Arthur Morris & Company Limited

Transcription

1 Arthur Morris & Company Limited Chartered Professional Accountants Century House 1 6 Par-Ja-VIIIe Road Hamilton HMOS Bermuda Tel: Fax: Independent Auditor's Report To the Board of Directors We have audited the accompanying condensed financial statements of Claddaugh Casualty Insurance Company Ltd. (the "Company"), which comprise the condensed balance sheet as of December 31, 2016, and the related condensed statement of income and condensed statement of capital and surplus for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Condensed Financial Statements Management is responsible for the preparation and fair presentation of the condensed financial statements based on the fmancial repmting provisions of The Insurance Act 1978, amendments thereto and the Insurance Account Rules 2016 with respect to Condensed General Purpose Financial Statements (the "Legislation"). Management is also responsible for the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these condensed financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perfmm the audit to obtain reasonable assurance about whether the condensed financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the condensed financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the condensed financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the condensed financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the condensed financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

2 Independent Auditor's Report Page 2. Basis for Adverse Opinion on Accounting Standards Generally Accepted in the United States of America As described in Note 4 to the condensed financial statements, the condensed financial statements are prepared by the Company based on the financial reporting provisions of the Legislation, which is a basis of accounting other than accounting standards generally accepted in the United States of America. The effects on the condensed financial statements of the variances between the basis of accounting described in Note 4 and accounting standards generally accepted in the United States of America are material. Adverse Opinion on Accounting Standards Generally Accepted in the United States of America In our opinion, because of the significance of the matter discussed in the "Basis for Adverse Opinion on accounting standards generally accepted in the United States of America" paragraph, the condensed financial statements referred to above do not present fairly, in accordance with accounting standards generally accepted in the United States of America, the financial position of the Company as of December 31, 2016, or the results of its operations or its cash flows for the year then ended. Opinion on Condensed Financial Statements In our opinion, the condensed financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and the results of its operations for the year then ended, in accordance with the financial reporting provisions of the Legislation. ~~~~~ Hamilton, Bermuda April28, 2017

3 CONDENSED CONSOLIDATED BALANCE SHEET Oladdaugh Casualty Insurance Company Ltd. As al December 31, 2016 expressed in lrruicn:i:iti':e';;d"<s<"to:; a ti:: e""'s"d~o~lli::a:: rs: , LINE No (f) 3. (f) 4. (f) (g) (h) 5. CASH AND CASH EQUIVALENTS QUOTED INVESTMENTS: Bonds and Debentures i. Held lo maturity li. Other Total Bonds and Debentures Equities I. Common stocks ji. Preferred stocks iii. Mutual funds Total equll!es Olher quoted investments Total quoted investments UNQUOTED INVESTMENTS: Bonds and Debentures I. Held to maturtly il. Other Total Bonds and Debentures Equities i. Common stocks 11. Preferred stocks Iii Mutual funds Tolal equllies Other unquoted lnveslrnenls Total unquoted Investments INVESTMENTS IN AND ADVANCES TO AFFILIATES Unregulated enlilies that conduct ancillary seivices Unregulated non.financial operating entities Unregulated financial operating enlilies Regulated non lnsurance financial operallng entities Regulated Insurance financial operallng enliues T olallnvestments in affiliates Advances to affiliates Total investments in and advances lo affiliates INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE: First liens Other lhan first liens Tolal investments In mortgage loans on real estate os2 I I ,632 I lll l f jl ll-- -l I 24,358,539 f jlf POLICY LOANS 7. REAL ESTATE: Occupied by the company (less encumbrances) Other properties (less encumbrancas) Total real estate f jl f COLLATERAL LOANS 9. INVESTMENT INCOME DUE AND ACCRUED 10. ACCOUNTS AND PREMIUMS RECEIVABLE: In course of collection Deferred - not yel due Receivables from retrocessional contracts Total accounts and premiums receivable 11. REINSURANCE BALANCES RECEIVABLE: Foreign affiliates Domestic affiliates Pools & associations All other Insurers Total reinsurance balance receivable 12. FUNDS HELD BY CEDING REINSURERS

