other assets. Both debt discount and deferred debt issuance costs are amortized to interest expense over the expected life of the debt instrument using the effective interest method. Equity issuance costs are a reduction to the proceeds allocated to the equity component.

Prepaid Share Repurchase Forward Contract. A prepaid share repurchase forward contract is generally a contract that allows the Company to buy from the counterparty a specified number of common shares at a specific time at a given forward price. The Company entered into such a contract in December 2013 and evaluated the characteristics of the forward contract to determine whether it met the definition of a derivative financial instrument pursuant to U.S. GAAP. The Company determined the forward contract is an equity contract on the Company’s common shares requiring physical settlement in common shares of the Company. As such, the transaction is recognized as a component of stockholders’ equity with a charge to additional paid-in capital equal to the prepayment amount, which represents the cash paid to the counterparty. There will be no recognition in earnings for changes in fair value in subsequent periods.

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.

Advance Premiums. Premium payments received prior to the policy effective date are recorded as advance premiums. Once the policy is in force, the premiums are recorded as described under “Premium Revenue” below.

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 reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions. Amounts recoverable from reinsurers would be estimated in a manner consistent with the applicable reinsurance contract(s). 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 gross premiums earned. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.

Certain of the Company’s current contracts contain retrospective provisions including terms and conditions that adjust premiums, increase the amount of future coverage, or result in profit commissions based on the loss experience under the contracts. In such cases, a with-and-without method is used to estimate the asset or liability amount to be recognized at each reporting date. The amount of the estimate is the difference between the net contract costs before and after the loss experience under the contract. Estimates related to premium adjustments, profit commissions and coverage changes are recognized in ceded premiums earned. These estimates are reviewed monthly based on the loss experience to date and as adjustments become necessary. Such adjustments are reflected in the Company’s current operations.

Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies and is included in gross premiums earned. Unearned premiums represent the portion of the premium related to the unexpired policy term. The Company reviews its policy detail and establishes an allowance for any amount outstanding for more than 90 days. As of December 31, 2013 and 2012, there was no allowance required.

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. Effective October 1, 2013 on a prospective basis, policy fees are recognized ratably over the policy coverage period. Prior to October 1, 2013, the fees were recognized in income when the policy was written on the basis that the revenues were appropriately matched to the Company’s incremental direct costs related to policy underwriting.

 

Florida Insurance Guaranty Association Assessments. 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 other operating expenses.

Income Taxes. The Company files consolidated federal and state income tax returns and allocates taxes among its wholly-owned subsidiaries in accordance with a written tax-allocation agreement approved by the Company’s Board of Directors.

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, 2013, 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, 2013 and 2012. Fair values for securities are based on the framework for measuring fair value established by U.S. GAAP (see Note 5 — “Fair Value Measurements”).

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 generally recognized as compensation expense 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 service, market and performance conditions. As a result, restricted stock grants with market condition are expensed over the derived service period for each separately vesting tranche. For awards with performance conditions, the Company recognizes compensation expense over the requisite service period when it is probable that the performance condition will be achieved. Compensation expense related to all awards is included in other operating expense.

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, 2013 consisted of stock options, the 7.0% Series A cumulative convertible preferred stock (see Note 15 — “Stockholders’ Equity”) and the 3.875% convertible senior notes (see Note 10 — “Long-term debt”).

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

v2.4.0.8
Recent Accounting Pronouncements
12 Months Ended
Dec. 31, 2013
Accounting Changes And Error Corrections [Abstract]  
Recent Accounting Pronouncements

Note 3 — Recent Accounting Pronouncements

Accounting Standards Update No. 2013-02. In February 2013, the Financial Accounting Standards Board 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 income 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 did not have a material effect on the Company’s consolidated financial statements.

v2.4.0.8
Investments
12 Months Ended
Dec. 31, 2013
Investments Debt And Equity Securities [Abstract]  
Investments

Note 4 — Investments

The Company holds investments in fixed-maturity securities as well as equity securities, which are classified as available-for-sale. At December 31, 2013 and 2012, the cost or 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:

 

