UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20172022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number001-34126

HCI Group, Inc.

(Exact name of Registrant as specified in its charter)

Florida

20-5961396

(State of Incorporation)

(IRS Employer

Identification No.)

5300 West Cypress Street, Suite 100

Tampa, FL 336073802 Coconut Palm Drive

Tampa, FL33619

(Address, including zip code, of principal executive offices)

(813) (813) 849-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Shares, no par value

HCI

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-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 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes No ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes No

The aggregate market value of the common stock held bynon-affiliates of the registrant as of June 30, 2017,2022, computed by reference to the price at which the common stock was last sold on June 30, 2017,2022, was $375,747,684.$486,709,703.

The number of shares outstanding of the registrant’s common stock, no par value, on February 27, 2018March 2, 2023 was 9,458,442.8,596,873.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Form10-K is incorporated by reference from the registrant’s definitive proxy statement which will be filed not later than 120 days after the end of the fiscal year covered by this Form10-K.



HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page

PART I:

Item 1

Business

Page

2-14

Item 1A

Risk FactorsPART I:

14-29

Item 1

Business

2-9

Item 1A

Risk Factors

9-18

Item 1B

Unresolved Staff Comments

18

29

Item 2

Properties

19

29-30

Item 3

Legal Proceedings

20

31

Item 4

Mine Safety Disclosures

20

31
PART II:

PART II:

Item 5

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21-23

32-35

Item 6

Selected Financial DataReserved

23

36-37

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24-34

38-55

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

34-35

56-57

Item 8

Financial Statements and Supplementary Data

36-112

58-140

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

113

141

Item 9A

Controls and Procedures

113

141-142

Item 9B

Other Information

113

142
PART III:

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

114

PART III:

Item 10

Directors, Executive Officers and Corporate Governance

115

143

Item 11

Executive Compensation

115

143

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

115

143

Item 13

Certain Relationships and Related Transactions, and Director Independence

115

143

Item 14

Principal AccountingAccountant Fees and Services

115

144
PART IV:

PART IV:

Item 15

Exhibits,Exhibit and Financial Statement Schedules

145-152

Signatures

Certifications116-121

Signatures

Certifications


PART I

ITEM 1 –Business

General

Incorporated in 2006, HCI Group, Inc. is a Florida-based company that, through its subsidiaries, is engaged in a variety of business activities, including property and casualty insurance, reinsurance,information technology services, insurance management, real estate and information technology. Its principal business is property and casualty insurance. HCI was incorporated in 2006.reinsurance. References to “we,” “our,” “us,” “the Company,” or “HCI” in this Form10-K generally refer to HCI Group, Inc. and its subsidiaries. Our principal executive offices are located at 5300 West Cypress Street, Suite 100,3802 Coconut Palm Drive, Tampa, Florida 33607,33619, and our telephone number is (813)849-9500.

Based After the reorganization of our business in the first quarter of 2021, we now manage our operations in the following organizational segments, based on our organizational structure, revenue sources,managerial emphasis and evaluation of financial and operating performances by management, we manage four operating divisions, which includes the following operations:performances:

a)Insurance Operations

Property and casualty insurance

Reinsurance

b)Other Operations

Real estate

Information technology

a)
HCPCI Insurance Operations
Property and casualty insurance
Reinsurance and other auxiliary operations
b)
TypTap Group
Property and casualty insurance
Information technology
c)
Real Estate Operations
d)
Other Operations
Holding company operations

HCPCI Insurance Operations

Property and Casualty Insurance

We sell our property and casualty insurance products through two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), our principal operating subsidiary, and TypTap Insurance Company (“TypTap”). HCPCI was incorporated and began operations in 2007. TypTap was incorporated and began operations in 2016. We provideHCPCI provides various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. Through HCPCI, we currently provide property and casualty insurance to homeowners, condominium owners and tenants onfor properties primarily located in Florida and in various states outside of Florida. TypTap primarily offers standalone flood policies to Florida homeowners through an online platform that is designed to be accessible by any Internet capable device. HCPCI’s and TypTap’s operations are supported by HCI and the following wholly owned subsidiaries of HCI:

Homeowners Choice Managers, Inc. – a managing general agent providing marketing, underwriting, claims settlement, accounting and financial services to HCPCI;

Southern Administration, Inc. – provides policy administration servicesDue to the policyholders with HCPCI;

TypTap Management Company – provides managerialreduced availability and operational servicesaffordability of flood reinsurance coverage, HCPCI in 2023 will cease to TypTap; and
offer flood insurance policies. Gross earned premiums from such policies comprised less than 1% of total HCPCI gross premiums earned during 2022.