4 CONDENSED CONSOLIDATED BALANCE SHEET Claddaugh Casualty Insurance Company Ltd. As al December 31, 2016 e~pressed In I United States Dollars LINE No. 13. (f) (g) (h) (i) m (k) 14. SUNDRY ASSETS: Derivative Instruments Segregated accounts companies- long-term business vari<~ b le annullles Segregated accounts companies - long-term busin~ssother Segregated accounts companies - general business Deposit assets Deferred acquisition costs Net receivables for inveslments sold LETTERS OF CREDIT, GUARANTEES AND OTHER INSTRUMENTS Letters of credit Guaranlees Other instruments Total tellers o.f credit. guarantees and other lnstr11ments 2o1s I l. ---'2==o"' 1s=---_ TOTAL TOTAL INSURANCE RESERVES, OTHER LIABILITIES AND STATUTORY CAPITAL AND SURPLUS UNEARNED PREMIUM RESERVE Gross unearned premium reserves Less; Ceded unearned premium reserve I. Foreign affiliates il. Domestic affiliates ill. Pools & associations lv. All other insurers Total ceded unearned premium reserve Net unearned premium reserve LOSS AND LOSS EXPENSE PROVISIONS: Gross loss and loss expense provisions Less ; Reinsurance recoverable balance i. Foreign affiliates II. Domestic affiliates iii. Pools & associations iv. All other reinsurers Total reinsurance recoverable balance Net loss and loss expense provisions 106, ,885, I 11, I 11,173, , ,075 I 400,4 12 I 4,683, , OTHER GENERAL BUSINESS INSURANCE RESERVES 19. TOTAL GENERAL BUSINESS INSURANCE RESERVES LONG-TERM BUSINESS INSURANCE RESERVES 20. RESERVE FOR REPORTED CLAIMS 21. RESERVE FOR UNREPORTED CLAIMS 22. POLICY RESERVES- LIFE 23. POLICY RESERVES- ACCIDENT AND HEALTH 24. POLICYHOLDERS' FUNDS ON DEPOSIT 25. LIABILITY FOR FUTURE POLICYHOLDERS' DIVIDENDS 26. OTHER LONG-TERM BUSIN ESS INSURANCE RESERVES 27. TOTAL LONG-TERM BUSINESS INSURANCE RESERVES Total Gross Long-Term Business Insurance Reserves Less: Reinsurance recoverable balance on long-term business (i) Foreign Affiliates (il) Domestic Affillaties (Ill) Pools and Associations (lv) All Other Insurers Total Reinsurance Recoverable Bat~nce Total Net Long-Term Business Insurance Reserves OTHER LIABILITIES f------lllf

5 CONDENSED CONSOLIDATED BALANCE SHEET g y p y As at December 31, 2016 expressed in I United States Dollars LINE No. 28. INSURANCE AND REINSURANCE BALANCES PAYABLE 29. COMMISSIONS, EXPENSES, FEES AND TAXES PAYABLE 30. LOANS AND NOTES PAYABLE ' '2""0'-'-'16,,1 Ll,2,0"-'15, -' 40.32t I 1so.414 I 6, I 31. INCOME TAXES PAYABLE DEFERRED INCOME TAXES 32. AMOUNTS DUE TO AFFILIATES 33. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 34. FUNDS HELD UNDER REINSURANCE CONTRACTS: 35. DIVIDENDS PAYABLE 36. (<t) (I) (g) (h) 37. SUNDRY LIABILITIES: LEITERS OF CREDIT, GUARANTEES AND OTHER INSTRUMENTS: Leiters or credit Guarantees Other Instruments Total letters of credit, guarantees and other instruments 62055

6 CONDENSED CONSOLIDATED BALANCE SHEET g ty p y Asal e~presse d in December 31, 2016 JUnited States Dollars LINE No. 38. TOTAL OTHER LIABILITIES 39, TOTAL INSURANCE RESERVES AND OTHER LIABILITIES 2016 II ,830, ,811,892 CAPITAL AND SURPLUS 40. TOTAL CAPITAL AND SURPLUS 41. TOTAL ,073, ,092,131 96,885,829 TRUE TRUE