     Cost or
Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Estimated
Fair

Value
 

As of December 31, 2013

          

Fixed-maturity securities

          

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

   $ 4,549       $ 37       $ (22   $ 4,564   

Corporate bonds

     25,139         484         (219     25,404   

Commercial mortgage-backed securities

     10,929         499         (96     11,332   

State, municipalities, and political subdivisions

     69,715         917         (181     70,451   

Redeemable preferred stock

     406         5         (11     400   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     110,738         1,942         (529     112,151   

Equity securities

     17,248         920         (519     17,649   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 127,986       $ 2,862       $ (1,048   $ 129,800   
  

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 42,192       $ 2,831       $ (194   $ 44,829   
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2013, fixed-maturity securities included $105 of U.S. Treasury securities, which represents a statutory deposit held in trust with the Treasurer of Alabama.

 

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at December 31, 2013 and 2012 are as follows:

 

     December 31,  
     2013      2012  
     Amortized
Cost
     Estimated
Fair

Value
     Amortized
Cost
     Estimated
Fair
Value
 

Available-for-sale

           

Due in one year or less

   $ 2,366       $ 2,381       $ 1,258       $ 1,264   

Due after one year through five years

     24,829         25,145         8,387         8,728   

Due after five years through ten years

     59,083         59,582         8,045         8,612   

Due after ten years

     13,531         13,711         5,038         5,705   

Commercial mortgage-backed securities

     10,929         11,332         10,708         11,644   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 110,738       $ 112,151       $ 33,436       $ 35,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

     Proceeds      Gross
Realized
Gains
     Gross
Realized
Losses
 

Year ended December 31, 2013

        

Fixed-maturity securities

   $ 1,749       $ 92       $ (4
  

 

 

    

 

 

    

 

 

 

Equity securities

   $ 2,809       $ 155       $ (163
  

 

 

    

 

 

    

 

 

 

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
  

 

 

    

 

 

    

 

 

 

 

* Amounts reported for the year ended December 31, 2011 include the gross realized gains and losses from equity option contracts. During the year ended December 31, 2011, 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 and realized gains of $49 during the year ended December 31, 2011. 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 or in subsequent years.

 

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, 2013 and 2012, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

 

     Less Than Twelve Months      Twelve Months or
Greater
     Total  
As of December 31, 2013    Gross
Unrealized
Loss
    Estimated
Fair

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

Fixed-maturity securities

              

U.S. treasury and U.S. government agencies

   $ (22   $ 3,291       $ —        $ —         $ (22   $ 3,291   

Corporate bonds

     (212     9,502         (7     230         (219     9,732   

Commercial mortgage-backed securities

     (96     2,179         —          —           (96     2,179   

State, municipalities, and political subdivisions

     (181     20,233         —          —           (181     20,233   

Redeemable preferred stock

     (11     239         —          —           (11     239   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total fixed-maturity securities

     (522     35,444         (7     230         (529     35,674   

Equity securities

     (273     10,742         (246     1,069         (519     11,811   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ (795   $ 46,186       $ (253   $ 1,299       $ (1,048   $ 47,485   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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, 2013 and 2012.

Other Investments

Other investments consist primarily of the Company’s real estate portfolio and the related assets of the marina and restaurant facilities acquired in 2012 and 2011. 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, 2013 and 2012:

 

     December 31,  
     2013     2012  

Land

   $ 11,299      $ 10,993   

Land improvements

     1,351        1,326   

Building

     3,022        2,869   

Other

     1,262        1,238   
  

 

 

   

 

 

 

Total, at cost

     16,934        16,426   

Less: accumulated depreciation and amortization

     (706     (339
  

 

 

   

 

 

 

Other investments

   $ 16,228      $ 16,087   
  

 

 

   

 

 

 

Depreciation and amortization expense for other investments was $388 and $279, respectively, for the years ended December 31, 2013 and 2012.

