TypTap Insurance Group, Inc. [TYTP] Filings

As filed with the Securities and Exchange Commission on November 8, 2021.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TypTap Insurance Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida		6331		85-2578837
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

5300 West Cypress Street, Suite 100

Tampa, Florida 33607

844-289-7968

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Paresh Patel, President and Chief Executive Officer

Kevin Mitchell, Executive Vice President

TypTap Insurance Group, Inc.

5300 West Cypress Street, Suite 100

Tampa, Florida 33607

844-289-7968

(Name, address, including zip code, and telephone number including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Curt P. Creely Russell E. Ryba Foley & Lardner LLP 100 North Tampa Street, Suite 2700 Tampa, Florida 33602 (813) 229-2300		Byron B. Rooney Shane Tintle Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☐
				Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered		Proposed maximum aggregate offering price(1)(2)		Amount of registration fee
Common Stock, par value $0.001 per share		$100,000,000		$9,270

(1)	Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the registrant.

(2)	Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, and it is not soliciting an offer to buy, these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated November 8, 2021

Preliminary Prospectus

            shares

 

 

Common Stock

 

 

This is an initial public offering of            shares of our common stock.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price will be between $        and $        per share. We intend to apply to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “TYTP”.

Immediately after this offering, HCI Group, Inc., or HCI, will own 75,000,000 shares of our common stock, which will represent approximately    % of our total outstanding shares of common stock and voting power. As long as HCI continues to control shares representing a majority of our voting power, it will generally be able to determine the outcome of all corporate actions requiring shareholder approval, including the election of directors. As a result, we believe we are eligible for, but do not intend to take advantage of, the “controlled company” exemptions to the corporate governance rules for NYSE-listed companies.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), and, as such, are subject to reduced public company reporting requirements. See “Prospectus Summary —  Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 20 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission or other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

		Per share				Total
Initial Public Offering Price		$				$
Underwriting Discounts and Commissions(1)		$				$
Proceeds, Before Expenses, to TypTap Insurance Group, Inc.		$				$

 

(1)	See “Underwriting” for a description of the compensation payable to the underwriters.

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale through a directed share program to some of our directors, officers, employees, business associates and related persons. See “Underwriting — Directed Share Program.”

The underwriters have options for a period of 30 days from the date of this prospectus to purchase up to a maximum of            additional shares of our common stock from us at the initial public offering price, less the underwriting discounts and commissions.

Delivery of the shares of common stock will be made on or about                    , 2021.

Book-Runners

JMP Securities		Truist Securities

Oppenheimer & Co.

Co-Managers

Dowling and Partners Securities, LLC		Fifth Third Securities		TigerRisk Capital Markets & Advisory

The date of this prospectus is                    , 2021.

 

Table of Contents

 

		Page
Prospectus Summary			1
Risk Factors			20
Cautionary Note Regarding Forward-Looking Statements			61
Market and Industry Data			63
Use of Proceeds			64
Dividend Policy			65
Capitalization			66
Dilution			68
Management’s Discussion and Analysis of Financial Condition and Results of Operations			70
Business			98
Regulation			114
Management			121
Executive Compensation			130
Certain Relationships and Related Party Transactions			140
Principal Shareholders			146
Description of Capital Stock			148
Shares Eligible for Future Sale			156
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Our Common Stock			159
Underwriting			163
Legal Matters			169
Experts			169
Where You Can Find More Information			169
Index to Consolidated and Combined Financial Statements			F-1

Neither we nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. If anyone provides you with additional, different or inconsistent information, we and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, such information. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, operating results and prospects may have changed since such date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, before deciding to invest in our common stock. Our business, financial condition, results of operations or prospects could be materially and adversely affected by any of these risks or uncertainties, as well as by risks or uncertainties not currently known to us, or that we do not currently believe are material. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

We may not become profitable or maintain profitability in the future.

We incurred net losses of $12.4 million and $6.9 million in the years ended December 31, 2020 and December 31, 2019, respectively, and a net loss of $14.7 million for the nine months ended September 30, 2021. We may incur significant losses in the future for a number of reasons, including insufficient growth in the number of customers, a failure to retain our existing customers, a failure to obtain or retain our independent agents and independent agency networks, and increasing competition, as well as other risks described in this “Risk Factors” section, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. We expect to continue to make investments in the development and expansion of our business, which may not result in increased or sufficient revenue or growth, as a result of which we may not be able to achieve profitability or maintain profitability in the future.

We may lose existing customers or fail to acquire new customers.

We believe that growth of our business and revenue depends upon our ability to continue to grow our business in the geographic markets that we currently serve by retaining our existing customers and adding new customers in our current as well as new geographic markets. Expanding into new geographic markets takes time, requires us to navigate and comply with extensive regulations and may occur more slowly than we expect or than it has occurred in the past. If we lose customers, our value will diminish. In particular, while loss performance has improved over time as more customers renew their policies and remain policyholders for longer, a future loss of customers could lead to higher loss ratios or loss ratios that cease to decline, which would adversely impact our profitability. If we fail to remain competitive on customer experience, pricing, and insurance coverage options, our ability to grow our business may also be adversely affected. In addition, we may fail to accurately predict risk segmentation of new customers or potential customers, which could also reduce our profitability.

While a key part of our business strategy is to retain and add customers in our existing markets, we also intend to expand our operations into new markets nationwide. In doing so, we may incur losses or otherwise fail to enter new markets successfully. Our expansion into new markets may place us in unfamiliar competitive environments and involve various risks, including competition, government regulation, the need to invest significant resources and the possibility that returns on such investments will not be achieved for several years or at all.

There are many factors that could negatively affect our ability to grow our customer base, including if:

 

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we lose customers to new market entrants and/or existing competitors;

 

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we do not obtain regulatory approvals necessary for expansion into new markets nationwide;

 

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we fail to effectively use digital marketing and advertising;

 

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we suffer reputational harm to our brand including from negative publicity, whether accurate or inaccurate;

 

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we fail to provide effective updates to our existing products or to keep pace with technological improvements in our industry;

 

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technical or other problems frustrate the independent agent or policyholder experience, particularly if those problems prevent us from generating quotes for our independent agents or paying claims to our policyholders in a fast and reliable manner; or

 

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we fail to obtain, maintain, protect, defend and enforce our intellectual property and proprietary rights.

Our inability to overcome these challenges could impair our ability to attract new customers and retain existing customers, and could have a material adverse effect on our business, operating results and financial condition.

Our expansion within the United States will subject us to additional costs and risks, and our plans may not be successful.

Our success depends in significant part on our ability to expand into additional markets in the United States. As of October 2021, we are licensed in 18 states, including Florida, and are writing policies in Florida, Georgia, South Carolina, Connecticut, Nevada, Utah, and Rhode Island. We plan to have a presence in almost all states by the end of 2024 but cannot guarantee that we will be able to provide nationwide coverage on that timeline or at all. Moreover, one or more states could revoke our license to operate, or implement additional regulatory hurdles that could preclude or inhibit our ability to obtain or maintain our license in such states. As we seek to expand in the United States, we may incur significant operating expenses, although our expansion may not be successful for a variety of reasons, including because of:

 

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our lack of significant experience operating outside Florida;

 

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barriers to obtaining the required government approvals, licenses or other authorizations;

 

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failures in identifying independent agents and potential strategic partnerships with independent agency networks;

 

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challenges in, and the cost of, complying with various laws and regulatory standards, including with respect to the insurance business and insurance distribution, capital and outsourcing requirements, data privacy and protection, tax, claims handling, and local regulatory restrictions;

 

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difficulty in recruiting and retaining talented and capable employees;

 

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competition from existing insurance companies that already own market share, better understand the local market, may market and operate more effectively and may enjoy greater local affinity or awareness; or

 

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differing demand dynamics, which may make our product offerings less successful.

Expansion into new markets in the United States will also require additional investments by us both in marketing and with respect to securing applicable regulatory approvals. These incremental costs may result from hiring additional personnel, from engaging third-party service providers and from incurring other research and development costs. If we invest substantial time and resources to expand our operations while our revenues from those additional operations do not exceed the expense of establishing and maintaining them, or if we are unable to manage these risks effectively, our business, results of operations and financial condition could be adversely affected.

If we fail to grow our geographic footprint or geographic growth occurs at a slower rate than expected, our business, results of operations and financial condition could be materially and adversely affected.

Our brand may not become as widely known or accepted as existing insurance companies’ brands or the brand may become tarnished.

Many of our competitors have brands that are well-recognized. As a relatively newer entrant into the insurance market, we have spent, and expect that we will for the foreseeable future continue to spend, considerable amounts of money and other resources on creating brand awareness and building our reputation with independent

 

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agents and customers. We may not be able to build brand awareness to levels matching our competitors, and our efforts at building, maintaining and enhancing our reputation with independent agents and customers could fail and/or may not be cost-effective. Complaints or negative publicity about our business practices, our marketing and advertising campaigns (including marketing affiliations or partnerships), our compliance with applicable laws, data privacy or security issues, and other aspects of our business, whether real or perceived, could diminish confidence in our brand, which could adversely affect our reputation and business. As we enter new markets, we will need to establish our reputation with new independent agents, independent agency networks and customers, and to the extent we are not successful in creating positive impressions, our business in these newer markets could be adversely affected. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful or cost effective. If we are unable to maintain or enhance our reputation or enhance independent agent and consumer awareness of our brand in a cost-effective manner, our business, results of operations and financial condition could be materially adversely affected.

Our future growth and profitability depends in part on our ability to successfully operate in an insurance industry that is highly competitive.

We currently compete against a variety of regional and digital-based homeowners insurance carriers. Based on our expansion plan, we will begin to compete against well-established national brands such as State Farm, Allstate, Farmers, Liberty Mutual and Travelers. Several of these established national insurance companies are larger than we are and have significant competitive advantages, including better name recognition, strong financial ratings, greater resources, easier access to capital, and the ability to offer more types of insurance than we do, which are often bundled together to help attract and retain customers. In addition, the insurance industry consistently attracts well-capitalized new entrants to the market. Our future growth will depend in large part on our ability to grow our insurance business in which traditional insurance companies retain certain advantages. In particular, unlike us, many of these competitors offer customers the ability to purchase multiple other types of insurance coverage and “bundle” them together into one policy and, in certain circumstances, include an umbrella liability policy for additional coverage at competitive prices. In the flood insurance market, the National Flood Insurance Program, a government-backed organization, continues to be the dominant underwriter of flood policies. Given its mandate and pricing strategy, the National Flood Insurance Program could limit our growth potential in the flood insurance market for the foreseeable future. Because of the competitive nature of the insurance industry, there can be no assurance that we will continue to compete effectively within our industry, or that competitive pressures will not have a material effect on our business, results of operations or financial condition.

We rely on independent agents and independent agency networks to write our insurance policies, and if we are not able to engage and retain independent agents and independent agency networks, our revenues would be negatively affected.

We primarily sell our products through independent insurance agents, and our relationships with these agents are generally non-exclusive and terminable on short notice. We must compete with other insurers for independent agents’ business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher commissions to their agents, in which case our agents may reduce or terminate the sale of our products. In addition, if our products, pricing and commissions do not remain competitive, we may find it more difficult to attract new business from independent agents to sell our products. A material reduction in the amount of our products that independent agents sell could negatively affect our business, results of operations and financial condition. Finally, the failure of independent agents to comply with applicable laws and regulations could have an adverse effect on our business, and we may from time to time terminate independent agents for noncompliance with laws or policies or for problematic business practices.

 

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Increased competition, competitive pressures, industry developments, and market conditions could affect the growth of our business and adversely impact our financial results.

The homeowners and flood insurance industry in Florida and nationwide is cyclical and highly competitive. We compete not only with other stock and mutual companies but also with the U.S. government, other underwriting organizations and alternative risk sharing mechanisms. Our principal lines of business are also written by numerous other insurance companies. Competition now and in the future for any one account may come from very large, well-established national companies, smaller regional companies, other specialty insurers in our field, and new entrants to the relevant market. Many of these competitors have greater financial resources, larger agency networks and greater name recognition than our company. Additionally, our competitors may merge or acquire one another and further increase their combined financial resources and agency networks. We compete for business not only on the basis of price, but also on the basis of financial strength, types of coverage offered, availability of coverage desired by customers, commission structure, and quality of service. We may have difficulty continuing to compete successfully on any of these bases in the future. Competitive pressures coupled with market conditions may affect our rate of premium growth and financial results.

We obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in Florida and many other states. Mortgage companies may require homeowners to obtain property insurance from an insurance company with an acceptable A.M. Best rating, which we do not currently have and may never try to obtain. Such a requirement could prevent us from expanding our business unless we obtain such rating, which may in turn limit our ability to compete with large, national insurance companies and certain regional insurance companies. A downgrade or loss of our Demotech rating could result in a substantial loss of business in the event insureds move their business to insurers with a sufficient financial strength rating.

There are inherent limitations and risks related to our estimates of claims and loss reserves. If our actual losses exceed our loss reserves, our financial results, our ability to expand our business, and our ability to compete in the homeowners and flood insurance industry may be negatively affected. In addition, industry developments could further increase competition in our industry. These developments could include:

 

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an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies attempt to enter the insurance business because of better pricing and/or terms;

 

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new programs or changes to existing programs in which federally or state-sponsored entities provide homeowners and/or flood insurance in catastrophe-prone areas or other alternative markets;

 

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changes in the regulatory climate in Florida and the other states where we operate; and

 

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the enactment of federal proposals for an optional federal charter that would allow some competing insurers to operate under regulations different or less stringent than those applicable to our insurance subsidiaries.

These developments and others could make the homeowners and flood insurance marketplace more competitive by increasing the supply of insurance available.

If competition limits our ability to write new business at adequate rates, our future business, results of operations and financial condition could be materially adversely affected.

Our success will depend on the continuous development and improvement of the company’s proprietary platform, including the development and implementation of new features and analytical models.

We utilize our technology platform to gather and analyze data in order to determine whether or not to write and how to price our homeowners and flood insurance products. Our future success will depend on the continuous development and improvement of our proprietary technology platform, including further refinements and enhancements to our data engine, analytical models, AI-enabled underwriting algorithms, and agent and consumer interfaces. The success of our efforts to further develop and refine our technology platform depends on several factors, including the timely completion, introduction and effectiveness of such refinements and

 

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enhancements. We may not be successful in either developing these refinements and enhancements or in bringing them into use in a timely fashion. Our technology platform is expensive and complex, and its continuous development, maintenance and operation may entail unforeseen difficulties, including performance problems or undetected defects, errors, failures, bugs or vulnerabilities. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our technology from operating properly. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting process, which could subject us to legal or regulatory liability and harm our brand and reputation. Any of these possibilities could result in a material adverse effect on our business, results of operations and financial condition.

Our business and platform make extensive use of third-party data.

We utilize third-party data to support and develop our technology platform. We anticipate that we will continue to rely on this third-party data in the future. We cannot ensure that this third-party data will continue to be available to us on commercially reasonable terms, if at all. Any defects or errors in the third-party data could adversely affect the operation of our technology platform. Many of the risks associated with the use of third-party data cannot be eliminated, and these risks could negatively affect our brand and business.

We may not continue to grow at historical rates in the future.

Our limited operating history may make it difficult to evaluate our current business and our future prospects. While our revenue has grown in recent periods, this growth rate may not be sustainable and should not be considered indicative of future performance, and we may not realize sufficient revenue to become profitable, or maintain profitability, in the future. As we grow our business, we expect our revenue growth rates may slow in future periods due to a number of reasons, which may include slowing demand for our products, increasing competition, a decrease in the growth of our overall market, and our failure to capitalize on growth opportunities or the maturation of our business.

Our success will depend on our ability to appropriately price the risks we underwrite.

Our results of operations and financial condition will depend on our ability to underwrite and set premium rates appropriately for a wide variety of risks, including risks associated with homeowners insurance and flood insurance. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, and underwriting expenses and to earn a profit. To price our products and select policies to underwrite appropriately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas and weighting measures; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and thus, price our products and select the policies to underwrite appropriately, is subject to several risks and uncertainties, some of which are outside our control, including:

 

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the availability of sufficient and reliable data;

 

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the uncertainties that inherently characterize estimates and assumptions;

 

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our selection and application of appropriate rating and pricing techniques;

 

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changes in legal standards, claim settlement practices, and restoration costs; and

 

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new legal or regulatory restrictions on underwriting, rating and pricing activities.

In addition, we could underprice risks, which would negatively affect our profit margins. We could also overprice risks, which could reduce our retention, sales volume and competitiveness. The foregoing factors could materially and adversely affect our profitability.

 

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The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.

We utilize a number of strategies to mitigate risk exposure within our insurance business, which include:

 

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engaging in vigorous underwriting;

 

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carefully evaluating terms and conditions of our policies;

 

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focusing on our risk aggregations by geographic zones and other bases; and

 

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ceding insurance risk to reinsurance companies.

However, there are inherent limitations in these tactics. We cannot provide assurance that an unanticipated event or series of events will not result in loss levels which could have a material adverse effect on our financial condition or results of operations.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

Our insurance underwriting process is generally designed to limit our exposure to known and manageable risks. Various provisions of our policies, such as limitations or exclusions from coverage, which have been negotiated to limit our risks, may not be enforceable in the manner we intend.

In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to deny coverage in the event of a violation of those conditions. While our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect our loss experience, which changes could have a material adverse effect on our financial condition or results of operations.