7 CONDENSED CONSOLIDATED STATEMENT OF INCOME Claddaugh Casualty Insurance Company Ltd. As al December 31, 2016 expressed In United States Dollars LINE No. GENERAL BUSINESS UNDERW RITING INCOME 2016 I I GROSS PREMIUMS WRITTEN {a) Direct gross premiums written {b) Assumed gross premiums wtilten {c) Total g(oss premiums wlilten 2. REINSURANCE PREMIUMS CEDED 3. NET PREMIUMS WRITTEN 4. INCREASE (DECREASE) IN UNEARNED PREMIUMS 5, NET PREMIUMS EARNED 6. OTHER INSURANCE INCOME 7. TOTAL GENERAL BUSINESS UNDERWRITING INCOME 8. INCURRED GENERAL BUSINESS UNDERWRITING EXPENSES 9, COMMISSIONS AND BROKERAGE 10. TOTAL GENERAL BUSINESS UNDERWRITING EXPENSES 11. NET UNDERWRITING PROFIT {LOSS) GENERAL BUSINESS LONG-TERM BUSINESS INCOME 12. GROSS PREMIUMS AND OTHER CONSIDERATIONS: Direcl gross premiums and other considerations Assumed gross premiums and olher considerations Tolal gross premiums and other consideralions 31, ,276, ,680,042 31,278,567 4,9oo,ooo o.ooo 1 26,780,042 27,938, ,37o I (10,347,790}1 27,187,412 17,590,777 2, I 29,291, , ,287,692 I 2,164,870 I ,567,157 16,303, l l l 13. PREMIUMS CEDED 14. NET PREMIUMS AND OTHER CONSIDERATIONS: Life AnnutUes {c) Accident and healih Total net premiums and otherconside(alions 15. OTHER INSURANCE INCOME 16. TOTAL LONG-TERM BUSINESS INCOME LONG-TERM BUSINESS DEDUCTIONS AND EXPENSES 17. CLAIMS- LIFE 18. POLICYHOLDERS' DIVIDENDS 19. SURRENDERS 20. MATURITIES 21. ANNUITIES 22. ACCIDENT AND HEALTH BENEFITS 23. COMMISSIONS 24. OTHER 25. TOTAL LONG-TERM BUSINESS DEDUCTIONS AND EXPENSES 26. INCREASE (DECREASE) IN POLICY RESERVES (ACTUARIAL LIABILITIES): {a) life Annuities Accident and hea\lh Total increase {decrease) In policy reserves 27. TOTAL LONG-TERM BUSINESS EXPENSES 28. NET UN DERWRITING PROFIT (LOSS)- LONG-TERM BUSINESS 29. COMBINED NET UNDERWRITING RESULTS BEFORE THE UNDERNOTED ITEMS 21,567,157 16,303,065

8 LINE No UNDERNOTED ITEMS 30. COMBINED OPERATING EXPENSE General and administration Personnel cost Oiher Total combined operating expenses ,098 ~ a 31. COMBINED INVESTMENT INCOME - NET 143,790 I 16, COMBINED OTHER INCOME (DEDUCTIONS) 33. COMBINED INCOME BEFORE TAXES 21,453, COMBINED INCOME TAXES (IF APPLICABLE): Current Deferred 6[ ) Total 6,200, COMBINED INCOME BEFORE REALIZED GAINS (LOSSES) 13,177,609 9,883, COMBINED REALIZED GAINS (LOSSES) 37. COMBINED INTEREST CHARGES 36. NET INCOME 13177,609 9,883,313

9 CONDENSED CONSOLIDATED STATEMENT OF CAPITAL AND SURPLUS g y p y As at expressed In December 31, 2016 United Stales Dollars LINE No. L 2~0~16~~~ Ll 2~0~1~5~ 1. CAPITAL: Capital Stock (i) Common 'i's'-'ha,r_,e,_s- ---,-,..,...-,..,.-,-, authorized shares or par value $ each issued and fully paid shares 12o,ooo 1 12o,ooo I (ii) (A) Prererred,,.;s!!Jhgar~e~s:'-----, aulhorized I I share~ of par value.. each tssued and fully paid shares aggregate liquidation value for - ;~~:1 I,.======"'-'subsidiary: lshares of par value each Issued and fully paid shares aggregate liquidalion value for - ;~~~~ I (ill) Treasuryi"S,_,h,ar_,e,_s -----, repurchased I I shares of par value.. each Issued Conhibuled surplus Any other fixed oapllal (i) Hybrid capllallnstrumenls (ii) Guaranlees and others (Ill) Total any other fixed capital Total Capital s5.sz7,3s3 I ,383 I I--ll ~ ; 56.,047,383 56,047, SURPLUS: (f) Surplus- Beginning of Year Add: Income for the year Less: Dividends paid and payable Add (Deduct) change in unrealized appreciation (depreciation) of Investments Add (Deduct) change In any other surplus Surplus- End of Year 19, I 9.143,241 13,177,609 9,863, MINORITY INTEREST 4. TOTAL CAPITAL AND SURPLUS 75,073,937