Claddaugh Casualty Insurance Company Ltd. – participates in the reinsurance programs of HCPCI and TypTap. (SeeReinsurance below)

HCPCI began operations by participating in a“take-out “take-out program” through which we assumed insurance policies issued by Citizens Property Insurance Corporation (“Citizens”), a Florida state-supported insurer. Thetake-out program is a legislatively mandated program designed to reduce the State’s risk exposure by encouraging private companies to assume policies from Citizens. We have assumed policies in a series of separate transactions, which took place from July 2007 through December 2017. In addition, we acquired policies from one Florida carrier in November 2011. Substantially all of our premium revenue since inception has come from the policies acquired in these transactions and subsequent renewals.

Citizens requires us to offer renewals on assumed policies for a period of three years subsequent to their initial expiration. We strive to retain assumed policies by offering competitive rates and exceptional service to our policyholders. However, policyholders may cancel their policies at any time and place their coverage with another insurance company. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens aswhen opportunities arise, providedarise.

As an established carrier, HCPCI has also accepted the assumedtransfer or assumption of policies meet our underwriting criteria. We also continually explore accretive opportunities to acquire business from other insurance companies.companies in Florida or any states in which it operates. For example, in 2011 we accepted approximately 70,000 homeowners’ insurance policies representing $106 million in written premium from a carrier placed into receivership, approximately 43,000 homeowners’ insurance policies representing $69 million of annualized premium in April 2020 from a ratings-downgraded carrier that ceased conducting business, and approximately 6,000 homeowners’ insurance policies representing $20 million of annualized gross written premium from a carrier liquidated in August 2021.

We plan to seek opportunities to enterRecently, HCPCI assumed personal lines insurance business in the propertystates of Connecticut, New Jersey, Massachusetts, and casualtyRhode Island (collectively “Northeast Region”) from United Property & Casualty Insurance Company, an insurance marketsubsidiary of United Insurance Holdings Corporation (“United”). HCPCI began renewing and/or replacing United policies in two states of the Northeast Region in December 2021, a third state in January 2022, and establish our presencethe fourth state in otherApril 2022. More recently, HCPCI assumed personal lines insurance business in the states especially with residential flood insurance. During 2017,of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”) from United. HCPCI received regulatory approvalbegan renewing United policies in South Carolina in September 2022. HCPCI is authorized to write residential property and casualty insurance in the states of Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, New Jersey, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas. Written premium generated by HCPCI in states other than Florida during 2022, including from assumed business, totaled approximately $38.5 million.

2


Reinsurance and other auxiliary operations

We have a Bermuda domiciled wholly owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd (“Claddaugh”). We selectively retain risk in Claddaugh, reducing the cost of third party reinsurance. Claddaugh fully collateralizes its exposure to HCPCI and TypTap Insurance Company (“TypTap”) by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts, however Claddaugh did not enter into any retrocession contracts for the 2022-2023 treaty year. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services.

For the years ended December 31, 2022, 2021 and 2020, revenues from HCPCI insurance operations before intracompany elimination represented 66.1%, 74.6% and 73.4%, respectively, of total revenues of all operating segments. At December 31, 2022 and 2021, HCPCI insurance operations’ total assets represented 53.4% and 58.7%, respectively, of the combined assets of all operating segments. See Note 15 -- “Segment Information” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

TypTap Group

TypTap Insurance Group, Inc. (“TTIG”), our majority-owned subsidiary, currently has yet to commence operationsfour subsidiaries: TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in these states.