We may require additional capital to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features and products or enhance our existing products, satisfy our regulatory capital and surplus requirements, cover losses, improve our operating infrastructure or acquire complementary businesses and technologies. Many factors will affect our capital needs as well as their amount and timing, including our growth and profitability, regulatory requirements, market disruptions and other developments. If our present capital and surplus is insufficient to meet our current or future operating requirements, including regulatory capital and surplus requirements, or to cover losses, we may need to raise additional funds through financings or curtail our growth. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans and operating performance, as well as the condition of the capital markets at the time we seek financing. We cannot be certain that additional financing will be available to us on favorable terms, or at all.

If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of common stock. As an insurance holding company that owns TypTap Insurance Company, a Florida-domestic stock insurer, we are subject to extensive laws and regulations in Florida administered by the Florida Office of Insurance Regulation, and any such issuances of equity or convertible debt securities to secure additional funds may be impeded by regulatory approvals or requirements imposed by Florida Office of Insurance Regulation if such issuances were deemed to result in a person acquiring “control” of our company under applicable insurance laws and regulations. Such regulatory

 

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requirements may require potential investors in 10% or more of our voting securities to disclose their organizational structure and detailed financial statements, as well as require managing partners, directors, senior officers and/or certain owners to submit biographical affidavits and fingerprints, which may deter funds from investing in our company. Similar requirements may be imposed by insurance regulatory authorities in states where TypTap Insurance Company has applied or will apply for authority to transact insurance. Moreover, any debt financing that we secure in the future could subject us to restrictive covenants relating to our capital raising activities, our ability to make certain types of investments or payments, and other financial and operational matters, which may increase our difficulty to obtain additional capital or to pursue business opportunities, including new product offerings and potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired, and our business, revenue, results of operations and financial condition may be materially harmed.

We expect a number of factors to cause our results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our revenue and results of operations could vary significantly from quarter to quarter and year to year, and may fail to match periodic expectations as a result of a variety of factors, many of which are outside of our control. Our results may vary from period to period as a result of fluctuations in the number of customers purchasing our insurance products and renewing their agreements with us as well as fluctuations in the timing and amount of our expenses. In addition, the insurance industry is subject to its own cyclical trends and uncertainties, including periods of intense pricing competition due to excessive underwriting capacity, periods when shortages of writing capacity permit more favorable underwriting profits as well as extreme weather which is often seasonal and may result in volatility in claims reporting and payment patterns. Fluctuations and variability across the industry may also affect our revenue. As a result, comparing our results of operations on a period-to-period basis may not be meaningful, and the results of any one period should not be relied on as an indication of future performance. Our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price. In addition to other risk factors discussed in this “Risk Factors” section and elsewhere in this prospectus, factors that may contribute to the variability of our quarterly and annual results include:

 

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our ability to attract new customers and retain existing customers, including in a cost-effective manner;

 

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our ability to accurately forecast revenue and losses and appropriately plan our expenses;

 

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the effects of increased competition on our business;

 

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our ability to successfully maintain our position in and expand in existing markets as well as successfully enter new markets;

 

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our ability to obtain, maintain, protect, defend or enforce our existing intellectual property and to create or otherwise acquire new intellectual property;

 

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our ability to maintain an adequate rate of growth and effectively manage that growth;

 

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our ability to keep pace with technology changes in the insurance industry;

 

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the success of our sales and marketing efforts;

 

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costs associated with defending claims, including coverage claims, intellectual property infringement, misappropriation or other claims, misclassifications and related judgments or settlements;

 

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the impact of, and changes in, governmental or other regulation affecting our business;

 

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the attraction and retention of qualified employees and key personnel;

 

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our ability to identify and engage independent agents and independent agency networks as we continue to enter new markets nationwide;

 

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the effects of natural or man-made catastrophic events;

 

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the effectiveness of our internal controls; and

 

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changes in our tax rates or exposure to additional tax liabilities.

Severe weather events and other catastrophes, including the effects of climate change, are inherently unpredictable and may have a material adverse effect on our financial results and financial condition.

Our business may be exposed to catastrophic events such as hurricanes, tropical storms, tornadoes, sinkholes, tsunamis, earthquakes, windstorms, hailstorms, severe thunderstorms, floods, wildfires and other fires, as well as non-natural events such as explosions, riots, terrorism, or war, which could cause operating results to vary significantly from one period to the next. We may incur catastrophe losses in our business in excess of: (1) those experienced in prior years, (2) the average expected level used in pricing, (3) current reinsurance coverage limits, or (4) loss estimates from external hurricane, tornado, hail and earthquake models at various levels of probability. In addition, we are subject to customer insurance claims arising from weather events such as winter storms, rain, hail and high winds. The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity of customer insurance claims when severe weather conditions occur.

The incidence and severity of severe weather conditions and catastrophes are inherently unpredictable and the occurrence of one catastrophe does not render the possibility of another catastrophe greater or lower. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. In particular, severe weather and other catastrophes could significantly increase our costs due to a surge in claims following such events and/or legal and regulatory changes in response to catastrophes that may impair our ability to limit our liability under our policies. Severe weather conditions and catastrophes can cause greater losses for us, which can cause our liquidity and financial condition to deteriorate.

As we currently have sold the majority of our policies in Florida, any catastrophic event, destructive weather pattern, general economic trend, regulatory developments or other conditions specifically affecting the state of Florida could have a disproportionately adverse impact on our business, financial condition, and results of operations until we have significantly expanded across the United States. While we actively manage our exposure to catastrophic events through our underwriting process and the purchase of reinsurance, the fact that our business is currently concentrated in the state of Florida subjects it to increased exposure to certain catastrophic events and destructive weather patterns such as hurricanes, tropical storms, and tornados. Changes in the prevailing regulatory, legal, economic, political, demographic and competitive environment, and other conditions in the state of Florida could also make it less attractive for us to do business in Florida and would have a more pronounced effect on our business than it would on other insurance companies that are more geographically diversified. Since our business is currently concentrated in this manner, the occurrence of one or more catastrophic events or other conditions affecting losses in the state of Florida could have an adverse effect on our business, financial condition, and results of operations.

Climate change may affect the occurrence of certain natural events, such as an increase in the frequency or severity of wind and thunderstorm events, eruptions of volcanoes, and tornado or hailstorm events due to increased convection in the atmosphere; more frequent wildfires and subsequent landslides in certain geographies; higher incidence of deluge flooding and the potential for an increase in severity of the hurricane events due to higher sea surface temperatures. Additionally, climate change may cause an impact on the demand, price and availability of insurance, as well as the value of our investment portfolio. Due to significant variability associated with future changing climate conditions, we are unable to predict the impact climate change will have on our business.

Non-natural events such as power disruptions, computer viruses or data security breaches may also prevent us from continuing our operations and may result in system interruptions, reputational harm, delays in our

 

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development activities and lengthy interruptions in service, any of which could have an adverse effect on our business, financial condition, and results of operations.

Our results of operations and financial condition may be adversely affected due to limitations in the analytical models used to assess and predict our exposure to catastrophe losses.

Like others in the insurance industry, we use models developed both internally and by third party vendors along with our own historical data in assessing our reserves and capital levels as they relate to homeowners and flood insurance exposure to catastrophe losses. These models assume various conditions and probability scenarios; however, they do not necessarily accurately predict future losses or measure losses currently incurred. Further, the accuracy of such models may be negatively impacted by changing climate conditions, including increased weather severity patterns. Catastrophe models use historical information and scientific research about natural events, such as hurricanes and earthquakes, as well as detailed information about our policies in-force. However, since actual catastrophic events vary considerably, there are limitations with respect to catastrophe models’ usefulness in predicting losses in any reporting period. Other limitations are evident in significant variations in estimates between models, material increases and decreases in results due to model changes and refinements of the underlying data elements and actual conditions that are not yet well understood or may not be properly incorporated into the models.

Our intellectual property and proprietary rights are valuable, and any inability to obtain, maintain, protect, defend and enforce them could reduce the value of our products and brand.

Our trade secrets, trademarks, copyrights, and other intellectual property rights are important assets for us. Our ability to compete effectively is dependent in part on our ability to obtain, maintain, protect, defend and enforce our intellectual property and other proprietary rights, including our proprietary technology. We rely on, and expect to continue to rely on, various agreements with our employees, independent contractors, consultants and other third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright and trade secret laws and regulations, to protect our brand and other intellectual property rights. Such agreements, laws and regulations may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology, and we may fail to consistently obtain, police and enforce such agreements. Additionally, various factors outside our control pose a threat to our intellectual property rights, as well as to our products and technologies. For example, we may fail to obtain effective intellectual property protection. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective in all cases. For example, governmental entities that grant intellectual property rights may deny our applications for such rights despite our best efforts. Additionally, granted intellectual property rights are subject to challenge. Successful challenges may result in such rights being narrowed in scope or declared invalid or unenforceable. Despite our efforts to obtain and protect broad intellectual property rights, there can be no assurance our intellectual property rights will be sufficient to protect against others offering products that are substantially similar to ours and compete with our business, and unauthorized parties may attempt to copy aspects of our technology and use information that we consider proprietary. Competitors or other third parties may also attempt to circumvent or design around our intellectual property rights. In each case, our ability to compete could be significantly impaired. To the extent we expand our activities internationally, our exposure to unauthorized copying or use of our technology and proprietary information may increase.

We have filed, and may continue in the future to file, applications to protect certain of our innovations and intellectual property. We have not applied for any patents and cannot give assurances that any patent applications will be made by us or that, if they are made, they will be granted. We do not know whether any of our applications will result in the issuance of a trademark or copyright, as applicable, or whether the examination process will require us to narrow our claims or otherwise limit the scope of such intellectual property. In addition, we may not receive competitive advantages from the rights granted under our intellectual property. Our

 

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existing intellectual property, and any intellectual property granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing our intellectual property rights. Therefore, the exact effect of the protection of this intellectual property cannot be predicted with certainty. Because obtaining patent protection requires disclosing our inventions to the public, such disclosure may facilitate our competitors developing improvements to our innovations. Given this risk, we have chosen not to, and in the future may sometimes choose not to seek patent protection for certain innovations and instead rely on trade secret protection. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to adversely impact our business.

We currently hold various domain names relating to our brand, including TypTap.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our website. We may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.

In addition to registered intellectual property rights such as trademark and domain name registrations, we rely on non-registered proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. Certain information or technology that we endeavor to protect as trade secrets may not be eligible for trade secret protection in all jurisdictions, or the measures we undertake to establish and maintain such trade secret protection may be inadequate. In order to protect our proprietary information and technology, we rely in part on agreements with our employees, independent contractors, consultants and other third parties that place restrictions on the use and disclosure of this intellectual property and confidential information. In some cases, these agreements may not adequately protect our trade secrets or confidential information, these agreements may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become known to our competitors, which could cause us to lose a competitive advantage resulting from this intellectual property. However, our employees, independent contractors, consultants or other third parties with whom we do business may nonetheless use intellectual property owned by others in their work for us, and disputes may arise as to the rights in related or resulting know-how and inventions. Current or future legal requirements may require us to disclose certain proprietary information or technology, such as our proprietary algorithms, to regulators or other third parties, including our competitors, which could impair or result in the loss of trade secret protection for such information or technology. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations and competitive position.

We may be required to spend significant resources in order to monitor and protect our intellectual property rights, and some violations may be difficult or impossible to detect. To prevent substantial unauthorized use of our intellectual property and proprietary rights, it may be necessary to prosecute actions for infringement, misappropriation or other violations of our intellectual property and proprietary rights against third parties. In addition, third parties may seek to challenge, invalidate or circumvent our trademarks, copyrights, trade secrets or other intellectual property and proprietary rights, or any applications for any of the foregoing, including through administrative processes such as re-examination or interference, or litigation. The legal standards relating to the validity, enforceability and scope of protection of intellectual property and proprietary rights are uncertain and still evolving. The value of our intellectual property and proprietary rights could also diminish if others assert rights therein or ownership thereof, and we may be unable to successfully resolve any such conflicts in our favor or to our satisfaction. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. There can be no assurance that we will be successful in such action, even when our rights have been infringed, misappropriated or otherwise violated. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or asserting that we infringe third-party intellectual property rights and if such

 

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defenses, counterclaims or countersuits are successful, we could lose valuable intellectual property and proprietary rights. The unauthorized copying or use of our proprietary technology, as well as any costly litigation or diversion of our management’s attention and resources, could impair the functionality of our platform, delay introductions of enhancements to our platform, result in our substituting inferior or more costly technologies into our platform or harm our reputation or brand. In addition, we may be required to license additional technology from third parties to develop and market new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect our ability to compete.

While we take precautions designed to protect our intellectual property, it may still be possible for competitors and other unauthorized third parties to copy our technology and use our proprietary brand, content and information to create or enhance competing products, which could adversely affect our competitive position in our rapidly evolving and highly competitive industry. Some license provisions that protect against unauthorized use, copying, transfer and disclosure of our technology may be unenforceable under the laws of certain jurisdictions and foreign countries. While we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with our third-party providers and strategic partners, we cannot guarantee that we have entered into such agreements with each party that has or may have had access to our proprietary information, know-how and trade secrets or that has developed intellectual property on our behalf and these agreements may be insufficient tor breaches. Further, no assurance can be given that these agreements will be effective in controlling access to, and use, distribution, misuse, misappropriation, reverse engineering or disclosure of, our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our offerings. Moreover, these agreements may not provide an adequate remedy for breaches or in the event of unauthorized use or disclosure of our confidential information or technology, or infringement of our intellectual property. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or know-how is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, trade secrets and know-how can be difficult to protect and some courts inside and outside the U.S. are less willing or unwilling to protect trade secrets and know-how. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us, and our competitive position would be materially and adversely harmed. Additionally, individuals not subject to invention assignment agreements may make adverse ownership claims to our current and future intellectual property, and, to the extent that our employees, independent contractors, consultants or other third parties with whom we do business use intellectual property owned by others as to the rights in related or resulting know-how and inventions.

Changes to existing laws or regulations or new laws or regulations could impede our use of our confidential information, intellectual property or technology, or require that we disclose our confidential information, intellectual property or technology to our competitors, which could impair our competitive position and could have a material adverse effect on our business, operating results and financial condition.

We use open source software in our proprietary underwriting technology, which may pose particular risks in a manner that could have a negative effect on our business.

We use open source software in our proprietary underwriting technology and anticipate continuing to use open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code of such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost, and we may be subject to such terms. The terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products. Additionally, we could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we develop using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These

 

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claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated products unless and until we can re-engineer such source code to eliminate use of such open source software. This re-engineering process could require us to expend significant additional research and development resources, and we may not be able to complete the re-engineering process successfully. We may also incur significant legal expenses defending such allegations or be subject to significant damages. If we are required by the terms of any open source license to release our proprietary source code, it could allow our competitors to create similar software with lower development effort and time and ultimately could result in a loss of sales for us.

In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, assurance of title or controls on the origin or operation of the open source software, which are risks that cannot be eliminated, and could, if not properly addressed, negatively affect our business. There is typically no support available for open source software, and we cannot ensure that the authors of open source software will implement or push updates to address security risks or will not abandon further development and maintenance. We have established processes to help alleviate these risks, including a review process for screening requests from our development teams for the use of open source software, but we cannot be sure that all of our use of open source software is in a manner that is consistent with our current policies and procedures, or will not subject us to liability. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and operating results.

Claims by others that we infringe, misappropriate or otherwise violate, or have infringed, misappropriated or otherwise violated, their proprietary technology or other intellectual property rights could harm our business.

From time to time, third parties may assert claims of infringement, misappropriation or other violations of intellectual property rights against us. As we face increasing competition and become increasingly high profile, the possibility of receiving a larger number of intellectual property claims against us grows. In addition, various “nonpracticing entities” and other intellectual property rights holders may attempt to assert intellectual property claims against us or seek to monetize intellectual property rights they own to extract value through licensing or other settlements. Although we may have meritorious defenses, there can be no assurance that we will be successful in defending against these allegations or in reaching a business resolution that is satisfactory to us. Many potential litigants, including some of our competitors, have the ability to dedicate substantial resources to the assertion of their intellectual property rights. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business and could require us to cease use of such intellectual property.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, we risk compromising our confidential and proprietary information during this type of litigation. We may be required to pay substantial damages, royalties or other fees in connection with a claimant securing a judgment against us, we may be subject to an injunction or other restrictions that prevent us from using or distributing our intellectual property, or from operating under our brand, or we may agree to a settlement that prevents us from distributing our offerings or a portion thereof, which could adversely affect our business, results of operations and financial condition. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Our use of third-party software, data and other intellectual property rights also may be subject to claims of infringement or misappropriation. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that such personnel have divulged proprietary or other confidentiality information to us. Further, we may be unaware of intellectual property rights or proprietary rights of others that may cover some or all of our products.

With respect to any intellectual property rights claim, we may have to seek out a license to continue operations found or alleged to violate such rights, which may not be available, or if available, may not be available on

 

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favorable or commercially reasonable terms and may significantly increase our operating expenses. Some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If a third party does not offer us a license to its intellectual property on reasonable terms, or at all, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected offerings), effort and expense and may ultimately not be successful. Any of these events could adversely affect our business, results of operations and financial condition.