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

 

     Years Ended December 31,  
     2013     2012     2011  

Available-for-sale securities:

      

Fixed-maturity securities

   $ 1,868      $ 1,464      $ 1,339   

Equity securities

     499        492        247   

Investment expense

     (210     (150     (92

Time deposits

     —          357        538   

Other investments

     (1,045     (1,334     (96

Cash and cash equivalents

     357        151        125   
  

 

 

   

 

 

   

 

 

 
   $ 1,469      $ 980      $ 2,061   
  

 

 

   

 

 

   

 

 

 

At December 31, 2013, $241,378 or 82.3% of the Company’s cash and cash equivalents were deposited at three national banks and included $22,252 in two custodial accounts. At December 31, 2012, deposits at two national banks totaled $208,890, representing 90.7% of the Company’s cash and cash equivalents and included $22,957 in two custodial accounts.

v2.4.0.8
Fair Value Measurements
12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 5 — Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair value but does not elect the fair value option for its long-term debt. 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.

Long-term debt:

Long-term debt includes the Company’s 8% senior notes due 2020 and 3.875% convertible senior notes due 2019. The 8% senior notes were initially sold to the public in January 2013 and trade on the New York Stock Exchange. The estimated fair value of the 8% senior notes is based on the closing market price on December 31, 2013. The 3.875% convertible senior notes were sold in a private offering completed December 30, 2013. The fair value of the 3.875% convertible senior notes is estimated using a discounted cash flow method that relies on Level 3 inputs.

 

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 and the estimated fair value of its long-term debt that is reflected in the financial statements at carrying value. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of December 31, 2013 and 2012:

 

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

As of December 31, 2013

           

Financial Assets:

           

Cash and cash equivalents

   $ 293,398       $ —         $ —         $ 293,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed-maturity securities:

           

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

     3,520         1,044         —           4,564   

Corporate bonds

     24,476         928         —           25,404   

Commercial mortgage-backed securities

     —           11,332         —           11,332   

State, municipalities, and political subdivisions

     —           70,451         —           70,451   

Redeemable preferred stock

     400         —           —           400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed-maturity securities

     28,396         83,755         —           112,151   

Equity securities

     17,649         —           —           17,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     46,045         83,755         —           129,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 339,443       $ 83,755       $ —         $ 423,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities:

           

Long-term debt:

           

8% Senior notes

   $ —         $ 43,390       $ —         $ 43,390   

3.875% Convertible senior notes

     —           —           86,630         86,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ —         $ 43,390       $ 86,630       $ 130,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

As of December 31, 2012

           

Financial Assets:

           

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter of 2013, the Company analyzed its investment portfolio and determined the municipal bonds, which were previously classified as Level 1, should be classified as Level 2 based on the inputs used to measure fair value and the level of market activity in those instruments. As such, transfers into Level 2 from Level 1 were $10,684 during the year ended December 31, 2013. In addition, $11,066 related to municipal bonds included in the table related to December 31, 2012 was transferred from Level 1 to Level 2. There were no transfers between Level 1, 2 or 3 during the year ended December 31, 2012.

 

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 for the year ended December 31, 2012.

With respect to the Company’s business acquisition completed in 2012 (see Note 6 — “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.

v2.4.0.8
Business Acquisitions
12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
Business Acquisitions

Note 6 — Business Acquisitions

Effective April 2, 2012, the Company, through its subsidiary, Greenleaf Capital LLP (formerly known as 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 $8,157. Operating activities at acquisition include the restaurant as well as wet boat storage 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 $8,285, which exceeded the $8,157 purchase price. As a result, the Company recognized a gain on bargain purchase in the amount of $179 ($119 net of tax), which is included in operations for the year ended December 31, 2012. 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:

 

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 effect 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 $4,553 in revenues and $698 of net loss inclusive of the net gain on bargain purchase.

v2.4.0.8
Deferred Policy Acquisition Costs
12 Months Ended
Dec. 31, 2013
Insurance [Abstract]  
Deferred Policy Acquisition Costs

Note 7 — Deferred Policy Acquisition Costs

The following table summarizes the activity with respect to deferred policy acquisition costs:

 

     December 31,  
     2013     2012  

Beginning balance

   $ 10,032      $ 12,321   

Policy acquisition costs deferred

     31,097        15,984   

Amortization

     (27,058     (18,273
  

 

 

   

 

 

 

Ending balance

   $ 14,071      $ 10,032   
  

 

 

   

 

 

 

Effective January 1, 2012, the Company adopted, on a prospective basis, the accounting standards update related to DAC. As such, the Company recognized additional amortization expense of $1,210 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, 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.