Our operating and growth strategies for ourIndia. TTIG is primarily engaged in the property and casualty insurance business, focusing on standalone flood and homeowners multi-peril policies, and is currently using internally developed technology to collect and analyze claims and other supplemental data to generate savings and efficiency for its insurance operations.

In November 2021, we first announced our intention to list TTIG’s common shares on a major U.S. stock exchange through a planned initial public offering to raise additional capital to fund its growth plan. In January 2022, we announced our postponement of TTIG’s initial public offering due to market conditions not favorable to its success and realization of true value.

Property and Casualty Insurance

TypTap, TTIG’s insurance subsidiary, was incorporated and began operations in 2016 and has been the primary source of our organic growth in gross written premium since then. Gross written premium consists of the sum of direct premiums written and assumed premiums written. In its first year of operation in 2016, gross written premium was $2.5 million and by 2022 it has grown to $348.2 million. Since TypTap began applying for approval to offer homeowners coverage in states outside of Florida in October 2020, TypTap has received approvals from 28 states. Written premium generated by TypTap in states other than Florida during 2022, including from assumed business, totaled approximately $100.2 million. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently.

In addition to the expansion in TypTap business, we also expect continued growth from the policies assigned to TypTap in connection with the aforementioned assumed personal lines insurance business in the Northeast and Southeast Regions from United. TypTap began renewing and/or replacing United policies in two states of the Northeast Region in December 2021, a third state in January 2022, and the fourth state in April 2022. In June 2022, TypTap assumed personal lines insurance business in the Southeast Region from United and simultaneously began renewing United policies in South Carolina. TypTap began renewing and/or replacing United policies in Georgia in October 2022. In December 2022, TypTap began renewing United policies in North Carolina.

TypTap will also phase out its flood insurance products during 2023 due to the reduced availability and affordability of flood reinsurance coverage. Gross earned premiums from such policies comprised less than 5% of total TypTap gross premiums earned during 2022.

Information Technology

Our information technology operations include a team of experienced software developers with extensive knowledge in designing and creating web-based applications. The operations, which are located in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products and services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors. Products created thus far have been solely for use by the Company’s insurance-related subsidiaries.

SAMSTM

SAMS is an online policy administration platform used by HCPCI. SAMS processes the full life cycle of a policy from policy quoting and issuance to continually optimizeagency management, cash receipts/disbursements, claims reserving and claim payments.

3


HarmonyTM

Harmony is the existing booknext generation policy administration platform used by both HCPCI and TypTap. The innovative Harmony system easily supports multiple companies and their products. In addition to supporting the full life cycle of business, managea policy, Harmony also provides advanced underwriting capabilities as well as a simplified user experience for quoting and binding.

ClaimColonyTM

ClaimColony is an end-to-end claims management platform used by insurance companies, third-party administrators, independent adjusters and insurance litigation services. Its unique capabilities include customizable workflows, real-time reporting, vendor management, and the ability to efficiently handle high claim volume. ClaimColony supports the entire claim lifecycle and also provides accounting and bookkeeping support as well as rich integration capabilities with policy administration systems such as SAMS and Harmony.

AtlasViewer®

AtlasViewer is a mapping and data visualization platform. AtlasViewer allows users to map location-based data from multiple sources for a customized view of their data. The unique multilayered analysis improves decision making by providing unique insights into the data. Users can also securely share their maps and data with others, making the information instantly available to all invited users.

For the years ended December 31, 2022, 2021 and 2020, revenues from TypTap Group before intracompany elimination represented 29.9%, 22.7% and 15.5%, respectively, of total revenues of all operating segments. At December 31, 2022 and 2021, TypTap Group’s total assets represented 37.9% and 29.3%, respectively, of the combined assets of all operating segments. See Note 15 -- “Segment Information” to our costsconsolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Shared Support Services

HCPCI’s and expenses, diversify both geographicallyTypTap’s operations are supported by HCI Group, Inc. and with new product offerings, developcertain HCI subsidiaries. Such operational support services consist of general administration, marketing, underwriting, accounting, policy administration, claim adjusting, and deploy newinformation technology. In particular, we leverage our internally developed software technologies to streamline operations, including policydrive efficiency in claim process and claims settlement, identify underwriting profitability, and production,improve satisfaction of our policyholders and pursue accretive opportunitiesagents within our insurance business.