An overall decline in economic activity could have a material adverse effect on the financial condition and results of operations of our business.

The demand for homeowners insurance generally rises as the overall level of household income increases and generally falls as household income decreases, affecting premiums, commissions and fees generated by our business. Some new polices may be sourced by referral sources tied to home closing transactions, and major slowdowns in the various housing markets we serve could impact our ability to generate new business. The economic activity that impacts homeowners insurance is most closely correlated with employment levels, corporate revenue and asset values.

We rely on highly skilled and experienced personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, our business may be seriously harmed. In addition, the loss of our president and chief executive officer or other key senior management personnel could harm our business and future prospects.

Our performance largely depends on the talents and efforts of highly-skilled and experienced individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled and experienced personnel and, if we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to maintain or implement our current initiatives or grow, or our business may contract and we may lose market share. Moreover, certain of our competitors or other insurance or technology businesses may seek to hire our employees. We cannot assure you that we will provide adequate incentives to attract, retain and motivate employees in the future. If we do not succeed in attracting, retaining and motivating highly qualified personnel, our business may be seriously harmed.

Our operations are highly dependent on the efforts of our senior executive officers, particularly our president and chief executive officer, Paresh Patel, our executive vice president, Kevin Mitchell, and our chief financial officer, Ankur Bhandari. The loss of Paresh Patel, architect of our proprietary underwriting technology, Kevin Mitchell, the president of TypTap Insurance Company, our subsidiary, or Ankur Bhandari could materially adversely impact our business, results of operations and financial condition. Further, to the extent that our business grows, we will need to attract and retain additional qualified management personnel in a timely manner, and we may not be able to do so. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain and integrate highly skilled personnel in all areas of our organization.

New legislation or legal requirements may affect how we communicate with our customers, which could have a material adverse effect on our business, financial condition, and results of operations.

State and federal lawmakers, insurance regulators, and advisory groups such as the National Association of Insurance Commissioners, or NAIC, are focusing upon the use of artificial intelligence broadly, including concerns about transparency, deception, and fairness in particular. Changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority specific to the use of artificial intelligence in the insurance industry may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business. We may also be required to disclose our proprietary software to regulators, putting our intellectual property and proprietary rights at risk, in order to receive regulatory approval to use such artificial intelligence in the underwriting of insurance and/or the payment of claims. To the extent that any changes in law or regulation restrict the ways in which we communicate with current customers during

 

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customer care or claims management, these restrictions could result in a material reduction in our customer acquisition and retention, reducing the growth prospects of our business, and adversely affecting our financial condition and future cash flows.

Our failure to pay claims accurately could have a material adverse effect on our business, operating results and financial condition.

We rely on claims personnel to accurately evaluate and pay claims made under our policies. Many factors could affect our ability to accurately evaluate and pay claims, including the accuracy of our adjusters (who are claims personnel of our parent company, HCI, currently) as they make their assessments and submit their estimates of damages; the training, background, and experience of our claims representatives; the ability of our claims personnel to ensure consistent claims handling given the input by the adjusters; the ability of the claims department to translate the information provided by the adjusters into acceptable claims settlements; and the ability of our claims personnel to maintain and update our claims handling procedures and systems as they evolve over time based on claims and geographical trends in claims reporting. Any failure to pay claims accurately could lead to material litigation and/or could have a material adverse effect on our business, operating results and financial condition.

Unexpected increases in the frequency or severity of claims may adversely affect our results of operations and financial condition.

Our business may experience volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. Changes in claim frequency may result from changes in mix of business, macroeconomic or other factors. A significant increase in claim frequency could have an adverse effect on our results of operations and financial condition.

Although we pursue various loss management initiatives to mitigate future increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future increases in claim severity.

Failure to maintain our risk-based capital at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business.

We are required to have sufficient capital and surplus in order to comply with insurance regulatory requirements, support our business operations and minimize our risk of insolvency. The NAIC has developed a system to test the adequacy of statutory capital and surplus of U.S.-based insurers, known as risk-based capital, that all states have adopted. This system establishes the minimum amount of capital and surplus necessary for an insurance company to support its overall business operations in consideration of its size and risk profile. It identifies insurers that may be inadequately capitalized by looking at certain risk factors, including asset risk, credit risk and underwriting risk with respect to the insurer’s business in order to determine an insurer’s authorized control level risk-based capital. An insurer’s risk-based capital ratio measures the relationship between its total adjusted capital and its authorized control level risk-based capital.

Insurers with a ratio falling below certain calculated thresholds may be subject to varying degrees of regulatory action, including suspension of their authority to write new or renewal business, heightened supervision, examination, rehabilitation or liquidation. An insurance company with total adjusted capital that is less than 200% of its authorized control level risk-based capital is at a company action level, which would require the insurance company to file a risk-based capital plan that, among other things, contains proposals of corrective actions the company intends to take that are reasonably expected to result in the elimination of the company action level event. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100% and 70% of its authorized control level risk-based capital. Lower percentages trigger increasingly

 

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severe regulatory responses. In the event of a mandatory control level event (triggered when an insurer’s total adjusted capital falls below 70% of its authorized control level risk-based capital), an insurer’s primary regulator is required to take steps to place the insurer into receivership.

In addition, the NAIC Insurance Regulatory Information System, or the IRIS, is a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. If our ratios fall outside of the usual range for one or more ratios set forth by the IRIS for any number of reasons, it could subject us to heightened regulatory scrutiny or measures, or create investor uncertainty around the stability of our financial condition, which could harm our business.

Further, the NAIC has promulgated a Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition, or the Hazardous Financial Condition Standards, which has been adopted by many states in whole or part. If our financial condition is deemed by state insurance regulators to meet the Hazardous Financial Conditions Standards, it could subject us to heightened regulatory scrutiny or measures, or create uncertainty around the stability of our financial condition, which could harm our business.

As a relatively new entrant to the insurance industry, we may face additional capital and surplus requirements as compared to those of our larger and more established competitors. Failure to maintain adequate risk-based capital at the required levels could result in increasingly onerous reporting and examination requirements and could adversely affect our ability to maintain regulatory authority to conduct our business.

Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.

Our financial condition and results of operations depend on our ability to appropriately price risk and assess potential losses and loss adjustment expenses under the terms of the policies we underwrite. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater than or less than the current estimate. In our industry, there is always the risk that reserves may prove inadequate since we may underestimate the cost of claims and claims administration.

We base our estimates on our assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liability, and other factors. These variables are affected by both internal and external events that could increase our exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, volatility in construction costs, severe weather, climate change, the cost of claims litigation and defense, economic and judicial trends and legislative and regulatory changes. We regularly monitor reserves using new information on reported claims and a variety of statistical techniques to update our current estimate. Our estimates could prove to be inadequate, and this underestimation could have a material adverse effect on our financial condition.

Recorded claim reserves, including case reserves and incurred but not reported, or IBNR, claims reserves, are based on our estimates of losses after considering known facts and interpretations of the circumstances, including settlement agreements. Additionally, models that rely on the assumption that past loss development patterns will persist into the future are used. Internal factors are considered including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims, loss management programs, product mix, state mix, contractual terms, industry payment and reporting patterns, and changes in claim reporting and settlement practices. External factors are also considered, such as court decisions, changes in law and litigation imposing unintended coverage. We also consider benefits, such as the availability of multiple limits for a single loss occurrence. Regulatory requirements and economic conditions are also considered.

 

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Because reserves are estimates of the unpaid portion of losses and expenses for events that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process that is regularly refined to reflect current estimation processes and practices. The ultimate cost of losses may vary materially from recorded reserves and such variance may adversely affect our results of operations and financial condition as the reserves and reinsurance recoverables are re-estimated.

If any of our insurance reserves should prove to be inadequate for the reasons discussed above, or for any other reason, we will be required to increase reserves, resulting in a reduction in our net income and stockholders’ equity in the period in which the deficiency is identified. Future loss experience substantially in excess of established reserves could also have a material adverse effect on future earnings and liquidity and financial rating, which would affect our ability to attract new business or to retain existing customers.

An unauthorized disclosure or loss of policyholder or employee data or information or other sensitive, confidential or personal information, including by cyber-attack or other security breach, or a suspected or actual violation of federal or state data privacy or protection laws, regulations or other obligations, could cause a loss of data or information, give rise to remediation or other expenses, expose us to liability under federal and state laws, and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows, financial condition and results of operations.

As part of our normal operations, we collect, retain, use, store, transmit and otherwise process certain sensitive and confidential information, including personal information. We are subject to various federal and state privacy laws, rules and regulations and contractual obligations regarding the use, storage, sharing, disclosure, protection and other processing of certain sensitive or confidential information, including the Gramm-Leach-Bliley Act and its state-law progeny. For example, we may currently be, or may become, subject to certain state and federal privacy laws that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer, disclosure, or other processing, all of which may significantly impact our business. Given the rapid development of data protection, privacy and security laws and regulations, we expect to encounter inconsistent interpretation and enforcement of these laws and regulations.

Despite the security measures and privacy policies and procedures we have implemented to help ensure data security and compliance with applicable laws, rules and regulations, which include firewalls, regular penetration testing and other measures, our facilities and systems, and those of our third-party service providers and vendors, may be vulnerable to cyber-attacks, security breaches, ransomware, unauthorized activity and access, malicious code, acts of vandalism, computer viruses, theft of data, misplaced or lost data, fraud, misconduct or misuse, social engineering attacks and denial of service attacks, phishing attacks, programming or human errors, physical break-ins, or other disruptions, any of which could result in the loss or disclosure of confidential or personal policyholder or employee information or our own proprietary information, software, methodologies and business secrets. Our information security risks have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile and other connected devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive, confidential or personal information, we and our third-party service providers now also face threats from sophisticated hackers who engage in attacks against organizations that are designed to disrupt key business services.

We rely on service providers and vendors to provide certain technology, systems and services that we use in connection with various functions of our business, including PCI DSS (Payment Card Industry Data Security Standard) compliant credit card processing, and we may entrust them with confidential or personal information. The information systems of our third-party service providers and vendors are also vulnerable to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to these systems or our information through fraud or other means of deceiving our associates, third-party service

 

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providers or vendors. Hardware, software or applications we obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time. Ever-evolving threats mean our third-party service providers and vendors must continually evaluate and adapt their own respective systems and processes, and there is no assurance that they will be adequate to safeguard against all data security breaches or misuses of data. Any future significant compromise or breach of our data security via a third-party service provider or vendor could result in additional significant costs, lost revenues, fines, lawsuits, and damage to our reputation.

Notwithstanding our efforts to create security barriers to such threats, it is virtually impossible for us to entirely mitigate these risks, and we cannot ensure that we will be able to identify, prevent or contain the effects of possible cyber-attacks or other cybersecurity risks in the future that may bypass our security measures or disrupt our information technology systems or business. While we have implemented safeguards and processes to thwart unwanted intrusions and to protect the data in our platform and computer systems, whether housed internally or externally by third parties, such safeguards and the cybersecurity measures taken by our third-party service providers may be unable to anticipate, or detect these techniques or implement adequate preventative measures quickly enough to prevent all attempts to compromise our platform. Additionally, our remediation efforts may not be successful or timely. Further, notwithstanding any contractual rights or remedies we may have, because we do not control our third-party service providers, including their security measures and the processing of data by our third-party service providers, we cannot ensure the integrity or security of measures they take to protect customer information and prevent data loss.

Noncompliance or perceived noncompliance with any privacy or security laws, rules, regulations, or contractual obligations, or our privacy policies, or any security breach, cyber-attack or cybersecurity breach, and any incident involving the misappropriation, loss or other unauthorized disclosure or use of, or access to, sensitive, confidential of personal information, could require us to expend significant capital and other resources to continue to modify or enhance our protective measures and to remediate any damage caused by such breaches or violations. In addition, this could result in interruptions to our operations and damage to our reputation, misappropriation of confidential or personal information, or regulatory enforcement actions or investigations, material fines and penalties, litigation, or other liability or actions which could have a material adverse effect on our business, cash flows, financial condition and results of operations. As the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.

We make public statements about our use and disclosure of personal information through our privacy policies, information provide on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Moreover, from time to time, concerns may be expressed about whether our products and services compromise the privacy of patients and others. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our businesses, discourage potential customers from using our products and services and have a material adverse effect on our business.

In addition, our insurance coverage may not be adequate to cover costs, expenses and losses associated with such events, and in any case, such insurance may not cover all of the types of costs, expenses and losses we could incur to respond to and remediate a security breach. Any incidents may result in loss of, or increased costs of, our cybersecurity insurance. We also cannot ensure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security incident or breach, or that the insurer will not deny coverage as to any future claim. The successful

 

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assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or coinsurance requirements, could adversely affect our reputation and our business, financial condition and results of operations. In addition to costs associated with investigating and fully disclosing a data breach, we could be subject to regulatory proceedings or private claims by affected in substantial monetary fines or damages, and our reputation would likely be harmed.

We may be unable to prevent, monitor or detect fraudulent activity, including payments of claims that are fraudulent in nature.

If we fail to maintain adequate systems and processes to prevent, monitor and detect fraud, including fraudulent claims activity, or if inadvertent errors occur with such prevention, monitoring and detection systems due to human or computer error, our business could be materially adversely impacted. While we believe past incidents of fraudulent activity have been relatively isolated, we cannot be certain that our systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes. We use a variety of tools to protect against fraud, but these tools may not always be successful at preventing such fraud.

Instances of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on our business and reputation. In addition, failure to monitor and detect fraud and otherwise comply with state Special Investigation Unit requirements can result in regulatory fines or penalties.

Misconduct or fraudulent acts by employees or third parties may expose us to financial loss, disruption of business, regulatory assessments and reputational harm.

Our company and the insurance industry are inherently susceptible to past and future misconduct or fraudulent activities by employees, independent agents, vendors, customers or other third parties. These activities could include fraud against the company, its employees and its customers through illegal or prohibited activities, or unauthorized acts or representations, unauthorized use or disclosure of personal or proprietary information.

Our information technology systems may fail or be disrupted or subject to errors, bugs, vulnerabilities or defects, which could adversely affect our business.

Our insurance business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. We rely on these systems to perform underwriting and other modeling functions necessary for writing business, as well as to handle our policy administration process (i.e., the printing and mailing of our policies, endorsements, renewal notices, etc.). Our information technology systems are complex, and therefore undetected errors, failures, bugs, vulnerabilities or defects may be present in our products or occur in the future in our products, our technology or software, or technology or software we license in from third parties, including open source software, especially when updates or new products are released. The failure or disruption of these systems could interrupt our operations and result in a material adverse effect on our business.

The growth of our insurance business is dependent upon the successful development and implementation of advanced computer and data processing systems as well as the development and deployment of new information technologies to streamline our operations, including policy underwriting, production and administration and claim handling. The failure of these systems to function as planned could slow our growth and adversely affect our future business volume and results of operations. Real or perceived errors, failures, bugs, vulnerabilities or defects in our information technology systems could result in negative publicity, loss of or delay in market acceptance of our products and harm to our brand and weakening of our competitive position. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any real or perceived errors, failures, bugs, vulnerabilities or defects in our information, technology systems could also impair our ability to attract new customers, retain existing customers or expand their use of our products, which would adversely affect our business, results of

 

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operations and financial condition. Additionally, our computer and data processing systems could become obsolete or could cease to provide a competitive advantage in policy underwriting, production and administration and claim handling which could negatively affect our future results of operations. We may also be subject to liability claims for damages related to real or perceived errors, failures, bugs, vulnerabilities or defects in our information technology systems. A material liability claim may harm our business and results of operations.

We conduct our business primarily from offices located in Tampa, Florida where tropical storms could damage our facilities or interrupt our power supply. The loss or significant impairment of functionality in these facilities for any reason could have a material adverse effect on our business although we believe we have sufficient redundancies to replace our facilities if functionality is impaired. In the event of a disaster causing a complete loss of functionality at our Tampa location, we plan to temporarily use our secondary office in Ocala, Florida to continue our operations.

If our customers were to claim that the policies they purchased failed to provide adequate or appropriate coverage, we could face claims that could harm our business, results of operations and financial condition.

Although we aim to provide adequate and appropriate coverage under each of our policies, customers could purchase policies that prove to be inadequate or inappropriate. If such customers were to bring a claim or claims alleging that we failed in our responsibilities to provide them with the type or amount of coverage that they sought to purchase, we could be found liable for amounts significantly in excess of the policy limit, resulting in an adverse effect on our business, results of operations and financial condition. While we maintain errors and omissions insurance coverage to protect us against such liability, such coverage may be insufficient or inadequate.

Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.

Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a diversified portfolio of investments in accordance with our investment policy, which is routinely reviewed by the investment committee of our board of directors. However, our investments are subject to general economic and market risks as well as risks inherent to particular securities.

Our primary market risk exposures are interest rate risk, credit risk and equity price risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risk.” In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely affect our operating results. Future increases in interest rates could cause the values of our fixed income securities portfolio to decline, with the magnitude of the decline depending on the maturity of the securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.

The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities. In addition, our investment portfolio may incur losses as a result of adverse changes in equity securities prices, and is subject to the volatility of the equity markets in general.

Such factors could reduce our net investment income and result in realized and/or unrealized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The

 

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valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions would occur.

Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include, but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC as it relates to the portfolio. The maximum percentage and types of securities we may invest in are subject to the insurance laws regulations, which may change. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in certain circumstances, we would be required to dispose of such investments.