The amount of policy acquisition costs amortized and included in policy acquisition and other underwriting expenses for the years ended December 31, 2013, 2012 and 2011 was $27,058, $18,273, and $19,450, respectively.

v2.4.0.8
Property and Equipment, net
12 Months Ended
Dec. 31, 2013
Property Plant And Equipment [Abstract]  
Property and Equipment, net

Note 8 — Property and Equipment, net

Property and equipment, net consists of the following:

 

     December 31,  
     2013     2012  

Land

   $ 1,642      $ 1,241   

Building

     7,596        5,955   

Computer hardware and software

     1,486        1,089   

Office furniture and equipment

     1,407        1,131   

Tenant and leasehold improvements

     3,093        2,767   

Other

     629        251   
  

 

 

   

 

 

 

Total, at cost

     15,853        12,434   

Less: accumulated depreciation and amortization

     (2,721     (1,581
  

 

 

   

 

 

 

Property and equipment, net

   $ 13,132      $ 10,853   
  

 

 

   

 

 

 

On February 28, 2013, the Company purchased real estate in Ocala, Florida for a total purchase price of $2,002. At acquisition, the real estate consisted of 1.6 acres of land and a vacant office building with rentable area of approximately 16,000 square feet. The facility is currently used by the Company’s insurance operations and, also, as an alternative location in the event a catastrophic event impacts the Company’s home office and other support operations.

Depreciation and amortization expense under property and equipment was $1,151, $848 and $466, respectively, for the years ended December 31, 2013, 2012 and 2011.

v2.4.0.8
Other Assets
12 Months Ended
Dec. 31, 2013
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]  
Other Assets

Note 9 — Other Assets

The following table summarizes the Company’s other assets:

 

     December 31,  
     2013      2012  

Benefits receivable related to retrospective reinsurance contracts

   $ 8,815       $ —     

Deferred costs related to retrospective reinsurance contracts

     194         —     

Deferred offering costs on senior notes issued in 2013

     4,305         127   

Prepaid expenses

     771         582   

Guarantee fund assessment recoverable

     —           482   

Other

     1,729         1,105   
  

 

 

    

 

 

 

Total other assets

   $ 15,814       $ 2,296   
  

 

 

    

 

 

 

Other assets include a $757 receivable related to the settlement of a 2009 revenue sharing agreement. The full settlement amount was received in January 2014.

v2.4.0.8
Long-Term Debt
12 Months Ended
Dec. 31, 2013
Debt Disclosure [Abstract]  
Long-Term Debt

Note 10 — Long-Term Debt

The following table summarizes the Company’s long-term debt:

 

     December 31,  
     2013      2012  

8% Senior Notes, due January 30, 2020

   $ 40,250       $ —     

3.875% Convertible Senior Notes, due March 15, 2019*

     86,682         —     
  

 

 

    

 

 

 

Total long-term debt

   $ 126,932       $ —     
  

 

 

    

 

 

 

 

* net carrying value

8% Senior Notes

On January 17, 2013, the Company completed the sale of unsecured senior notes in a public offering for an aggregate principal amount of $35,000. In addition, effective January 25, 2013, the Company received an aggregate principal amount of $5,250 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 were $38,690 after underwriting and issuance costs of approximately $1,560, $1,525 of which was paid during the year ended December 31, 2013. The notes will mature on January 30, 2020 and bear interest at a fixed annual rate of 8% payable quarterly on January 30, April 30, July 30 and October 30, commencing on April 30, 2013. The notes may be redeemed, in whole or in part, at any time on and after January 30, 2016 upon not less than 30 or more than 60 days’ notice. The redemption price will be equal to 100% of the principal amount redeemed plus accrued and unpaid interest. Additionally, the Company may, at any time, repurchase the senior notes at any price in the open market and may hold, resell or surrender the notes for cancellation.