Nature of Our Business

The nature of our business is to acquire polices when they arise, whether from Citizens or other insurance companies.

We face various challenges to implementing our operating and growth strategies. Since we currently write policies that cover Florida homeowners, condominium owners, and tenants, we cover losses that may arise from, among other things, hurricanes and other catastrophic events.events such as tornadoes, floods and winter storms. The occurrence of any such catastrophes could have a significant adverse effect on our business, results of operations, and financial condition. To mitigate ourthe risk of suchassociated with catastrophic losses,events, we purchase reinsurance from other large insurance companies. Reinsurance is the largest cost to our property

and casualty insurance business. Even without catastrophic events, we may incur losses and loss adjustment expenses that deviate substantially from our estimates and that may exceed our reserves, in which case our net income and capital would decrease. Our operating and growth strategies may also be impacted by regulation of our business by the State of Florida and other states in which we may operate. For example, insurance regulators must approve our policy forms and premium rates as well as monitor our compliance with financial and regulatory requirements. Additionally, we may compete with large, well-established insurance companies, possessing greater financial resources, larger agency networks, and greater name recognition. See Item 1A, “Risk Factors,” below.

CompetitionBusiness Strategy

We operate in highly competitive markets where we face competition from national, regional and residual market insurance companies and, in the case of flood insurance, a program backed by the U.S. government. We believe that we have approximately 11 significant competitors writing homeowners’ property and casualty insurance in the state of Florida. Based on September 30, 2017 annualized premiums written data produced by the Florida Office of Insurance Regulation (“FLOIR”) which excludes State Farm Florida Insurance Company, we are the sixth largest provider of homeowners’ property and casualty insurance in the state.

Our competitors may have larger financial capacities, greater resource availability, and more diversification in terms of insurance coverage. Our competitors include companies which market their products through agents, as well as companies which sell insurance directly to their customers. In addition, large national insurers that left the Florida homeowners’ property and casualty insurance market more than a decade ago after numerous hurricanes impacted the state, may reenter the Florida market and they may have certain competitive advantages such as increased name recognition, increased loyalty of their customer base, and reduced policy acquisition costs. We may also face competition from new or temporary entrants in our markets. In some cases,markets, and such entrants may because of inexperience, desire for new business, or other reasons, price their insurance products below ours. Thiscreate pricing pressure maythat could lead to overall premium reductions across the Florida market.reductions.

Our competitive strategies focus on the following key areas:

Exceptional service – We are committed to maintaining superior service to our policyholders and agents.
Claims settlement practices – We focus on fair and timely settlement of policyholder claims.
Disciplined underwriting – We analyze exposures and utilize available underwriting data to ensure policies meet our selective criteria.
New product offerings – We may cross-sell additional insurance products to our existing policyholders in order to broaden our lines of business and product mix or identify other lines of insurance to offer.
Effective and efficient use of technology – We strive to add or improve technology that can effectively and efficiently enhance service to our policyholders and agents. For instance, we use our internally developed application, ClaimColonyTM, to increase the efficiency of our claims processing and settlement.

4

Exceptional service – We are committed to maintaining superior service to our policyholders and agents.

Claims settlement practices – We focus on fair and timely settlement of policyholder claims.
Geographical expansion – We continue to pursue opportunities to further expand our business within the state of Florida and in other states to increase overall geographic diversification. HCPCI and TypTap currently have regulatory approvals to underwrite residential property and casualty insurance in various states.
Distribution channel – We continue to improve our relationship with independent agents through collaboration and implementation of technologies that facilitate independent agents in finding the right insurance policies for their clients. In fact, this agency relationship is very essential to the organic growth of TypTap.

Disciplined underwriting – We analyze exposures and utilize available underwriting data to ensure policies meet our selective criteria.

New product offerings – We may cross-sell additional insurance products to our existing policyholders in order to broaden our lines of business and product mix or identify other lines of insurance to offer.