Although we seek to preserve our capital, we cannot be certain that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.

Litigation and legal proceedings filed by or against us and our subsidiaries could have a material adverse effect on our business, results of operations and financial condition.

From time to time, we are subject to allegations, and may be party to litigation and legal proceedings relating to our business operations. Litigation and other proceedings may include complaints from or litigation by customers or reinsurers, related to alleged breaches of contract or otherwise.

As is typical in the insurance industry, we continually face risks associated with litigation of various types arising in the normal course of our business operations, including disputes relating to insurance claims under our policies as well as other general commercial and corporate litigation. Although we are not currently involved in any material litigation with our customers, members of the insurance industry are periodically the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues, including sale of insurance and claim settlement practices. In addition, because we employ a technology platform to collect and analyze data in our underwriting decisions, including customer data, it is possible that customers or consumer groups could bring individual or class action claims alleging that our methods of collecting data and pricing risk are impermissibly discriminatory. We cannot predict with any certainty whether we will be involved in such litigation in the future or what impact such litigation would have on our business. If we were to be involved in litigation and it was determined adversely, it could require us to pay significant damages or to change aspects of our operations, either of which could have a material adverse effect on our financial results. Even claims without merit can be time-consuming and costly to defend, and may divert management’s attention and resources away from our business and adversely affect our business, results of operations and financial condition. Additionally, routine lawsuits over claims that are not individually material could in the future become material if aggregated with a substantial number of similar lawsuits. In addition to increasing costs, a significant volume of customer complaints or litigation could also adversely affect our brand and reputation, regardless of whether such allegations have merit or whether we are liable. We cannot predict with certainty the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation or other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation, and other proceedings may harm our business and financial condition.

The COVID-19 pandemic may negatively impact our employees, business, results of operations and financial condition.

We continue to monitor the COVID-19 pandemic closely. Due to the global breadth of its spread (including in India, where we have approximately 100 employees), and the range of governmental and community reactions

 

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thereto, there is still considerable uncertainty around its ultimate impact. The impact of the pandemic may also exacerbate the other risks described in this “Risk Factors” section, and additional impacts may arise that we are not currently aware of, any of which could have a material effect on us. If there is a future resurgence of COVID-19, these negative impacts on our business may be further exacerbated. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration and intensity of the pandemic, including new variants like the Delta variant, all of which are uncertain and difficult to predict. As a result, the full extent of the impact of the pandemic on our overall financial and operating results, whether in the near or long term, cannot be reasonably estimated at this time.

Risks Related to Our Industry

The insurance business, including the market for homeowners and flood insurance, is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.

Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions, and other factors. The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry.

We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed. Additionally, negative market conditions could result in a decline in policies sold, an increase in the frequency of claims and premium defaults, and an uptick in the frequency of falsification of claims. If we cannot underwrite insurance at appropriate rates, our ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, results of operations and financial condition.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued and renewed, and our financial position and results of operations may be adversely affected as a result of any such unforeseen changes.

Industry trends, such as increased litigation against the insurance industry and individual insurers (including as a result of assignments of benefits), the willingness of courts to expand covered causes of loss, rising jury awards and the escalation of loss severity may contribute to increased costs and to the deterioration of the reserves of our insurance subsidiary.

Loss severity in the homeowners insurance industry may increase and may be driven by larger court judgments. In the event legal actions and proceedings are brought on behalf of classes of complainants, this trend may increase the size of judgments. The propensity of policyholders and third party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards may render our loss reserves inadequate for current and future losses.

 

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Reinsurance may be unavailable at current levels and prices, which may limit our ability to underwrite new policies. Furthermore, reinsurance subjects us to counterparty risk and may not be adequate to protect us against losses, which could have a material effect on our results of operations and financial condition.

Reinsurance is a contract by which an insurer, which may be referred to as the ceding insurer, agrees with a second insurer, called a reinsurer, that the reinsurer will cover a portion of the losses incurred by the ceding insurer in the event a claim is made under one or more policies issued by the ceding insurer, in exchange for a premium. We obtain reinsurance to help manage our exposure to homeowner and flood insurance risks. Although our reinsurance counterparties are liable to us according to the terms of the reinsurance policies, we remain primarily liable to our policyholders as the direct insurer on all risks reinsured. As a result, reinsurance does not eliminate our obligation to pay all claims, and we are subject to the risk that one or more of our reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts, limiting recovery. In addition, the reinsurance agreements we share with the other insurance subsidiary of our parent company, HCI, could be exhausted by that insurance affiliate, thereby limiting our coverage availability. We are also subject to the risk that under applicable insurance laws and regulations we may not be able to take credit for the reinsurance on our financial statements and instead would be required to hold separate admitted assets as reserves to cover claims on the risks that we have ceded to the reinsurer. Reinsurers may become financially unsound by the time they are called upon to pay amounts due, which may not occur for many years, in which case we may have no legal ability to recover what is due to us under our agreement with such reinsurer. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. We attempt to select financially strong reinsurers with an A.M. Best rating of “A-” or better or we require the reinsurer to fully collateralize its exposure. While we monitor from time to time the financial condition of our reinsurers, we rely principally on A.M. Best, our reinsurance broker, and other rating agencies in determining reinsurers’ ability to meet their obligations to us. Any failure on the part of one or more reinsurers to meet their obligations to us could have a material adverse effect on our financial condition or results of operations.

Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available, as such availability depends in part on factors outside of our control. A new contract may not provide sufficient reinsurance protection. Market forces and external factors, such as significant losses from weather and seismic events (like hurricanes or earthquakes) or terrorist attacks or an increase in capital and surplus requirements, impact the availability and cost of the reinsurance we purchase. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient at acceptable prices, we would have to either accept an increase in our catastrophe exposure, reduce our insurance underwritings, or develop or seek other alternatives.

The unavailability of reinsurance protection on acceptable terms would have a materially adverse impact on our business, which depends on reinsurance companies to potentially absorb unfavorable variance from the level of losses anticipated at underwriting. If we are unable to obtain adequate reinsurance at reasonable rates, we would have to increase our risk exposure or reduce the level of our underwriting commitments, either of which could have a material adverse effect upon our business volume and profitability. Alternatively, we could elect to pay higher than anticipated rates for reinsurance coverage, which could have a material adverse effect upon our profitability unless policy premium rates could also be raised, in most cases subject to approval by state regulators, to offset this additional cost.

We are subject to extensive regulation, which may reduce our profitability or limit our growth. Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and revocation or suspension of our licenses to operate, which may adversely affect our financial condition and results of operations.

The insurance industry is highly regulated and supervised. We are subject to supervision and regulation in Florida and the states in which we transact insurance business. In addition, as we seek to expand in the

 

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United States, we will be subject to the laws and regulatory standards with respect to the insurance business of the states in which we expand and operate. Such supervision and regulation is primarily designed to protect our policyholders rather than our shareholders. These regulations are generally administered by a department of insurance in each state and relate to, among other things:

 

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the content and timing of required notices and other policyholder information;

 

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the amount of premiums the insurer may write in relation to its surplus;

 

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the amount and nature of reinsurance a company is required or permitted to purchase;

 

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participation in guaranty funds and other statutorily created markets or organizations;

 

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business operations and claims practices;

 

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approval of policy forms and premium rates;

 

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standards of solvency, including risk-based capital measurements;

 

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licensing of insurers and their products;

 

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restrictions on the nature, quality and concentration of investments;

 

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restrictions on the ability of insurance company subsidiaries to pay dividends to their holding companies;

 

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restrictions on transactions between insurance companies and their affiliates;

 

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restrictions on the size of risks insurable under a single policy;

 

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requiring deposits for the benefit of policyholders;

 

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requiring certain methods of accounting;

 

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periodic examinations of our operations and finances;

 

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the form and content of records of financial condition required to be filed; and

 

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the level of loss and loss adjustment expense reserves that must be maintained by insurers.

The Florida Office of Insurance Regulation and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic and targeted examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. These regulatory authorities also conduct periodic examinations into insurers’ financial condition and business practices. These reviews may reveal deficiencies in our insurance operations or non-compliance with regulatory requirements.

In certain states, including Florida, insurance companies are subject to assessments levied by the states where they conduct their business. While we can recover these assessments from Florida policyholders through policy surcharges, our payment of the assessments and our recoveries may not offset each other in the same reporting period in our financial statements and may cause a material adverse effect on our cash flows and results of operations in a particular reporting period.

In addition, regulatory authorities have relatively broad discretion to restrict, deny, suspend or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business.

 

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Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business, reduce our profitability and limit our growth. For example, Florida Senate Bill 76, which took effect on July 1, 2021, reforms the Florida property insurance market and provides, among other things, (i) that any claim or reopened claim under a property insurance policy is barred unless notice of claim is given to the insurer within two years of the date of loss and further provides that a supplemental claim is barred unless notice is provided to the insurer within three years of the date of loss; (ii) that as a condition to filing suit under a property insurance policy, a claimant must provide written notice of intent to initiate litigation at least ten business days before filing suit, but such notice may not be given before the insurer has made a determination of coverage pursuant to applicable law; (iii) that the pre-suit notice must include a pre-suit settlement demand, which itemizes the damages, attorney’s fees and costs, and lists the amount in dispute; and (iv) that a prevailing party insured can recover attorney’s fees based on a statutory formula tied to the difference between the amount obtained and the pre-suit settlement offer. The impact of this legislation on our results of operations cannot be estimated at this time.

Our insurance company subsidiary is subject to assessments and other surcharges from state guaranty funds, and mandatory state insurance facilities, which may reduce our profitability.

The insurance laws of many states subject homeowners insurers doing business in those states to statutory guaranty fund assessments. The purpose of a guaranty fund is to protect customers by requiring that solvent homeowners insurers pay the insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on each insurer’s share of voluntary premiums written in the state. While most guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material, particularly following a large catastrophe or in markets which become disrupted.

Maximum contributions required by law in any one year vary by state. We cannot predict with certainty the amount of future assessments because they depend on factors outside our control, such as insolvencies of other insurance companies. Significant assessments could have a material adverse effect on our financial condition and results of operations.

A regulatory environment that requires rate increases to be approved and that can dictate underwriting practices and mandate participation in loss sharing arrangements may adversely affect our results of operations and financial condition.

From time to time, political events and positions affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach targeted levels of profitability. For example, if our loss ratio compares favorably to that of the industry, state or provincial regulatory authorities may impose rate rollbacks, require us to pay premium refunds to policyholders, or challenge or otherwise delay our efforts to raise rates even if the homeowners industry generally is not experiencing regulatory challenges to rate increases. Such challenges affect our ability to obtain approval for rate changes that may be required to achieve targeted levels of profitability and returns on equity. In particular due to the COVID-19 pandemic, state regulators and legislators are under increased political pressure to provide financial relief to policyholders through premium rebates or requiring insurers to pay claims arising from COVID-19 related losses, regardless of the applicable policy’s exclusions.

In addition, certain states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. Certain states also require insurers to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of business at lower-than-desired rates, possibly leading to an unacceptable return on equity. Laws and regulations of many states also limit an insurer’s ability to discontinue writing some or all of its business or to withdraw from one or more lines of insurance, except pursuant to a plan that is approved by the state insurance department. Additionally, as

 

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addressed above, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Our results of operations and financial condition could be adversely affected by any of these factors.

State insurance regulators impose additional reporting requirements regarding enterprise risk on insurance holding company systems, with which we must comply as an insurance holding company.

In the past decade, various state insurance regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. In 2012, the NAIC adopted significant amendments to the Insurance Holding Company Act and related regulations, or the NAIC Amendments. The NAIC Amendments are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. One of the major changes is a requirement that an insurance holding company system’s ultimate controlling person submit annually to its lead state insurance regulator an “enterprise risk report” that identifies activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. Other changes include the requirement that a controlling person submit prior notice to its domiciliary insurance regulator of a divestiture of control, detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator, including states (if any) in which the insurer is commercially domiciled. The NAIC Amendments must be adopted by the individual state legislatures and insurance regulators in order to be effective, and many states have already done so.

In 2012, the NAIC also adopted the Risk Management and Own Risk and Solvency Assessment Model Act, or the ORSA Model Act. The ORSA Model Act, as adopted by the various states, requires an insurance holding company system’s Chief Risk Officer to submit annually to its lead state insurance regulator an Own Risk and Solvency Assessment Summary Report, or ORSA. The ORSA is a confidential internal assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. The ORSA Model Act must be adopted by the individual state legislature and insurance regulators in order to be effective. We cannot predict the impact, if any, that any other regulatory requirements may have on our business, financial condition or results of operations.

There is also risk that insurance holding company systems may become subject to group capital requirements at the holding company level. In December 2020, the NAIC adopted additional amendments to the Insurance Holding Company System Regulatory Act and the Insurance Holding Company System Model Regulation to provide a framework intended to complement the current holding company analytics framework by providing additional information to the lead state regulator for use in assessing group risks and capital adequacy. The amendments to the Model Act and Model Regulation adopt a group capital calculation and liquidity stress test. We cannot predict whether or when these amendments may be adopted by Florida or the impact, if any, that the new regulatory requirements may have on our business, financial condition or results of operation.

The increasing adoption by states of cybersecurity regulations could impose additional compliance burdens on us and expose us to additional liability.

In response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider new cybersecurity measures, including the adoption of cybersecurity regulations. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. Alabama, Connecticut, Delaware, Indiana, Louisiana, Michigan, Mississippi, New Hampshire, Ohio, South Carolina and Virginia have adopted versions of the Insurance Data Security Model Law, each with a different effective date, and other states may adopt versions of

 

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the Insurance Data Security Model Law in the future. The New York Department of Financial Services has promulgated its own Cybersecurity Requirements for Financial Services Companies that is not based upon the Insurance Data Security Model Law and requires insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures with specific requirements. In addition, some jurisdictions, such as California, Massachusetts, and Nevada have enacted more generalized data privacy and security laws, rules and regulations that apply to certain data that we process. Although we take steps to comply with financial industry cybersecurity regulations and other data privacy and security laws and believe we are materially compliant with their requirements, our failure to comply with new or existing cybersecurity laws, rules and regulations could result in material regulatory actions, litigation, fines, reputational harm and other penalties. In addition, efforts to comply with new or existing cybersecurity or privacy laws, rules and regulations could impose significant costs on our business, which could materially and adversely affect our business, financial condition or results of operations.

We are subject to payment processing risk.

We currently rely exclusively on one third-party vendor to provide credit and debit card payment processing services, and our business would be disrupted if this vendor refuses to provide these services to us and we are unable to find a suitable replacement on a timely basis or at all. If we or our processing vendor fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.

The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data are compromised due to a breach of data, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.

Unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions, in our policies could have a material adverse effect on our financial condition and results of operations.

There can be no assurances that specifically negotiated loss limitations or exclusions in our policies will be enforceable in the manner we intend, or at all. As industry practices and legal, judicial, social, and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. For example, many of our policies limit the period during which a customer may bring a claim, which may be shorter than the statutory period under which such claims can be brought against our customers. While these limitations and exclusions help us assess and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion, or legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations. In addition, court decisions could read policy exclusions narrowly so as to expand coverage, thereby requiring insurers to create and write new exclusions. Under the insurance laws, the insurer typically has the burden of proving an exclusion applies and any ambiguities in the terms of a loss limitation or exclusion provision are typically construed against the insurer. These issues may adversely affect our business by either

 

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broadening coverage beyond our underwriting intent or by increasing the frequency or severity of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

Risks Related to Our Relationship with HCI

HCI controls the direction of our business, and the concentrated ownership of our common stock will prevent you and other shareholders from influencing significant decisions.

Following the completion of this offering, our parent company, HCI, will continue to control shares representing a majority of the voting power of all of our issued and outstanding shares of common stock. Immediately after this offering, HCI will own 75,000,000 shares of our common stock, which will represent approximately        % of our total outstanding shares of common stock and voting power (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us). As long as HCI continues to control shares representing a majority of our voting power, it will generally be able to determine the outcome of all corporate actions requiring shareholder approval (unless supermajority approval of such matter is required), including the election of directors. Even if HCI were to control less than a majority of our voting power, HCI may be able to influence the outcome of corporate actions so long as it owns a significant portion of our voting power. If HCI does not dispose of its shares of our common stock, HCI could retain control over us for an extended period of time or indefinitely.

Investors in this offering will not be able to affect the outcome of any shareholder vote while HCI controls the majority of our voting power. Due to its ownership and rights under our amended and restated articles of incorporation and bylaws that will be in effect immediately prior to the completion of this offering, HCI will be able to control, subject to applicable law, the composition of our board of directors, which in turn will be able to control all matters affecting us, including, among other things:

 

•

any determination with respect to our business direction and policies, including the appointment and removal of officers and, in the event of a vacancy on our board of directors, additional or replacement directors;

 

•

any determinations with respect to mergers, business combinations or dispositions of assets;

 

•

determination of our management policies;

 

•

determination of the composition of the committees on our board of directors;

 

•

our financing policy;

 

•

our compensation and benefit programs and other human resources policy decisions;

 

•

termination of, changes to or determinations under our agreements with HCI;

 

•

changes to any other agreements that may adversely affect us;

 

•

our dividend policy; and

 

•

determinations with respect to our tax returns.

See “Description of Capital Stock.”