The senior notes rank on parity with all of the Company’s other existing and future senior unsecured obligations. In addition, to the extent the senior notes are unsecured, they also rank junior in right of payment to any secured debt that the Company may have outstanding to the extent of the value of the assets securing such debt.

 

The senior notes contain customary restrictive covenants relating to merger, modification of the indenture, subordination, issuance of debt securities and sale of assets, the most significant of which include limitations with respect to certain designated subsidiaries on the incurrence of additional indebtedness or guarantees secured by any security interest on any shares of their capital stock. The senior note covenants also limit the Company’s ability to sell or otherwise dispose of any shares of capital stock of such designated subsidiaries. The senior note covenants do not contain any restrictions on the Company’s payment or declaration of dividends nor require a sinking fund to be established for the purpose of redemption.

Interest expense with respect to the senior notes was approximately $3,228 for the year ended December 31, 2013 and included amortization of debt issuance costs of approximately $159. The effective interest rate, taking into account the stated interest expense and amortization of debt issuance costs, approximates 8.7%.

3.875% Convertible Senior Notes

On December 11, 2013, the Company issued 3.875% Convertible Senior Notes (the “Convertible Notes”) in a private offering for an aggregate principal amount of $100,000. In addition, pursuant to the over-allotment option exercised by the underwriters, the Company received an aggregate principal amount of $3,000 on December 30, 2013. The aggregate net proceeds of the Convertible Notes were $99,514, after $3,486 in related issuance and transaction costs of which $3,245 had been paid as of December 31, 2013. The Convertible Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. The Convertible Notes bear interest at a rate of 3.875% per year, payable semiannually in arrears on March 15 and September 15 of each year. The Convertible Notes will mature on March 15, 2019 unless repurchased or converted prior to such date. The Company may not redeem the Convertible Notes prior to maturity unless requested by the note holders under certain events specified in the indenture.

The Convertible Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Convertible Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in the indenture to the Convertible Notes. The Convertible Notes do not require a sinking fund to be established for the purpose of redemption.

In conjunction with the issuance of the Convertible Notes, the Company entered into a prepaid stock repurchase forward contract and used $29,923 of the net proceeds from the Convertible Notes offering to repurchase the Company’s common stock. See Note 15 — “Stockholders’ Equity” for the effect of the repurchase forward contract on earnings per share.

For the year ended December 31, 2013, interest expense applicable to the Convertible Notes included the contractual interest coupon, discount amortization and amortization of allocated issuance costs aggregating $379, the amount of which included non-cash interest expense of $164. The effective interest rate, taking into account both cash and non-cash components, approximates 8.3%. As of December 31, 2013, the remaining amortization period of the debt discount was expected to be 5.2 years.

 

The following table summarizes information regarding the equity and liability components of the Convertible Notes:

 

     December 31,  
     2013     2012  

Principal amount

   $ 103,000      $ —     

Unamortized discount

     (16,318     —     
  

 

 

   

 

 

 

Liability component – net carrying value

   $ 86,682      $ —     
  

 

 

   

 

 

 

Equity component – conversion, net of offering costs

   $ 15,900      $ —     
  

 

 

   

 

 

 

Embedded Conversion Feature

Each $1 of principal of the Convertible Notes will initially be convertible into 16.0090 shares of common stock, which is the equivalent of approximately $62.47 per share, subject to adjustment upon the occurrence of specified events but will not be adjusted for any accrued and unpaid interest. The note holders may convert all or a portion of their Convertible Notes during specified periods as follows: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten consecutive trading-day period in which the trading price per $1 principal amount of the Convertible Notes is less than 98% of the product of the last reported sale price and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; or (4) at any time on or after January 1, 2019.

The note holders who elect to convert their Convertible Notes in connection with a fundamental change as described in the indenture will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of December 31, 2013, none of the conditions allowing the note holders to convert had been met.