10 CLADDAUGH CASUALTY INSURANCE CO:MPANY LTD. NOTES TO CONDENSED GENERAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2016 PART I: GENERAL NOTES TO THE FINANCIAL STATEMENTS 1. Claddaugh Casualty Insurance Company Ltd. (the "Company") was incorporated under the laws of Bermuda on May 6, The Company is a wholly-owned subsidiary of HCI Group, Inc. (the "Parent'') (fmmerly known as Homeowner's Choice, Inc.), a company incorporated in the United States of America. The Company is registered under and regulated by the Insurance Act 1978 and its related regulations. 2. The Company reinsures I-ICI Group, Inc. and Casualty Insurance Company, Jnc. ("HCI") for excess property only losses related to Homeowners property perils & dwelling. Effective June 1, 2012 through May 31, 2017, the Company participated in a catastrophe reinsurance agreement with HCI. The agreement covers underlying layer is 100% of $30 million (2015: $30 million) excess of $20 million (2015: $16 million) per occmtence underlying layer is 100% of$60 million (2015: $60 million) excess of $20 million per contract year aggregate (2015 : $16 million). This coverage is reinsmed to Aeolus. Additional coverage consists of20% (2015: 20%) pat1icipation ofhomeowners Choice's working layer consisting of $30 million (20 15: $58 million) excess of $50 million (201 5: $46 million). This additional coverage is reinsmed to Oxbridge Re and Aeolus Re. The Underlying Aggregate Excess of Loss policy is effective June 1, 2014 through May 31, From June 1, 2015 to May 31, 2016, the company covers claims up to 90% of$975 million excess of $345 million. From June 1, 2016 to May 31, 2017, the company covers up to 20% of earned premium less any adjustment value plus $13 million. The Company has catasttophe reinsurance agreements with Oxbridge Re and Aeolus Re. From June 1, 2016 to May 31,2017, Oxbridge covers claims up to 20% of$30 million excess of$50 million; Aeolus covers claims up to 20% of $30 million excess of $20 million, and up to 20% of $30 million excess of$50 million. 3. The condensed general purpose financial statements have been prepared in conformity with the financial repmting provisions of the Insurance Act 1978, amendments thereto and the Insurance Account Rules 2016 with respect to Condensed General Purpose Financial Statements (the "Legislation"). The condensed general purpose financial statements are based on United States of America Generally Accepted Accounting Principles ("US GAAP") but are in accordance with the reporting requirements of the Legislation, which varies in certain respects from US GAAP. 4. The financial statements are prepared in accordance with the Insurance Act 1978, as amended by the Insurance Amendment Act 1995, and reflect the following policies: Premiums Premiums are eamed on a pro rata basis over the policy term. The pmtion of premiums that will be earned in the future are defened and reported as unearned premiums. Losses and loss expense provisions The reserve for losses and loss adjustment expenses comprises estimates for specific case reserves and losses incurred but not repmted. Specific case reserves are recorded upon notification of a claim impacting the layers underwritten by the Company. Losses incurred but not reported reserve is established based on recommendations of an independent actuaty using past loss experience and case basis evaluation.