Because HCI’s interests may differ from ours or from those of our other shareholders, actions that HCI takes with respect to us, as our controlling shareholder, may not be favorable to us or our other shareholders.

 

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If HCI sells a controlling interest in us to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock, and we may become subject to the control of a currently unknown third party.

Following the completion of this offering, HCI will continue to hold approximately        % of our voting power (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us). HCI will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of us.

The ability of HCI to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of our shares that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to HCI on its private sale of our common stock it holds. Additionally, if HCI privately sells shares representing a significant portion of our common stock, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with other shareholders.

HCI’s interests may conflict with our interests and the interests of our other shareholders. Conflicts of interest between HCI and us could be resolved in a manner unfavorable to us and our other shareholders.

Various conflicts of interest between us and HCI could arise. Ownership interests of directors or officers of HCI in our common stock and ownership interests of our directors and officers in the stock of HCI, or a person’s service either as a director or officer of both companies, could create or appear to create potential conflicts of interest when those directors and officers are faced with decisions relating to us. These decisions could include:

 

•

corporate opportunities;

 

•

the impact that operating decisions for our business may have on HCI’s consolidated financial statements;

 

•

differences in tax positions between HCI and us, particularly in light of the tax allocation agreement among HCI and its subsidiaries, including us;

 

•

the impact that operating or capital decisions (including the incurrence of indebtedness) for our business may have on HCI’s current or future indebtedness or the covenants under that indebtedness;

 

•

future, potential commercial arrangements between HCI and us or between HCI and third parties;

 

•

business combinations involving us;

 

•

our dividend policy;

 

•

management stock ownership; and

 

•

the intercompany agreements between HCI and us.

See “Certain Relationships and Related Party Transactions.”

Furthermore, disputes may arise between HCI and us relating to our past and ongoing relationship and these potential conflicts of interest may make it more difficult for us to favorably resolve such disputes, including those related to:

 

•

tax, employee benefits, indemnification and other matters arising from this offering;

 

•

the nature, quality and pricing of services HCI agrees to provide to us;

 

•

sales or other disposals by HCI of all or a portion of its ownership interest in us; and

 

•

business combinations involving us.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. While we are controlled by HCI, we may not have the leverage to negotiate amendments to our agreements with HCI, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.

 

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Certain of our directors and officers may have actual or potential conflicts of interest because of their positions with HCI.

Following this offering, Paresh Patel, our president, chief executive officer and chairman of our board of directors, will continue to serve as chairman of the board of directors of HCI and as HCI’s chief executive officer. In addition, Eric Hoffman will continue to serve on our board of directors and on the board of directors of HCI following this offering. Such individuals may also own HCI common stock, options to purchase HCI common stock or other HCI equity awards. Their positions at HCI and the ownership of any HCI equity or equity awards creates, or may create the appearance of, conflicts of interest when these individuals are faced with decisions that could have different implications for HCI than the decisions have for us.

Our amended and restated articles of incorporation that will be in effect immediately prior to the completion of this offering limit HCI’s and its directors’ and officers’ liability to us or you for breach of fiduciary duty and could also prevent us from benefiting from corporate opportunities that might otherwise have been available to us.

Our amended and restated articles of incorporation that will be in effect immediately prior to the completion of this offering provide that, subject to any contractual provision to the contrary, HCI has no obligation to refrain from:

 

•

engaging in the same or similar business activities or lines of business as we do;

•

doing business with any of our customers or vendors; or

•

employing or otherwise engaging any of our officers or employees.

Under our amended and restated articles of incorporation that will be in effect immediately prior to the completion of this offering, neither HCI nor any officer or director of HCI, except as provided in our amended and restated articles of incorporation, will be liable to us or to our shareholders for breach of any fiduciary duty by reason of any of these activities.

Additionally, our amended and restated articles of incorporation that will be in effect immediately prior to the completion of this offering include a “corporate opportunity” provision in which we renounce any interests or expectancy in corporate opportunities which become known to (i) any of our directors or officers who are also directors, officers, employees or other affiliates of HCI or its affiliates (except that we and our subsidiaries shall not be deemed affiliates of HCI or its affiliates for the purposes of the provision), which we refer to in this paragraph as “dual persons”, or (ii) HCI itself, and which relate to the business of HCI or may constitute a corporate opportunity for both HCI and us. Generally, neither HCI nor our directors or officers who are also dual persons will be liable to us or our shareholders for breach of any fiduciary duty by reason of the fact that any such person pursues or acquires any corporate opportunity for the account of HCI or its affiliates, directs, recommends, sells, assigns or otherwise transfers such corporate opportunity to HCI or its affiliates, or does not communicate information regarding such corporate opportunity to us. The corporate opportunity provision may exacerbate conflicts of interest between HCI and us because the provision effectively permits one of our directors or officers who also serves as a director, officer, employee or other affiliate of HCI to choose to direct a corporate opportunity to HCI instead of us.

HCI will not be restricted from competing with us in the insurance business, including as a result of HCI acquiring a company that operates an insurance business. Due to the significant resources of HCI, including its financial resources, name recognition and know-how resulting from the previous management of our business, HCI could have a significant competitive advantage over us should it decide to utilize these resources to engage in the type of business we conduct, which may cause our operating results and financial condition to be materially adversely affected.

 

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We may not achieve some or all of the anticipated benefits of being a standalone public company.

We may not be able to achieve all of the anticipated strategic and financial benefits expected as a result of being a standalone public company, or such benefits may be delayed or not occur at all. These anticipated benefits include the following:

 

•

allowing investors to evaluate the distinct merits, performance and future prospects of our business, independent of HCI and HCI’s other businesses;

 

•

improving our strategic and operational flexibility and increasing management focus as we continue to implement our strategic plan and allowing us to respond more effectively to different customer needs and the competitive environment for our business;

 

•

allowing us to adopt a capital structure better suited to our financial profile and business needs, without competing for capital with HCI’s other businesses;

 

•

creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our capital stock; and

 

•

enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business.

We may not achieve the anticipated benefits of being a standalone public company for a variety of reasons, and it could adversely affect our operating results and financial condition.

The services that we receive from HCI may not be sufficient for us to operate our business, and we would likely incur material incremental costs if we lost access to HCI’s services.

Because we have not operated as an independent company, we have obtained, and will need to continue to obtain, services from HCI relating to many important corporate functions under a cost allocation agreement among HCI and its subsidiaries, including us (the “HCI Cost Allocation Agreement”). Following this offering, many of these services will continue to be governed by that agreement, under which we will be able to continue to use these HCI services for a fixed term established on a service-by-service basis. We generally will have the right to terminate a service before its stated termination date if we give notice to HCI. Partial reduction in the provision of any service will require HCI’s consent. In addition, either party will be able to terminate the HCI Cost Allocation Agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods. We will pay HCI mutually agreed-upon fees for these services, which will be based on HCI’s costs of providing the services.

If we lost access to the services provided to us by HCI under the HCI Cost Allocation Agreement, we would need to replicate or replace certain functions, systems and infrastructure. We may also need to make investments or hire additional employees to operate without the same access to HCI’s existing operational and administrative infrastructure. These initiatives may be costly to implement. Due to the scope and complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimate, and the timing of the incurrence of these costs could be subject to change.

We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we have received in the past and will continue to receive from HCI under the HCI Cost Allocation Agreement. Additionally, if the HCI Cost Allocation Agreement is terminated, we may be unable to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from HCI. If we have to operate these functions separately, if we do not have our own adequate systems and business functions in place or if we are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. In addition, we have historically received informal support from HCI, which may not be addressed in the HCI Cost Allocation Agreement. The level of this informal support could diminish or be eliminated following this offering.

 

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While we are controlled by HCI, we may not have the leverage to negotiate amendments to our agreements with HCI, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.

Our historical financial results are not necessarily representative of the results we would have achieved as a standalone company and may not be a reliable indicator of our future results.

Our historical financial results included in this prospectus do not reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future, which is primarily the result of the following factors:

 

•

our historical financial results reflect charges for certain support functions that are provided on a centralized basis within HCI, such as corporate administrative expenses, salaries, benefits, bonus and other expenses related to human resources services, accounting and legal services and other indirect operational costs under the HCI Cost Allocation Agreement;

 

•

our cost of potential future debt and our capital structure will be different from that reflected in our historical financial statements;

 

•

we will incur additional ongoing costs as a result of this offering, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act of 2002; and

 

•

this offering may have a material effect on our relationship with our customers and our other business relationships, including vendor relationships.

Our financial condition and future results of operations could be materially different from amounts reflected in our historical financial statements included elsewhere in this prospectus, so it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business.

Third parties may seek to hold us responsible for liabilities of HCI, which could result in a decrease in our income.

Third parties may seek to hold us responsible for HCI’s liabilities. If those liabilities are significant and we are ultimately held liable for them, we cannot assure that we will be able to recover the full amount of our losses from HCI.

We may be required to make cash payments to HCI for prior tax years under the Tax Allocation Agreement with HCI.

We are a party to a tax allocation agreement with HCI (the “Tax Allocation Agreement”) that requires that we pay to HCI the amount of U.S. federal income tax we would owe for each taxable year if we had filed a U.S. federal income tax return for such year as a separate company. If we incur a loss (or have unused tax credits) for a taxable year that can be carried back to prior years, HCI is required to pay us the amount of U.S. federal income tax refund we would be entitled to receive, computed on a separate company basis. If no carryback is allowed, however, HCI is obligated to pay us the amount of the reduction in the consolidated U.S. federal income taxes of HCI’s affiliated group that results from such group’s use of our losses or credits. The Tax Allocation Agreement will automatically terminate with respect to us when our membership in HCI’s affiliated group terminates following the completion of this offering, but certain rights and obligations arising under the Tax Allocation Agreement will survive termination. Following the completion of this offering, we may be required to make cash payments to HCI in respect of taxes for prior years under the Tax Allocation Agreement, which payments could harm our results of operations and financial condition.

 

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Risks Relating to Ownership of Our Common Stock

There is no existing market for our common stock and an active, liquid trading market for our common stock may not develop following this offering.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price of our common stock will be determined by negotiation between us and the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares at, or above, the initial public offering price.

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock. In addition, the market price of our common stock following this offering is likely to be highly volatile, may be higher or lower than the initial public offering price and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. The following factors, in addition to other factors described in this “Risk Factors” section and included elsewhere in this prospectus, may have a significant impact on the market price of our common stock:

 

•

the occurrence of severe weather conditions and other catastrophes;

 

•

our operating and financial performance, quarterly or annual earnings relative to similar companies;

 

•

publication of research reports or news stories about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

•

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

•

announcements by us or our competitors of acquisitions, business plans or commercial relationships;

 

•

any major change in our board of directors or senior management;

 

•

additional sales of our common stock by us, our directors, executive officers or principal shareholders;

 

•

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

•

short sales, hedging and other derivative transactions in our common stock;

 

•

exposure to capital market risks related to changes in interest rates, realized investment losses, credit spreads, equity prices, foreign exchange rates and performance of insurance-linked investments;

 

•

our creditworthiness, financial condition, performance, and prospects;

 

•

our dividend policy and whether dividends on our common stock have been, and are likely to be, declared and paid from time to time;

 

•

perceptions of the investment opportunity associated with our common stock relative to other investment alternatives;

 

•

regulatory or legal developments;

 

•

changes in general market, economic, and political conditions;

 

•

conditions or trends in our industry, geographies or customers;

 

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•

changes in accounting standards, policies, guidance, interpretations or principles; and

 

•

threatened or actual litigation or government investigations.

In addition, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline rapidly and unexpectedly. In addition, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, results of operations or prospects. Any adverse determination in litigation could also subject us to significant liabilities.

Additionally, if our common stock is not listed on, or becomes delisted from, the New York Stock Exchange, or the NYSE, for any reason, and is quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on the NYSE or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.

Investors purchasing common stock in this offering will experience immediate and substantial dilution as a result of this offering and any future equity issuances.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock prior to completion of this offering. Accordingly, if you purchase our common stock in this offering, you will pay substantially more for your shares than the amounts paid by our existing shareholders for their shares and you will suffer immediate dilution of approximately $                per share in pro forma net tangible book value of our common stock. In addition, if the underwriters exercise their option to purchase additional shares from us, or if we issue additional equity securities in the future, investors purchasing shares of common stock in this offering will experience additional dilution. See “Dilution.”

We have broad discretion over the use of the net proceeds from this offering and it is possible that we will not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively could adversely affect our business, results of operations and financial condition. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock.

A substantial portion of the outstanding shares of our common stock after this offering will be restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Based on 91,263,210 shares of our common stock outstanding (after

 

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giving effect to the Preferred Stock Conversion) as of October 31, 2021, we will have                shares of our common stock outstanding after this offering, assuming no exercise of the underwriters’ option to purchase additional shares from us. Our executive officers, directors and key employees, as well as substantially all holders of our currently outstanding shares, have entered into lock-up agreements with the underwriters under which they have agreed, or will agree, subject to specific exceptions, not to sell any of our stock for 180 days following the date of this prospectus. We refer to such period as the lock-up period. The underwriters may release certain shareholders from the lock-up agreements prior to the end of the lock-up period.

As a result of these agreements, and subject to the provisions of Rule 144, as promulgated under the Securities Act (“Rule 144”) or Rule 701, as promulgated under the Securities Act (“Rule 701”), shares of our common stock will be available for sale in the public market as follows:

 

•

beginning on the date of this prospectus, all shares of our common stock sold in this offering will be immediately available for sale in the public market; and

 

•

beginning 181 days after the date of this prospectus, the remainder of the shares of our common stock will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rule 144, including the availability of current public information about us.

Sales of our common stock as restrictions end may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales could also cause the trading price of our common stock to fall and make it more difficult for you to sell shares of our common stock. See “Shares Eligible for Future Sale.”

Some provisions of Florida law and our amended and restated articles of incorporation and bylaws that will be in effect immediately prior to the completion of this offering may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.

Upon the closing of this offering, our status as a Florida corporation and the anti-takeover provisions of the Florida Business Corporation Act, which we sometimes refer to as the FBCA, may discourage, delay or prevent a change in control even if a change in control would be beneficial to our shareholders.

The control share acquisition statute, Section 607.0902 of the FBCA, generally provides that in the event a person acquires voting shares of the company in excess of 20% of the voting power of all of our issued and outstanding shares, such acquired shares will not have any voting rights unless such rights are restored by the holders of a majority of the votes of each class or series entitled to vote separately, excluding shares held by the person acquiring the control shares or any of our officers or employees who are also directors of the company. Certain acquisitions of shares are exempt from these rules, such as shares acquired pursuant to the laws of intestate succession or pursuant to a gift or testamentary transfer, pursuant to a merger or share exchange effected in compliance with the FBCA if we are a party to the agreement, or pursuant to an acquisition of our shares if the acquisition has been approved by our board of directors before the acquisition. The control share acquisition statute generally applies to any “issuing public corporation,” which means a Florida corporation which has:

 

•

One hundred or more shareholders;

 

•

Its principal place of business, its principal office, or substantial assets within Florida; and

 

•

Either (i) more than 10% of its shareholders are resident in Florida; (ii) more than 10% of its shares are owned by residents of Florida; or (iii) one thousand shareholders are resident in Florida.

The affiliated transaction (or so-called “business combination”) statute, Section 607.0901 of the FBCA, provides that we may not engage in certain mergers, consolidations, sales of assets, issuances of stock, reclassifications,

 

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recapitalizations, and other affiliated transactions with any “interested shareholder” for a period of three years following the time that such shareholder became an interested shareholder, unless:

 

•

Prior to the time that such shareholder became an interested shareholder, our board of directors approved either the affiliated transaction or the transaction which resulted in the shareholder becoming an interested shareholder; or

 

•

Upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of our voting shares outstanding at the time the transaction commenced; or

 

•

At or subsequent to the time that such shareholder became an interested shareholder, the affiliated transaction is approved by our board of directors and authorized at an annual or special meeting of shareholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting shares which are not owned by the interested shareholder.

An “interested shareholder” is generally defined as any person who is the beneficial owner of more than 15% of our outstanding voting shares.

The voting requirements set forth above do not apply to a particular affiliated transaction if one or more conditions are met, including, but not limited to, the following: if the affiliated transaction has been approved by a majority of our disinterested directors; if we have not had more than 300 shareholders of record at any time during the three years preceding the date the affiliated transaction is announced; if the interested shareholder has been the beneficial owner of at least 80% of our outstanding voting shares for at least three years preceding the date the affiliated transaction is announced; or if the consideration to be paid to the holders of each class or series of voting shares in the affiliated transaction meets certain requirements of the statute with respect to form and amount, among other things.

Both the control share acquisition statute and the affiliated transactions statute may have the effect of discouraging or preventing certain change of control or takeover transactions involving us.