The Company determined that the embedded conversion feature is not a derivative financial instrument but rather is required to be separately accounted for in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance, the Company accounted for the equity component of the embedded conversion feature, which amounted to $16,457, as a reduction in the carrying amount of the debt and an increase in additional paid-in capital. The increase in additional paid-in capital was offset in part by $557 in related transaction costs.

 

Embedded Redemption Feature

The note holders also have the right to require the Company to repurchase for cash all or any portion of the Convertible Notes at par prior to the maturity date should any of the fundamental change events described in the indenture occur. The Company concluded that the embedded redemption feature is not a derivative financial instrument and that it is not probable at issuance that any of the specified fundamental change events will occur. Therefore, the embedded redemption feature is not substantive and will not affect the expected life of the liability component.

v2.4.0.8
Reinsurance
12 Months Ended
Dec. 31, 2013
Insurance [Abstract]  
Reinsurance

Note 11 — Reinsurance

The Company cedes a portion of its homeowners insurance exposure to other entities under 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. Failure of reinsurers to honor their obligations could result in losses to the Company. 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 reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases 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:

 

     Years Ended December 31,  
     2013     2012     2011  

Premiums Written:

      

Direct

   $ 315,695      $ 205,839      $ 125,145   

Assumed

     39,076        73,340        62,104   
  

 

 

   

 

 

   

 

 

 

Gross written

     354,771        279,179        187,249   

Ceded

     (102,865     (75,939     (55,525
  

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 251,906      $ 203,240      $ 131,724   
  

 

 

   

 

 

   

 

 

 

Premiums Earned:

      

Direct

   $ 273,037      $ 168,937      $ 119,756   

Assumed

     64,076        64,670        23,850   
  

 

 

   

 

 

   

 

 

 

Gross earned

     337,113        233,607        143,606   

Ceded

     (102,865     (75,939     (55,525
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 234,248      $ 157,668      $ 88,081   
  

 

 

   

 

 

   

 

 

 

During the years ended December 31, 2013, 2012 and 2011, there were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred. Prepaid reinsurance premiums related to 27 reinsurers at December 31, 2013 and 31 reinsurers at December 31, 2012, respectively. There were no amounts receivable with respect to reinsurers at December 31, 2013 and 2012. Thus, there were no concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums as of December 31, 2013 and 2012. The ratio of assumed premiums earned to net premiums earned for the years ended December 31, 2013, 2012 and 2011 were 27.4%, 41.0%, and 27.1%, respectively.

 

Certain of the reinsurance contracts include retrospective provisions that adjust premiums, increase the amount of future coverage, or result in profit commissions in the event losses are minimal or zero. As a result, the Company’s reported revenue for the year ended December 31, 2013 includes a net reduction in ceded premiums of $12,521 comprised of various components of these adjustments, with $9,009 and $3,512 included in other assets and prepaid reinsurance premiums, respectively. See “Reinsurance” under Note 2 — “Summary of Significant Accounting Policies.”

 
v2.4.0.8
Losses and Loss Adjustment Expenses
12 Months Ended
Dec. 31, 2013
Insurance [Abstract]  
Losses and Loss Adjustment Expenses

Note 12 — 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 losses and LAE is summarized as follows:

 

     Years Ended December 31,  
     2013     2012     2011  

Balance, beginning of year

   $ 41,168      $ 27,424      $ 22,146   
  

 

 

   

 

 

   

 

 

 

Incurred related to:

      

Current year

     67,579        66,425        43,613   

Prior years

     (2,456     (115     4,630   
  

 

 

   

 

 

   

 

 

 

Total incurred

     65,123        66,310        48,243   
  

 

 

   

 

 

   

 

 

 

Paid related to:

      

Current year

     (40,240     (36,914     (26,132

Prior years

     (22,365     (15,652     (16,833
  

 

 

   

 

 

   

 

 

 

Total paid

     (62,605     (52,566     (42,965
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 43,686      $ 41,168      $ 27,424   
  

 

 

   

 

 

   

 

 

 

The significant increase in the Company’s liability for unpaid losses and LAE 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 establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. During the year ended December 31, 2013, the Company experienced favorable development of $2,456 with respect to its net unpaid losses and loss adjustment expenses established for the year ended December 31, 2012. Factors attributable to this favorable development include a lower severity of claims and reduced frequency of reported claims.