11 PART I: GENERAL NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Although management believes the reserve is reasonable, the ultimate cost of settlement of claims may vary materially from the amount recorded. Future adjustments to the amounts recorded as at December 31, 2016, resulting fi om the continual review process, as we11 as differences between estimates and ultimate settlements, will be reflected in the Company's statement of operations in future periods when such adjustments become known. Cash and cash equivalents Cash and cash equivalents comprise money market funds that are highly liquid and readily conve1tible into a known amount of cash. Federal income taxes The Company accounts for income taxes under Accounting Standards Codification No. 740 "Accounting for Income Taxes" ("ASC 740"). Under the asset and liability method of ASC No. 740, defetted tax assets and liabilities are recognised for the futme tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit canyfoiwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporaty differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date and defened tax assets are recognised if it is more likely than not that a benefit will be realised. Interest income Interest income is recorded on an accrual basis. 5. Income is recognised on the following basis: Premium income- See PattI note 4 Commission income-nia Interest income - See Part 1 note Not applicable PART JI : NOTES TO THE CONSOLIDATED STATEMENT OF CAPITAL AND SURPLUS 1. Capital Stock Authorised, issued and fully paid 120,000 common shares of par value $1 each. Not applicable. 2. Not applicable. PART III: NOTES TO THE CONSOLIDATED BALANCE SHEET 1. The Company has entered into a trust agreement with Homeowners Choice to establish a trust account which secures the Company's obligations. The Company is required to have assets in the trust account which Homeowners Choice can draw upon to settle claims or other balances due. Cash and cash equivalents with a fair value of $79,253,722 (2015: $89,332,932) were held in the trust account as of December 31,2016.

12 PART III: NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED) 2~3. Not applicable. 4. Amounts advanced to affiliates are interest free, unsecured and have no fixed terms of repayments Not applicable. 9. Accrued interest from investments held is $16, Not applicable. 13. Sundty assets are composed of deferred tax assets and prepaid expenses. Deferred tax asset amount $929,548. Prepaid expenses represents prepaid management fee and out of pocket expenses in the amount of $24, Not applicable. 16. See Part 1 note The following table provides a reconciliation ofthe activity in the reserves for insurance losses and loss adjustment expenses. Gross loss and loss expense provisions at beginning of year Less: Reinsurance recoverable at beginning of year Net loss and Joss expense provisions at beginning of year Net losses incurred and net loss expenses incurred related to: Cunent year Prior years Total net incurred losses & loss expenses Net losses and loss expenses paid or payable related to: Current year Prior years Total losses and loss expenses paid or payable Net loss and loss expense provisions at end of year Add: Reinsurance recoverable at end of year Gross loss and loss expense provisions at end of year 2016 $400, ,412 4,371,952 1,187,055 5,559,007 (160,441) (1,115,903) (1,276,344) 4,683,075.$ 4,683, $523, , , ,402 1,287,692 (897,843) (513,355) (1,411,198) 400,412 $ 400,412 No premium adjustments were made. Gross loss and loss expense provisions have increased from $400,412 last year to $4,683,075 this year. The increase is mainly due to the increase in TBNR, which was result from Hurricane Matthew. Not applicable. 20~27. Not applicable. 28. The insurance and reinsurance balances payable balance of $40,321 represents loss payable to the HCl Group. 29. The commissions, expenses, fees and tax payable balance of $1,191,892 represents the commission for HCl Group.

13 PART Til: NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED) 30. Not applicable. 31. The Company made an irrevocable election under Section 953 of the Internal Revenue Code of 1986, as amended, to treat the Company as a domestic insurance company for United States federal income tax purposes. As a result of the "domestic election", the Company is subject to U.S. taxation on its worldwide income as if it were a U.S. corporation. The Company and its Parent file a consolidated federal income tax return and the balance owing, or recoverable, is paid by or paid to, the Parent company. Income tax expense in the Company's statement of income and retained eamings has been allocated under Intemal Revenue Code Section 1552 (2). The components of income tax expense are as follows: Current income tax expense Deferred income tax expense (benefit) The component of income tax payable are as follows: Current income tax payable Deferred income tax 2016 $ 8,243,249 32,310 $ 8,275, $ 651,685 $651, $ 6,694,536 (494,343) $ 6,200, $56,151 $ 56, Amounts due to affiliates are interest free, unsecured and have no fixed terms of repayment. 33. Accounts payable and accrued expenses in the amount of $37,635 represent the accrued secretarial fee, actuarial fee, and audit fee Not applicable. 36. Sundry liabilities of$62,055 represent the deferred brokerage income. 37. Not applicable. PART N: NOTES TO THE CONSOLIDATED STATEMENT OF INCOME 6. The other insurance income of $2,103,621 represents the earned ceded underwriting income from the working layer policy. 15. Not applicable. 32. Not applicable. 36. Not applicable.