In addition, our amended and restated articles of incorporation and bylaws that will be in effect immediately prior to the completion of this offering contain provisions that may make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares. These provisions include:

 

•

our board of directors is classified into three classes of directors with staggered three-year terms;

 

•

nothing in our amended and restated articles of incorporation precludes future issuances without shareholder approval of the authorized but unissued shares of our common stock;

 

•

advance notice procedures apply for shareholders to nominate candidates for election as directors or to bring matters before an annual meeting of shareholders;

 

•

our shareholders will only be able to take action at a meeting of shareholders and not by written consent;

 

•

a special meeting of shareholders can only be called by our chairman of the board of directors, our chief executive officer, our president (in the absence of a chief executive officer), a majority of our board of directors or the holders of 10% or more of all of our votes entitled to be cast on any issue proposed to be considered at the special meeting of shareholders;

 

•

no provision in our amended and restated articles of incorporation or bylaws provides for cumulative voting, which limits the ability of minority shareholders to elect director candidates;

 

•

directors will only be able to be removed for cause;

 

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•

our amended and restated articles of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of our capital stock; and

 

•

certain litigation against us can only be brought in Florida.

These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. See “Description of Capital Stock.”

Applicable insurance laws may make it difficult to effect a change of control.

TypTap Insurance Company is domiciled in Florida, and, pursuant to Section 628.461 of the Florida Statutes, generally no person may acquire a controlling interest, whether by purchase of 10% or more of TypTap Insurance Company’s or our (as its parent company) voting securities or otherwise, unless the acquiring person gives prior notice to the insurer and has received prior approval from the Florida Office of Insurance Regulation. Under Florida insurance law, an entity is presumed to have control of an insurance company if it owns, directly or indirectly, 10% or more of the voting stock of that insurance company or its parent company. This requirement may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of us, including through transactions that some or all of the shareholders might consider to be desirable. See also “Regulation—Changes of Control.”

Our bylaws that will be in effect immediately prior to the completion of this offering designates the state courts located within the state of Florida as the exclusive forum for substantially all disputes between us and our shareholders and the federal district courts as the exclusive forum for Securities Act claims, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

Our bylaws that will be in effect immediately prior to the completion of this offering provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our shareholders, (iii) any action arising pursuant to any provision of the FBCA, our amended and restated articles of incorporation or our bylaws, or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be a state court located within the state of Florida (or, if a state court located within the state of Florida does not have jurisdiction, the federal district court for the Middle District of Florida); provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, or to any claim for which the federal courts have exclusive jurisdiction. Our bylaws that will be in effect immediately prior to the completion of this offering also provide that, unless we consent in writing to the selection of an alternative forum, the U.S. federal district courts shall be the exclusive forum for the resolution of any claims arising under the Securities Act. Under the Securities Act, federal and state courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act.

By becoming a shareholder in our company, you will be deemed to have notice of and have consented to the provisions of our bylaws related to choice of forum. The choice of forum provisions in our bylaws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Additionally, the enforceability of choice of forum provisions in other companies’ governing documents has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our bylaws to be inapplicable or unenforceable in such action. If so, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.

 

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Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

•

be required to present only two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations in a registration statement for its initial public offering;

 

•

be exempt from compliance with the requirement that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

•

be exempt from compliance with any requirement that the PCAOB may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

•

be exempt from the “say on pay,” “say when on pay,” and “say on golden parachute” non-binding advisory vote requirements; and

 

•

be exempt from certain disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act.

We currently intend to take advantage of each of the exemptions described above. We could be an emerging growth company for up to five years after this offering. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002 and are, therefore, not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. As an emerging growth company, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of (i) the year following our first annual report required to be filed with the SEC or (ii) the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

As a private company, we do not currently have any internal audit function. To comply with the requirements of being a public company, we have undertaken various actions, and will need to take additional actions, such as implementing numerous internal controls and procedures and hiring additional accounting or internal audit staff or consultants. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we

 

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identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. We could also become subject to investigations by the SEC, the stock exchange on which our securities are listed or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remedy any material weakness, our financial statements could be inaccurate and we could face restricted access to capital markets.

We depend on the ability of our subsidiaries to transfer funds to us to meet our obligations, and our insurance subsidiary’s ability to pay dividends to us is restricted by law.

We are a holding company that transacts all of our business through operating subsidiaries. Our ability to meet our operating and financing cash needs depends on the surplus and earnings of our subsidiaries, and upon the ability of our insurance subsidiary to pay dividends to us.

Payments of dividends by our insurance subsidiary are restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. The limitations are based on income and surplus determined in accordance with statutory accounting principles, not U.S. generally accepted accounting principles. In addition, our insurance subsidiary could be subject to contractual restrictions in the future, including those imposed by indebtedness we may incur in the future. Our insurance subsidiary may also face competitive pressures in the future to maintain insurance financial stability or strength ratings. These restrictions and other regulatory requirements would affect the ability of our insurance subsidiary to make dividend payments and we may not receive dividends in the amounts necessary to meet our obligations. See “Regulation—Restrictions on Paying Dividends.”

We do not currently expect to pay any cash dividends on our common stock.

We do not currently expect to pay any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future earnings, if any, for the future operation and expansion of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our results of operations (including our ability to generate cash flow in excess of expenses and our expected or actual net income), liquidity, cash requirements, financial condition, retained earnings and collateral and capital requirements, general business conditions, contractual restrictions, legal, tax and regulatory limitations, the effect of a dividend or dividends upon our financial strength ratings, and other factors that our board of directors deems relevant. See “Dividend Policy.”

Because we are a holding company and all of our business is conducted through our subsidiaries, dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to fund operations and pay dividends. Accordingly, our ability to pay dividends to our shareholders is dependent on the earnings and distributions of funds from our subsidiaries. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any of our future debt or preferred equity securities or our subsidiaries. Accordingly, if you purchase shares of our common stock in this offering, realization of a gain on your investment will depend on the appreciation of the price of shares of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

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The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, the requirements of the Sarbanes-Oxley Act of 2002 and the listing standards of the NYSE, may strain our resources, increase our costs, and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost-effective manner. In addition, certain members of our management team have limited experience managing a public company.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the requirements of the Sarbanes-Oxley Act of 2002, and the listing standards of the NYSE. These requirements will place a strain on our management, systems and resources and we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare a proxy statement with respect to our annual meeting of shareholders. The Sarbanes-Oxley Act will require that we maintain effective disclosure controls and procedures, and internal controls over financial reporting. The NYSE will require that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, and comply with the Exchange Act and the NYSE requirements, significant resources and management oversight will be required. This may divert management’s attention from other business concerns and lead to significant costs associated with compliance, which could have a material adverse effect on us and the price of our common stock.

We expect these reporting and corporate governance rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or its committees or as our executive officers. Advocacy efforts by shareholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action, and potentially civil litigation.

Certain members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

General Risks

Future acquisitions of other insurance companies’ books of business or other investments could disrupt our business and harm our financial condition.

In the future we may selectively pursue acquisitions of other insurance carriers’ books of business or other investments that we believe will help us increase our scale and expand nationally. There is no assurance that such acquisitions or investments will perform as expected or will be successfully integrated into our business or generate substantial revenue, and we may overestimate cash flow, underestimate costs or fail to understand the risks of or related to the acquired book of business or investment. The process of acquiring a book of business

 

58

can also cause us to incur various expenses and create unforeseen operating difficulties, expenditures and other challenges, whether or not those acquisitions are consummated, such as:

 

•

intense competition for suitable targets, which could increase prices and adversely affect our ability to consummate deals on favorable or acceptable terms;

 

•

inadequacy of reserves for losses and loss adjustment expenses;

 

•

failure or material delay in closing a transaction, including as a result of regulatory review and approvals;

 

•

regulatory conditions attached to the approval of the acquisition or investment and other regulatory hurdles;

 

•

a need for additional capital that was not anticipated at the time of the acquisition;

 

•

anticipated benefits not materializing or being lower than anticipated;

 

•

diversion of management time and focus from operating our business to addressing integration challenges;

 

•

transition of the acquired customers;

 

•

difficulties in integrating the technologies, operations, existing contracts and personnel;

 

•

retention of employees or business partners;

 

•

cultural challenges associated with integrating employees into our organization;

 

•

integration of accounting, management information, human resources and other administrative systems;

 

•

the need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies;

 

•

coordination of product development and sales and marketing functions;

 

•

theft of our trade secrets or confidential information that we share with potential candidates;

 

•

risk that an acquired business or investment cannibalizes a portion of our existing business;

 

•

adverse market reaction to an acquisition; and

 

•

liability for activities of the acquired business before the acquisition, including intellectual property infringement, misappropriation and other claims, violations of laws and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

If we are unable to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment and we might incur unanticipated liabilities or otherwise suffer harm to our business generally.

To the extent that we pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of cash available to us for other purposes. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill on our consolidated and combined balance sheet, any of which could seriously harm our business.

If securities or industry analysts cease publishing research or reports about us, our business or our markets, or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price and trading volume could materially decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our markets, or our competitors. We cannot provide any assurance that analysts will continue to cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative

 

59

recommendations about our competitors, our stock price could materially decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to materially decline.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. In particular, statements about the markets in which we operate, including growth of our various markets, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance contained in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements, or could affect our share price. Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to, the following:

 

•

we may not become profitable or maintain profitability in the future;

 

•

we may lose existing customers or fail to acquire new customers;

 

•

our expansion within the United States will subject us to additional costs and risks, and our plans may not be successful;

 

•

our brand may not become as widely known or accepted as existing insurance companies’ brands or the brand may become tarnished;

 

•

our future growth and profitability depends in part on our ability to successfully operate in an insurance industry that is highly competitive;

 

•

our ability to engage and retain independent insurance agents and independent insurance agency networks to sell our insurance policies;

 

•

risks related to competition, competitive pressures, the cyclical nature of the homeowners and flood insurance industry, as well as insurance industry developments and market conditions;

 

•

the impact of HCI’s control of the direction of our business and the inability of our other shareholders to influence significant decisions as a result of HCI’s control;

 

•

our ability to continuously develop and improve our proprietary platform, including developing and implementing new features and analytical models;

 

•

risks related to our use of third-party data, including potential harm caused by loss, misappropriation or unauthorized disclosure of or access to our data, including personal data, and compromises in cybersecurity;

 

•

we may not continue to grow at historical rates in the future;

 

•

our ability to appropriately price the risks we underwrite;

 

•

our ability to effectively utilize our risk mitigation strategies and loss limitation methods;

 

•

risks related to emerging claim and coverage issues and insurance industry trends, such as increased litigation, expanded covered causes of loss, rising jury awards and the escalation of loss severity;

 

61

•

reinsurance may be unavailable at current levels and prices, which may limit our ability to underwrite new policies;

 

•

we are subject to extensive regulation and any failure to comply in full or part with regulatory requirements may result in fines, revocation or suspension of our license to operate in one or more jurisdictions or other penalties;

 

•

risks that HCI’s interests may conflict with our interests and the interests of our other shareholders;

 

•

risks associated with severe weather events and other catastrophes;

 

•

our intellectual property and proprietary rights are valuable, and any inability to obtain, maintain, protect, defend and enforce them could reduce the value of our products and brand;

 

•

an unauthorized disclosure or loss of policyholder or employee data or information or other sensitive, confidential or personal information, including by cyber-attack or other security breach, or a suspected or actual violation of applicable data privacy or protection laws, regulations or other obligations, could cause a loss of data or information giving rise to remediation or other expenses, and expose us to liability under such obligations, and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows, financial condition and results of operations; and

 

•

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

Given the risks and uncertainties set forth in this prospectus, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this prospectus are not guarantees of future performance and our actual results of operations, financial condition, and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by federal securities laws, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data. Unless otherwise indicated, information concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity and market size, are based on our management’s knowledge and experience in the markets in which we operate, together with currently available information obtained from various sources, including publicly available information, industry reports and publications, surveys, our customers, trade and business organizations, and other contacts in the markets in which we operate. Certain information is based on management estimates, which have been derived from third-party sources, as well as data from our internal research, and are based on certain assumptions that we believe to be reasonable.

In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets in which we operate. While we believe the estimated market and industry data included in this prospectus are generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise, and you are cautioned not to give undue weight to such estimates. Market and industry data are subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of such data. In addition, projections, assumptions and estimates of the future performance of the markets in which we operate are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us. Accordingly, you are cautioned not to place undue reliance on such market and industry data or any other such estimates. The content of, or accessibility through, the sources and websites identified herein, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein and any websites are an inactive textual reference only.

 

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USE OF PROCEEDS

The net proceeds to us from the sale of shares of common stock by us in this offering will be approximately $                million, assuming an initial public offering price of $                per share (the midpoint of the range set forth on the cover of this prospectus), and after deducting underwriting discounts and commissions and estimated offering expenses.

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, software development, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses or technologies. However, currently we do not have agreements or commitments for any material acquisitions or investments.

We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering or the amounts we actually spend on the uses set forth above. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit or direct or guaranteed obligations of the U.S. government. Our management will have broad discretion in the application of the net proceeds from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

Additionally, we are a holding company that transacts all of our business through operating subsidiaries. Consequently, our ability to pay dividends to shareholders is largely dependent on receipt of dividends and other distributions from our subsidiaries. Applicable insurance laws restrict the ability of our insurance subsidiary to declare shareholder dividends and require insurance companies to maintain specified levels of statutory capital and surplus. Insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect. See “Regulation—Restrictions on Paying Dividends.”

Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. See “Risk Factors—Risks Relating to Ownership of Our Common Stock—We depend on the ability of our subsidiaries to transfer funds to us to meet our obligations, and our insurance subsidiary’s ability to pay dividends to us is restricted by law” and—“We do not currently expect to pay any cash dividends on our common stock.”

 

65

CAPITALIZATION

The following table sets forth our cash, cash equivalents and restricted cash, as well as our total capitalization, as of September 30, 2021:

 

•

on an actual basis;

 

•

on a pro forma basis, giving effect to (i) the filing and effectiveness of our amended and restated articles of incorporation, which will occur immediately prior to the completion of this offering, and (ii) the Preferred Stock Conversion, as if it had occurred on September 30, 2021; and

 

•

on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and the receipt of the estimated net proceeds from the sale and issuance by us of            shares of our common stock in this offering (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us) at an assumed initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus), and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with our consolidated and combined financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

		As of September 30, 2021
		Actual				Pro forma				Pro forma as adjusted(1)
(in thousands)		(unaudited)				(unaudited)				(unaudited)
Cash and cash equivalents		$	180,840			$				$
Restricted cash(2)		$	2,000
Redeemable Series A preferred stock, par value $0.001; 37,502,000 shares authorized and 10,000,000 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted			87,731				—				—
Stockholders’ equity:
Preferred stock, par value $0.001; no shares authorized, issued and outstanding, actual;                     shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted			—				—				—
Common stock, par value $0.001; 183,000,000 shares authorized and 81,278,175 shares issued and outstanding, actual;                     shares authorized and                     shares issued and outstanding, pro forma; and                     shares authorized and                     shares issued and outstanding, pro forma as adjusted			81
Additional paid-in capital			58,650
Retained deficits			(24,753	)
Accumulated other comprehensive income, net of taxes			125
Total stockholders’ equity			34,103
Total capitalization		$	121,834							$

 

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(1)

A $1.00 increase or decrease in the assumed initial public offering price per share of our common stock would increase or decrease each of cash, additional paid-in-capital and total capitalization on a pro forma as adjusted basis by approximately $ million, assuming the number of shares of our common stock offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

(2)	Represents funds held to meet regulatory requirements of certain states in which the Company’s insurance subsidiary conducts business.

The number of shares of our common stock to be outstanding immediately after this offering is based on shares of our common stock outstanding as of October 31, 2021, and reflects 10,000,000 shares of our preferred stock that will convert into shares of our common stock pursuant to the Preferred Stock Conversion. The number of shares of our common stock to be outstanding after this offering excludes:

 

•

6,450,000 shares of our common stock issuable upon the exercise of options granted on October 1, 2021 under our 2021 Omnibus Plan at an exercise price of $23.00 per share; and

 

•

1,250,000 shares of common stock reserved for future issuance under the 2021 Omnibus Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under the plan.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. Dilution in pro forma net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities and redeemable preferred stock by the number of shares of our common stock outstanding. Our historical net tangible book value as of September 30, 2021, was approximately $27.8 million, or $0.34 per share. Our pro forma net tangible book value as of September 30, 2021 was approximately $115.6 million, or $1.27 per share, based on the total number of shares of our common stock outstanding as of September 30, 2021, after giving effect to the Preferred Stock Conversion.