 

The Company writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. The occurrence of a major catastrophe could have a significant effect on the Company’s yearly results and cause a temporary disruption of the 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.

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes

Note 13 — Income Taxes

A summary of income tax expense is as follows:

 

     Years Ended December 31,  
     2013      2012     2011  

Current:

       

Federal

   $ 34,372       $ 18,484      $ 7,220   

State

     5,844         3,168        1,196   

Foreign

     118         137        9   
  

 

 

    

 

 

   

 

 

 

Total current taxes

     40,334         21,789        8,425   
  

 

 

    

 

 

   

 

 

 

Deferred:

       

Federal

     514         (1,986     (1,715

State

     43         (380     (269
  

 

 

    

 

 

   

 

 

 

Total deferred taxes

     557         (2,366     (1,984
  

 

 

    

 

 

   

 

 

 

Income tax expense

   $ 40,891       $ 19,423      $ 6,441   
  

 

 

    

 

 

   

 

 

 

The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows:

 

     Years Ended December 31,  
     2013     2012      2011  
     Amount     %     Amount      %      Amount      %  

Income taxes at statutory rate

   $ 37,258        35.0      $ 17,353         35.0       $ 5,785         35.0   

Increase (decrease) in income taxes resulting from :

               

State income taxes, net of federal tax benefits

     3,802        3.6        1,799         3.6         599         3.6   

Other

     (169     (0.2     271         0.6         57         0.7   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Income tax expense

   $ 40,891        38.4      $ 19,423         39.2       $ 6,441         39.3   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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, 2012, 2011, and 2010 remain subject to examination by the Company’s 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. There have been no such interest or penalties during the three years ended December 31, 2013. In January 2014, the Company received notice from the Internal Revenue Service with respect to an examination of the Company’s 2011 federal income tax return. The examination commenced in the first quarter of 2014. In February 2014, the Company received notice from the Florida Department of Revenue with respect to an examination of the Company’s 2010, 2011 and 2012 state income tax returns. The examination commenced in the first quarter of 2014.

 

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 the Company’s net deferred income tax (liabilities) assets are as follows:

 

     December 31,  
     2013     2012  

Deferred tax assets:

    

Unearned premiums

   $ 8,829      $ 9,149   

Losses and loss adjustment expenses

     885        1,116   

Organizational costs

     95        106   

Stock-based compensation

     2,026        394   

Accrued expenses

     163        40   

Deferred expenses

     —          72   

Unearned revenue

     52        —     

Bad debt reserve

     5        —     
  

 

 

   

 

 

 

Total deferred tax assets

     12,055        10,877   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Property and equipment

     (1,748     (1,519

Deferred policy acquisition costs

     (5,600     (4,027

Unrealized net gain on securities available-for-sale

     (700     (1,017

Basis difference related to convertible senior notes

     (6,295     —     

Prepaid expenses

     (296     (225

Unearned brokerage income

     —          (105

Other

     (156     (136
  

 

 

   

 

 

 

Total deferred tax liabilities

     (14,795     (7,029
  

 

 

   

 

 

 

Net deferred tax (liabilities) assets

   $ (2,740   $ 3,848   
  

 

 

   

 

 

 

A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred 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, 2013 or 2012.

v2.4.0.8
Earnings Per Share
12 Months Ended
Dec. 31, 2013
Earnings Per Share [Abstract]  
Earnings Per Share

Note 14 — 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:

 

     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Year Ended December 31, 2013

       

Net income

   $ 65,562        

Less: Preferred stock dividends

     (104     

Less: Income attributable to participating securities

     (3,213     
  

 

 

      

Basic Earnings Per Share:

       

Income allocated to common stockholders

     62,245        10,691       $ 5.82   
       

 

 

 

Effect of Dilutive Securities:

       

Stock options