After giving effect to the sale by us of                  shares of our common stock in this offering at an assumed initial public offering price of $                 per share, which is the midpoint of the range set forth on the cover of this prospectus and after deducting underwriting discounts and commissions, and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2021, would have been $                 million, or $                 per share. This represents an immediate increase in pro forma net tangible book value of $                 per share to our existing shareholders and an immediate dilution in pro forma net tangible book value of $                 per share to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution:

 

Public offering price per share of common stock						$
Pro Forma net tangible book value per share as of September 30, 2021 before this offering		$	1.27
Increase per share attributable to new investors purchasing shares of common stock in this offering
Pro forma net tangible book value per share immediately after this offering
Dilution in pro forma net tangible book value per share to new common stock investors in this offering						$

The following table presents, on a pro forma basis as of September 30, 2021, after giving effect to the Preferred Stock Conversion and the sale by us of shares of our common stock in this offering, the differences between the existing shareholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares of our common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid. The calculation below is based on an initial public offering price of $                 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

Shares purchased

Total consideration

Average price per share

Number

Percent

Amount

Percent

($ in millions)

Existing shareholders

%

$

%

$

New investors

%

%

Total

%

$

%

 

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If the underwriters exercise in full their option to purchase                  additional shares of our common stock from us in this offering, the pro forma net tangible book value (deficit) per share after this offering would be $                 per share and the dilution to new investors in this offering would be $                 per share. If the underwriters exercise such option in full, the number of shares held by new investors will increase to approximately                  shares of our common stock, or approximately     % of the total number of shares of our common stock outstanding after this offering.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity, as common stock, or other securities that are convertible into our common stock, such as convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

The number of shares of our common stock to be outstanding immediately after this offering is based on shares of our common stock outstanding as of October 31, 2021, and reflects 10,000,000 shares of our preferred stock that will convert into shares of our common stock pursuant to the Preferred Stock Conversion. The number of shares of our common stock to be outstanding after this offering excludes:

 

•

6,450,000 shares of our common stock issuable upon the exercise of options granted on October 1, 2021 under the 2021 Omnibus Plan at an exercise price of $23.00 per share; and

 

•

1,250,000 shares of common stock reserved for future issuance under the 2021 Omnibus Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under the plan.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information which TypTap’s management believes is relevant to an assessment and understanding of TypTap’s consolidated and combined results of operations and financial condition. You should read the following discussion and analysis of TypTap’s consolidated and combined results of operations and financial condition together with TypTap’s consolidated and combined financial statements and related notes and other information included elsewhere in this prospectus.

In addition to historical financial information, this discussion contains forward-looking statements based upon TypTap’s current expectations that involve risks and uncertainties. TypTap’s actual results could differ materially from such forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this prospectus. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

All dollar balances presented in this section are in US thousands, unless otherwise noted.

Overview

TypTap is a rapidly growing technology-driven insurance company that leverages extensive data and AI-enabled analytics to better select and price homeowners insurance risk. We have a successful track record of profitable underwriting, with loss ratios better than the overall homeowners industry average, and offer our insurance agents a frictionless full-stack digital technology platform that provides policyholders with a better purchase and claims experience. We achieve this through a comprehensive suite of technology solutions to manage the end-to-end insurance process, from risk selection and underwriting to accelerated quoting to claims management.

The $110 billion U.S. homeowners insurance market is a large market with attractive industry dynamics and a strong growth outlook. We believe it is also a good candidate for technology-driven innovation. For decades, the insurance industry has underinvested in technology and is thus dependent on inefficient legacy systems. This has led to mispriced risk and high loss ratios, low policyholder satisfaction scores, and a frustrating agent experience. While many companies have attempted to take a more tech-forward approach to insurance in recent years, they typically lack sustainable unit economics and fail to address the biggest inefficiency in the industry – high claims costs, that comprise, on average, 73% of total costs for an insurance carrier.

While many insurance companies have accepted current loss ratios as a relatively fixed component of the insurance company cost structure, we have developed technology that allows us to improve on this. Our strategy is simple – use our data-driven underwriting technology to identify and price the best risks that we determine have the lowest probability of a claim and achieve a desired level of underwriting profitability, leading to a sustainable loss ratio advantage over competitors. With the help of a better and more efficient experience for agents and policyholders, we achieve high retention and strong agent alignment, that enable us to rapidly scale up.

While the first wave of Insurtech companies focused primarily on customer experience and lowering distribution costs as opposed to improving underwriting, we are focused on the entire value chain – using technology to lower claims costs, creating a compelling agent value proposition to scale the business and a customer experience that creates high retention. We see our business model as the future of Insurtech, driving a positive flywheel and profitable underwriting results as it scales. Our data-driven underwriting platform gives us the ability to source and analyze up to 1,000 different home characteristics, allowing us to price and bind at the individual home level with lower claims probability – in less than 5 minutes. When losses do occur, our claims management software proactively helps us manage our claims adjustment costs. Our digitally enhanced user interfaces were also designed to keep our agents and policyholders happy, aligning incentives and driving increased efficiencies throughout the process.

 

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TypTap’s business was incubated in 2016 as a subsidiary of HCI Group, Inc., or HCI (NYSE: HCI), a publicly-listed insurance holding company. We chose to develop and test our underwriting technology in Florida, a complex yet attractive homeowners insurance market with a total addressable homeowners insurance market of $11 billion. Since then, we have continued to refine our technology and improve our underwriting platform. After developing a market leading underwriting track record in Florida, we have begun to execute on a national growth strategy and are writing policies in seven states as of October 2021.

 

 

TypTap’s competitive advantage is derived from our internally developed technology suite that provides advanced analytics, comprehensive end-to-end insurance lifecycle management, and an agent-facing user interface that prioritizes policyholder ease-of-use and empowers independent insurance agents:

 

•

We use differentiated data and proprietary analytics to create better results:    Underwriting home insurance is complex, with many individual data factors contributing to underwriting risk, including roof type, roof shape, home elevation, square footage, presence of a pool, geography, and building material, to name just a few. We spent four years developing, testing, and refining our AI-enabled data warehousing solution before writing our first residential flood insurance policy in 2016. We continued to improve the data engine and risk selection algorithm before launching our homeowners insurance offering in 2017, giving us the confidence that we had a solution that worked by the time we launched. Our data-driven and analytical approach provides us with a differentiated understanding of how to underwrite and price for unique risk characteristics on an individual home basis. This results in loss ratios that have been better than industry average by over 25 percentage points. As we collect more data, we will continue to refine our underwriting model and algorithms through an iterative analytic process.

 

•

We empower independent insurance agents to create a better insurance purchasing experience:    Independent agents are a valuable component of our business model. We expect them to continue to control insurance distribution over the direct-to-consumer channel in the foreseeable future. We have designed our technology to empower agents to spend more time acquiring new customers and less time on the inefficiencies that cause friction in the insurance selling and management process. Our easy-to-use digital agent portal, instant quote technology, efficient binding and ongoing document management, competitive prices, consistent renewal decisions, user friendly claims management software, and competitive commissions all add value for our agents. Our platform drives increased agent adoption, with our current target agent cohort increasing their TypTap book of business by 151% between 2020 and 2021.

 

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•

We have designed our platform for a better policy-holder experience, with ease of use in mind:    Our online quoting platform is designed for ease of use and efficiency for both the agent and policyholder. We come to an underwriting decision in minutes without extensive and tedious data collection from the policyholder and price the policy accurately at inception to ensure stability of coverage and price. Our claims technology is also designed for a transparent and user-friendly experience and gives us the ability to be proactive in the claims process, including by engaging with our policyholders.

 

•

We have developed fully integrated technology solutions and processes to better manage the end-to-end insurance lifecycle:    Our scalable, full-stack technology platform is internally developed and designed to be easily adapted to evolving agent and policyholder needs. Our technology improves risk selection, enables faster quoting and a better agent and policyholder experience, and efficiently manages the claims process, driving operating efficiencies and accelerating our growth as we scale

 

•

We use reinsurance as a tool to protect our balance sheet and for efficient capital management:    We purchase excess-of loss reinsurance and optimize for both frequency and severity as well as specific geography perils. Historically we have purchased reinsurance in excess of what is required by regulators to create the appropriate protection for our business. We enjoy support from a diverse panel of 49 highly rated reinsurance providers across the US, Europe and Asia. Our technology platform has helped create transparency and a favorable economic outcome for our reinsurance providers.

These key differentiated strengths – our high quality data and analytics to power our risk selection, our ability to empower and create strong alignment with independent agents, our policyholder experience, and our comprehensive technology platform – have allowed us to build a sustainable business model for profitable growth. We have a strong track record of achieving both high growth and underwriting profitability using this model and will continue to expand on these key competitive advantages as we expand geographically.

We have also built our business with a capital-efficient strategy in mind. To date, we have only received $177 million of capital in our business (which includes the $100 million investment by Centerbridge Partners, L. P. in the February 2021). TypTap’s rapid growth and strong value proposition are driven primarily by our intellectual property, technology platform, and operational excellence. Our track record of sourcing and retaining profitable business allows us to use reinsurance primarily to manage our balance sheet and earnings volatility.

The execution of our future expansion strategy into new states is key to going after our total addressable market opportunity. Our operational success to date and ability to identify unique localized risk characteristics, as evidenced by our success in current markets, has laid the foundation to expand nationwide, where we will leverage our institutional track record and superior technology to generate strong premium growth with attractive underwriting results.

We had gross premiums earned of $78.8 million and $30.9 million in the years ended December 31, 2020 and December 31, 2019, respectively, and gross premiums earned of $119.4 million for the nine months ended September 30, 2021. We incurred net losses of $12.4 million and $6.9 million in the years ended December 31, 2020 and December 31, 2019, respectively, and a net loss of $14.7 million for the nine months ended September 30, 2021. We may incur losses in the future for a number of reasons, including as a result of investments in the development and expansion of our business.

Our Business Model

Our goal is to leverage our data analytics and technology to solve for the three key drivers of success in insurance – underwriting outcomes, agent alignment, and policyholder experience. We believe our technology advantage creates a proven and sustainable business model where high growth and profitability are not mutually exclusive.

TypTap has grown rapidly over the last five years, as agents and prospective policyholders discover the simplicity, ease of use, and speed of our platform. In-force premiums exceeded $100 million at the end of 2020,

 

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and by September of 2021, in-force premiums exceeded $214 million, which includes $59 million of United Property & Casualty Insurance Company’s premiums (see “Results of Operations — Comparison of the Three and Nine Months Ended September 30, 2021 and 2020” below), with both growth milestones achieved ahead of our announced goals. We also achieved these growth objectives without having to sacrifice our underwriting standards or profitability targets. After testing our underwriting platform in the Florida market, a relatively difficult state to profitably write homeowners insurance, we have gained confidence that the technology, underwriting algorithms, and processes that we have built differentiate us from our peers and will help us as we scale and expand nationally.

Our success is defined by our key competitive strengths – data and analytics, agent relationships, policyholder experience, and technology solutions – that have helped us create a product, experience, and financial outcome that is truly differentiated from the industry.

Key Factors and Trends Affecting Our Operating Performance

Our financial condition and results of operations have been, and will continue to be, affected by a number of factors.

 

•

Underwriting performance and continued investments in our technology.    We leverage data, technology, and artificial intelligence to help manage risk. For instance, we leverage dynamic data sources obtained through various sources, and we use advanced statistical methods to model that data into our pricing algorithm. We expect to improve our ability to manage risk and price risk accurately over time as we incorporate new external data sources and utilize the experience gained over time with our own customer base. We expect this to lead to better underwriting, lower loss frequency, and, adjusting for weather-related events, lower loss ratios over time. Our success in this area depends on our ability to incorporate new data sources as they become available and to use them to improve our ability to accurately and competitively price risk.

 

•

Continued interaction with our agent network.    We are selective not only in the risks we underwrite, but in the agents we choose to sell our policies. We continuously monitor our network of agents – by tracking system use, analyzing quoting activity and results, and evaluating agent buy-in metrics – to strengthen relationships with and direct more business to our best-performing agents while phasing out under-performing ones. The AI-enabled technology works best when our agents’ incentives are aligned with ours, and we carefully manage our agent force to ensure we only work with those that are sending us quality policyholders to help us write profitable business.

 

•

National expansion strategy.    We believe that national expansion will be a key driver of the long-term growth and success of our business. As of December 31, 2020, we were authorized to provide property and casualty insurance in the states of Florida, Indiana, Mississippi, Montana, Nevada, South Carolina, South Dakota, and Utah. Since December 31, 2020, we have expanded our ability to sell property and casualty insurance to Arkansas, Connecticut, Georgia, Iowa, Massachusetts, Michigan, New Jersey, New Mexico, Rhode Island, and West Virginia. We expect to apply our highly scalable model nationally, with a tailored approach to each state that is driven by the regulatory environment and local market dynamics. We hope to expand rapidly and efficiently across different geographies while maintaining a high level of control over the specific strategy within each state. State expansion should create a broader base from which to grow premiums while increasing the geographic diversity in our customer base and related insured risks. We believe that increased geographic diversity will also improve our ability to secure attractive terms from reinsurers, which would improve our overall cost structure and profitability.

Seasonality

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

 

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Northeast usually occur during the period between December 1^st and March 31^st of each year. Also, with our reinsurance agreements typically effective as of June 1^st of each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning on June 1^st of each year.

Reinsurance

We seek to reduce our exposure to losses that may arise from catastrophes or other events by reinsuring certain levels of risk with other insurance enterprises or reinsurers. Under this strategy, we purchase reinsurance annually or as deemed appropriate, taking into consideration probable loss scenarios and reinsurance market conditions. We contract with a number of reinsurers to secure our annual reinsurance coverage, which generally becomes effective June 1^st each year.

Currently, TypTap cedes a portion of its homeowners and flood insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and currently one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance agreements, which is the primary form of reinsurance used by us, are subject to revision resulting from subsequent adjustment to total insured value. Under the terms of the quota share reinsurance agreement, we are entitled to a 30% ceding commission on ceded premiums written.

TypTap also participates in reinsurance contracts with affiliates. The reinsurance allocation method is governed by HCI’s reinsurance allocation agreement, which states that each cedant’s retention and reinsurer’s limit of liability for a loss occurrence is apportioned based on the amount of loss contributed to that occurrence. The reinsurance allocation agreement also states that the reinsurance premium shall be apportioned to each company in the same proportion that the company’s premium subject to the reinsurance agreement bears to the total premium subject to the reinsurance agreement. See Note 22—“Related Party Transactions.” to TypTap’s audited consolidated and combined financial statements for the years ended December 31, 2020 and 2019 included elsewhere in this prospectus.

Under all reinsurance agreements, TypTap ceded 37% and 36% of its gross premiums earned to reinsurers for the years ended December 31, 2020, and 2019, respectively. For the nine months ended September 30, 2021 and 2020, TypTap ceded 35% and 35%, respectively, of its gross premiums earned to reinsurers. Our actual ceded loss was only 1.7% and 1.3% of ceded premium for the years ended December 31, 2020 and 2019, respectively – a result of our robust underwriting performance.

This reinsurance strategy also helps support our growth, as third-party reinsurance helps decrease the statutory capital required to support new business growth. As a result, we expect to be able to grow at an accelerated pace with lower capital investments upfront than we would otherwise require. We have a successful track record of securing such reinsurance, providing a solid foundation for what we believe to be a long-term, sustainable model. As our business scales, we expect to have the flexibility to reduce our quota share levels to retain more of our gross business for our shareholders.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. As a provider of homeowners insurance, TypTap continually prepares for disasters and catastrophic events, including events that could disrupt business continuity. As a result, we were able to quickly adjust our technologies and infrastructure to support a remote workforce and maintain business continuity. TypTap has not experienced and, at present, does not foresee a direct material impact from the outbreak of COVID-19 in terms of increased claims, losses, or uncollectability of premiums. As the COVID-19 pandemic continues to persist, and new variants emerge, like the Delta Variant, there is still uncertainty as to whether the pandemic will have a future material impact on our business, financial condition, liquidity, or results of operations.

 

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Basis of Presentation

The accompanying consolidated and combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as determined by the Financial Accounting Standards Board Accounting Standards Codification and pursuant to the regulations of the SEC.

Key Performance Indicators

As we make strategic decisions, measure our performance, evaluate our business, and identify trends in our business, we review a number of metrics, including the following key operating and financial performance indicators.

 

		Three months ended September 30,								Nine months ended September 30,
(dollars in thousands, except Premiums per policy)		2021				2020				2021				2020
Gross written premium		$	55,987			$	27,349			$	161,602			$	62,708
Gross premiums earned		$	51,553			$	19,854			$	119,364			$	54,829
Policies in force			48,897				33,825				48,897				33,825
In-force premiums		$	155,406			$	87,095			$	155,406			$	87,095
Premiums per policy		$	3,178			$	2,575			$	3,178			$	2,575
Gross loss ratio			48.3	%			37.5	%			45.0	%			41.0	%
Adjusted gross profit		$	6,085			$	1,781			$	20,797			$	12,334
Adjusted gross profit margin			11.8	%			9.0	%			17.4	%			22.5	%
Adjusted EBITDA		$	(9,592	)		$	(5,662	)		$	(16,036	)		$	(8,193	)
Adjusted EBITDA margin			(18.6	)%			(28.5	)%			(13.4	)%			(14.9	)%

 

		Year ended December 31,
(dollars in thousands, except Premiums per policy)		2020				2019
Gross written premium		$	104,855			$	60,272
Gross premiums earned		$	78,836			$	30,904
Policies in force			37,196				25,540
In-force premiums		$	105,420			$	59,591
Premiums per policy		$	2,834			$	2,333
Gross loss ratio			43.8	%			28.0	%
Adjusted gross profit		$	13,703			$	9,498
Adjusted gross profit margin			17.4	%			30.7	%
Adjusted EBITDA		$	(14,345	)		$	(8,390	)
Adjusted EBITDA margin			(18.2	)%			(27.1	)%

Key Financial Terms

Gross written premium

Gross written premium is the amount received or to be received for insurance policies written or assumed by us as an insurance company, without reduction for policy acquisition costs, reinsurance costs, or other deductions. In addition, gross written premium includes amounts received from reinsurance we provide to others. The volume of our gross written premium in any given period is generally influenced by:

 

•

New business submissions;

 

•

Binding of new business submissions into policies;

 

•

Bound policies going effective;

 

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•

Renewals of existing policies; and

 

•

Average size and premium rate of bound policies.

We use gross written premium to manage our business because we believe that it reflects the business volume and economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations are the key drivers of our future profit opportunities.

Gross premiums earned

Gross premiums earned represents the earned portion of our gross written premium. Our insurance policies generally have a term of one year, and premium is earned pro rata over the term of the policy. We view this as an important metric as it allows us to evaluate our growth prior to the impacts of ceded reinsurance.

Policies in force

Policies in force is defined as the number of currently active policies written by us as of the period end date. We view policies in force as an important metric to assess our financial performance because policy growth drives revenue growth, expands brand awareness, and deepens market penetration.

In-force premiums

In-force premiums is defined as gross written premium per policy multiplied by policies in force as of the period end date. We view in-force premiums as an estimate of annualized run rate of gross written premium as of a given period. We view this as an important metric because it is an indicator of the size of our portfolio of policies, as well as an indicator of the expected earned premium over the coming 12 months given our historical retention rates. In-force premiums is not, however, necessarily an accurate metric to forecast of future revenue nor is it a reliable indicator of revenue expected to be earned in any given period in light of our historically high-growth rates that can yield much higher revenues and the possibility of higher than expected policy cancellation. We believe that our calculation of in-force premiums is useful to investors because it captures the impact of growth in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations, and non-renewals.

Premiums per policy

Premiums per policy is in-force premiums divided by policies in force. We view gross written premium per policy as an important metric which provides information as to the average size of our insured relationships. Growth in the metric can be indicative of increased coverages offered to our customers.

Gross loss ratio

We define gross loss ratio as the ratio of gross losses and loss adjustment expenses to gross premiums earned during the period. We view gross loss ratio as an important metric because it is a commonly used ratio in the insurance industry regarding the loss experience, which can be compared to our peers.

Adjusted gross profit

We define adjusted gross profit, a non-GAAP financial measure, as follows:

 

•

Total revenue, minus;

 

•

Loss and loss adjustment expenses, minus;

 

•

Other insurance related expenses, minus;

 

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•

Net investment income, minus;

 

•

Net realized gains and losses, minus;

 

•

Unrealized gains and losses, minus;

 

•

Income associated with license fee.

Other insurance related expenses include amortized premium taxes, credit card processing fees, and home inspection costs. All policy acquisition commission costs are included in policy acquisition and other underwriting expenses and are excluded from adjusted gross profit. After these adjustments, we believe the resulting calculation is inclusive of all costs of revenue incurred to successfully service a policy, irrespective of how it was sourced or acquired.

See “—Non-GAAP Financial Measures” for a reconciliation of total revenue to adjusted gross profit.

Adjusted gross profit margin

We define adjusted gross profit margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to gross premiums earned. See “—Non-GAAP Financial Measures.”

Adjusted EBITDA

We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income, and other transactions that we would consider to be unique in nature. See “—Non-GAAP Financial Measures” for a reconciliation of net loss to adjusted EBITDA in accordance with GAAP.

Adjusted EBITDA margin

We define adjusted EBITDA margin, a non-GAAP financial measure, expressed a percentage, as the ratio of adjusted EBITDA to gross premiums earned. See “—Non-GAAP Financial Measures.”

Components of Results of Operations

Revenue

Gross premiums earned

Gross premiums earned represents the earned portion of our gross written premium. Our insurance policies generally have a term of one year, and premium is earned pro rata over the term of the policy.

Premiums ceded

Premiums ceded represents the amount of gross premiums earned that are ceded to reinsurers. We enter into reinsurance contracts to attempt to limit our exposure to potential losses as well as to provide additional capacity for growth. Premiums ceded are treated as a reduction of gross premiums earned during a specific period of time over the reinsurance contract period in proportion to the period of risk covered. The volume of our premiums ceded is impacted by policy exposures reflected in gross premiums earned, pricing and availability of reinsurance, and decisions we make to increase or decrease retention levels.

Net premiums earned

Net premiums earned represents the earned portion of our gross written premium for insurance policies written or assumed by us, less premiums ceded (any portion of our gross written premium that is ceded to third-party reinsurers under our reinsurance agreements). We earn written premiums on a pro-rata basis over the term of the policies.

 

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Net investment income

Net investment income represents interest earned from fixed maturity securities and short-term investments, and dividends received on investments in equity securities. Our invested assets primarily consist of cash, fixed-maturity securities, and equity securities. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio.

Net realized investment gains or losses

Net realized investment gains or losses are a function of the difference between the amount received by us upon the sale of a security and the security’s amortized cost, as well as any allowances for credit losses recognized in earnings, if any.

Net unrealized investment gains or losses

Net unrealized investment gains or losses represent the net change in the fair value of equity securities during a period.

Policy fee income

Policy fee income represents income from nonrefundable fees for insurance coverage, which is intended to reimburse a portion of the costs incurred to underwrite the policy. Policy fee income is recognized ratably over the policy coverage period.

Other

Other income represents income from fees charged to policyholders for the use of installment payment options and from software license fees.

Expenses

Loss and loss adjustment expenses

Loss and loss adjustment expenses represent the costs incurred for losses net of amounts ceded to reinsurers and include management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to us, which are based on actuarial assumptions and management judgement.

Policy acquisition and other underwriting expenses

Policy acquisition and other underwriting expenses primarily consist of amortization of direct acquisition commission costs and premium taxes incurred upon the successful acquisition of business written on a direct basis.

General and administrative personnel expenses

General and administrative personnel expenses primarily consist of employee compensation, including stock-based compensation and benefits for our finance, human resources, legal, and general management functions, as well as facilities and professional services. We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC and other regulatory bodies, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

 

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Interest expense

Interest expense primarily relates to interest expense attributable to two loans from our parent company, HCI Group, Inc.

Other operating expenses

Other operating expenses primarily consist of professional fees, bank fees, costs of information technology support services, overhead allocated from our parent company, and fees for services received from affiliated companies. We expect to incur incremental operating expenses to support our plans to expand our operations nationwide.

Results of Operations

The company identifies its segments based on managerial emphasis, organizational structure and revenue source. The company identifies three reportable segments: insurance operations, information technology, and corporate. The insurance operations segment represents the homeowners and flood insurance operations of TypTap Insurance Company, together with TypTap Management Company, its managing general agent. The information technology segment represents the operations of technology companies Exzeo USA, Inc. and Cypress Tech Development Company, which owns Exzeo Software Private Limited. The corporate segment represents the activities of holding company TypTap Insurance Group. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations.

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

The company and its affiliate, Homeowners Choice Property & Casualty Insurance Company, Inc., entered into a quota share reinsurance agreement in June 2021 to provide 100% reinsurance on all in-force, new and renewal policies of United Property & Casualty Insurance Company (“United”) in the states of Connecticut, Massachusetts, New Jersey and Rhode Island. The agreement is effective June 1, 2021 and continues through May 31, 2022. Under the agreement, TypTap and Homeowners Choice each assume 50% of the business and pay United a ceding commission of 24% of premium.

 

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The following table presents our unaudited consolidated and combined statement of operations for the three months ended September 30, 2021 and 2020, and the dollar and percentage change between the two periods. Note that all amounts presented are in US thousands, unless otherwise noted:

 

		Three months ended September 30,								Change				% Change
(in thousands, except per share amount)		2021				2020
Revenue
Gross premiums earned		$	51,553			$	19,854			$	31,699				160	%
Premiums ceded			(20,135	)			(10,171	)			(9,964	)			98	%
Net premiums earned			31,418				9,683				21,735				224	%
Net investment income			85				153				(68	)			-44	%
Net realized investment gains (losses)			77				53				24				N.M.
Net unrealized investment gains (losses) on equity securities			(59	)			160				(219	)			N.M.
Policy fee income			307				211				96				45	%
Other			480				21				459				2186	%
Total revenue			32,308				10,281				22,027				214	%
Expenses
Losses and loss adjustment expenses			24,225				7,405				16,820				227	%
Policy acquisition and other underwriting expenses			10,360				4,067				6,293				155	%
General and administrative personnel expenses			4,256				2,544				1,712				67	%
Interest expense			1				—				1				N.M.
Other operating expenses			3,771				2,262				1,509				67	%
Total expenses			42,613				16,278				26,335				162	%
Loss before income taxes			(10,305	)			(5,997	)			(4,308	)			72	%
Income tax benefit			(2,432	)			(1,490	)			(942	)			63	%
Net loss			(7,873	)			(4,507	)			(3,366	)			75	%
Redeemable preferred stock dividends			(2,202	)			—				(2,202	)			N.M.
Net loss attributable to common shareholders		$	(10,075	)		$	(4,507	)		$	(5,568	)			124	%
Basic loss per share		$	(0.12	)		$	(0.06	)		$	(0.06	)			100	%

 

N.M.—Percentage

change not qualitatively meaningful

 

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The following table presents our unaudited consolidated and combined statement of operations for the nine months ended September 30, 2021 and 2020, and the dollar and percentage change between the two periods. Note that all amounts presented are in US thousands, unless otherwise noted:

 

		Nine months ended September 30,								Change				% Change
(in thousands, except per share amount)		2021				2020
Revenue
Gross premiums earned		$	119,364			$	54,829			$	64,535				118	%
Premiums ceded			(42,229	)			(19,078	)			(23,151	)			121	%
Net premiums earned			77,135				35,751				41,384				116	%
Net investment income			317				673				(356	)			-53	%
Net realized investment gains (losses)			582				(216	)			798				N.M.
Net unrealized investment gains (losses) on equity securities			34				(71	)			105				N.M.
Policy fee income			856				584				272				47	%
Other			1,130				84				1,046				1245	%
Total revenue			80,054				36,805				43,249				118	%
Expenses
Losses and loss adjustment expenses			52,976				22,043				30,933				140	%
Policy acquisition and other underwriting expenses			23,612				10,641				12,971				122	%
General and administrative personnel expenses			11,368				7,891				3,477				44	%
Interest expense			91				1				90				N.M.
Other operating expenses			10,581				6,173				4,408				71	%
Total expenses			98,628				46,749				51,879				111	%
Loss before income taxes			(18,574	)			(9,944	)			(8,630	)			87	%
Income tax benefit			(3,905	)			(2,429	)			(1,476	)			61	%
Net loss			(14,669	)			(7,515	)			(7,154	)			95	%
Redeemable preferred stock dividends			(5,175	)			—				(5,175	)			N.M.
Net loss attributable to common shareholders		$	(19,844	)		$	(7,515	)		$	(12,329	)			164	%
Basic loss per share		$	(0.25	)		$	(0.10	)		$	(0.15	)			150	%

 

N.M.—Percentage

change not qualitatively meaningful

Revenue

Gross premiums earned

Gross premiums earned increased $64,535, or 118%, from $54,829 for the nine months ended September 30, 2020 to $119,364 for the nine months ended September 30, 2021, and increased $31,699, or 160%, from $19,854 for the three months ended September 30, 2020 to $51,553 for the three months ended September 30, 2021. The increases in both periods were primarily attributable to the new business assumed from United and increased policies in force from growth in the company’s business.

Premiums ceded

Premiums ceded for the nine-months periods September 30, 2021 and 2020 were $42,229 and $19,078, respectively, representing 35% and 35%, respectively, of gross premiums earned. Premiums ceded, excluding Florida Hurricane Catastrophe Fund and Claddaugh Casualty Insurance Company Ltd., an affiliated reinsurance company, were $31,414 and $14,970 for the nine-months periods September 30, 2021 and 2020, respectively. Premiums ceded for the three-months periods September 30, 2021 and 2020 were $20,135 and $10,171,

 

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respectively, representing 39% and 51%, respectively, of gross premiums earned. Our premiums ceded represent costs of reinsurance to cover potential losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance agreements or to assume a proportional share of losses defined in a quota share arrangement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. The nine-months period increase of $23,151 and the three-months period increase of $9,964 were primarily attributable to higher reinsurance costs for the 2021 contract year due to increased total insured value as a result of premium growth and expansion.

Net premiums earned

Net premiums earned for the nine months ended September 30, 2021 and 2020 were $77,135 and $35,751, respectively, and for the three months ended September 30, 2021 and 2020 were $31,418 and $9,683, respectively, which reflect gross premiums earned less reinsurance costs as described above.

Net investment income

Net investment income decreased $356, or 53%, from $673 for the nine months ended September 30, 2020 to $317 for the nine months ended September 30, 2021. The decrease was primarily attributable to lower interest rates on cash and fixed maturity securities during 2021.

Policy fee income

Policy fee income increased $272, or 47%, from $584 for the nine months ended September 30, 2020 to $856 for the nine months ended September 30, 2021, which was primarily attributable to increased policies in force from growth in the company’s business.

Other

Other income increased $1,046, or 1245%, from $84 for the nine months ended September 30, 2020 to $1,130 for the nine months ended September 30, 2021. The increase was primarily attributable to software license revenue charged to affiliates starting in March 2021.

Expenses

Losses and loss adjustment expenses

Losses and loss adjustment expenses for the nine months ended September 30, 2021 and 2020 were $52,976 and $22,043, respectively, and for the three months ended September 30, 2021 and 2020 were $24,225 and $7,405, respectively. The increases in both periods were attributable to the growth of our policies in force and losses from the reinsurance of the United policies starting June 1, 2021.

Policy acquisition and other underwriting expenses

Total amortized policy acquisition expenses increased $11,319 from $9,222 for the nine months ended September 30, 2020 to $20,541 for the nine months ended September 30, 2021 reflecting the organic growth of our policies in force. Policy acquisition and other underwriting expenses, which includes amortized agent commissions, increased $12,971, or 122%, from $10,641 for the nine months ended September 30, 2020 to $23,612 for the nine months ended September 30, 2021.

Total amortized policy acquisition expenses increased $5,714 from $3,536 for the three months ended September 30, 2020 to $9,250 for the three months ended September 30, 2021. Policy acquisition and other underwriting expenses increased $6,293, or 155%, from $4,067 for the three months ended September 30, 2020 to $10,360 for the three

 

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months ended September 30, 2021. The increase was primarily attributable to higher agent commissions and property inspection costs associated with the organic growth in the quantity of policies in force, and $3.5 million and $4.7 million for the three and nine months ended September 30 2021 pertaining to ceding commissions related to the reinsured United policies.

General and administrative personnel expenses

General and administrative personnel expenses increased $3,477, or 44%, from $7,891 for the nine months ended September 30, 2020 to $11,368 for the nine months ended September 30, 2021. The change is primarily attributable to increases in salaries and benefit as staff is added to permit the company to operate on a standalone basis. The increase is further attributable to greater restricted stock expense but was offset by higher compensation expense capitalized as the cost of software developed for internal use.

Other operating expenses

Other operating expenses increased $4,408, or 71%, from $6,173 for the nine months ended September 30, 2020 to $10,581 for the nine months ended September 30, 2021. The change was primarily attributable to the $1,586 increase in cost of claims department personnel services received from an affiliate as part of an intercompany services arrangement that began in March 2021, $650 higher professional fees, $428 of greater corporate overhead allocated and $375 of higher bank fees.

 

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Comparison of the Years Ended December 31, 2020 and 2019

 

The following table presents our consolidated and combined statement of operations for the years ended December 31, 2020 and 2019, and the dollar and percentage change between the two periods. Note that all amounts presented are in US thousands, unless otherwise noted:

 

		Years ended December 31,								Change				% Change
(in thousands, except per share amount)		2020				2019
Revenue
Gross premiums earned		$	78,836			$	30,904			$	47,932				155	%
Premiums ceded			(28,822	)			(11,076	)			(17,746	)			160	%
Net premiums earned			50,014				19,828				30,186				152	%
Net investment income			814				1,056				(242	)			-23	%
Net realized investment gains (losses)			(43	)			(8	)			(35	)			N.M.
Net unrealized investment gains (losses) on equity securities			26				489				(463	)			-95	%
Policy fee income			819				424				395				93	%
Other			97				40				57				143	%
Total revenue			51,727				21,829				29,898				137	%
Expenses
Losses and loss adjustment expenses			34,059				8,505				25,554				300	%
Policy acquisition and other underwriting expenses			15,579				6,897				8,682				126	%
General and administrative personnel expenses			10,782				8,158				2,624				32	%
Interest expense			2				2				—				N.M.
Other operating expenses			7,766				6,758				1,008				15	%
Total expenses			68,188				30,320				37,868				125	%
Loss before income taxes			(16,461	)			(8,491	)			(7,970	)			94	%
Income tax benefit			(4,037	)			(1,580	)			(2,457	)			156	%
Net loss			(12,424	)			(6,911	)			(5,513	)			80	%
Redeemable preferred stock dividends			—				—				—				N.M.
Net loss attributable to common shareholders		$	(12,424	)		$	(6,911	)		$	(5,513	)			80	%
Basic loss per share		$	(0.17	)		$	(0.09	)		$	(0.08	)			89	%

N.M.—Percentage change not qualitatively meaningful

Revenue

Gross premiums earned

Gross premiums earned increased $47,932, or 155%, from $30,904 for the year ended December 31, 2019 to $78,836 for the year ended December 31, 2020, which was primarily attributable to growth in policies in force, partially offset by normal policy attrition.

Premiums ceded

Premiums ceded for the years ended December 31, 2020 and 2019 were $28,822 and $11,076, respectively, representing 37% and 36%, respectively, of gross premiums earned. Premiums ceded, excluding Florida Hurricane Catastrophe Fund and Claddaugh Casualty Insurance Company Ltd., an affiliated reinsurance

 

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