Effective and efficient use of technology – We strive to add or improve technology that can effectively and efficiently enhance service to our policyholders and agents. For instance, we currently use our internally developed application,Exzeo®, to increase the efficiency of our claims processing and settlement. In addition, ouron-line platform for quoting and binding residential flood policies streamlines the underwriting and policy production processes.

Geographical expansion – We continue to seek opportunities to expand our business within the state of Florida and into other states to increase overall geographic diversification. During 2017, HCPCI was approved to write residential property and casualty insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas.

Price – In the case of flood insurance, our rates are typically below the rates of the National Flood Insurance Program administered by the Federal Emergency Management Agency, which is the dominant provider of flood insurance in the United States.

Seasonality of Our Business

Our insurance business is seasonal as hurricanesseasonal. Hurricanes and tropical storms affecting Florida, our primary market, and other southeastern states typically occur during the period from June 1st through November 30th of each year. Moreover, withWinter storms in the northeast usually occur during the period between December 1st and March 31st of each year. In addition, our reinsurance contract yearscontracts are generally effective on June 1st of each year, and any variation in the cost of our reinsurance, whether due to changes in reinsurance rates, coverage levels or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1st of each year.

Government Regulation

We are subject to the laws and regulations in any state in which we conduct our insurance business. The regulations cover all aspects of our business and are generally designed to protect the interests of insurance policyholders as opposed to the interests of shareholders. Such regulations relate to a wide variety of financial andnon-financial matters including:

authorized lines of business;

capital and surplus requirements;

approval of allowable rates and forms;

approval of reinsurance contracts;

investment parameters;

underwriting limitations;

transactions with affiliates;

dividend limitations;

changes in control; and

market conduct.

Our failure to comply with certain provisions of applicable insurance laws and regulations could have a material, adverse effect on our business, results of operations or financial condition.

Regulatory UncertaintyImplications of Florida Senate Bill 2-A

Certain states including Florida have adopted laws or are considering proposed legislation which, among other things, limitsIn December 2022, the ability of insurance companies to effect rate increases or to cancel, reduce ornon-renew insurance coverage with respect to existing policies. The Florida legislature continuously considers bills affectingpassed Senate Bill 2-A (“SB 2-A”). The primary purpose of SB 2-A is to address the Floridaaffordability and availability of residential property insurance market. Currentin Florida. The bill also requires insurers to communicate, investigate, and pay valid claims more promptly. Key provisions in SB 2-A are-

The establishment of a new program called the Florida Optional Reinsurance Assistance Program. The program is intended to make available additional reinsurance coverage to residential property insurers against catastrophic losses at reasonable rates.
The repeal of Florida’s one-way attorney’s fee provision, which entitled an insured to reasonable attorney’s fees in any lawsuit in which any amount of recovery was awarded.
The requirement of an expedited claims process. Reduced time limits for insurers to respond to policyholders throughout the claims resolution process will be mandated.
The prohibition of an Assignment of Benefits (“AOB”) contract from being applied to residential property insurance policies. This provision is intended to prevent AOBs from being used as a tool for fraud and abuse and will help enforce the law penalizes insurerspassed in May 2022 prohibiting contractor solicitation of roof claims without proper disclosure to a consumer.

5


The reduction in the required time limit for noncompliance withfiling a claim. The time limit for providing a notice of loss to an insurer is reduced from two years to one year for initial or reopened claims and from three years to 18 months for supplemental claims.

We are optimistic that SB 2-A will deter frivolous lawsuits and improve the affordability and availability of residential property insurance code, establishes a private cause of action relating to claims payment practices, extends the notice period applicable to non-renewals of certain residential policies, preventsnon-renewals and cancellation except for material misrepresentation andnon-payment of premium and establishes procedures governing rate filings. Any changes in such laws and regulations could have a material, adverse effect on our operations or our ability to expand.Florida.

State Licensure and Approval

All states require licensure and regulatory approval prior to the marketing of insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, rates, and forms, the character of its officers and directors and other of its financial andnon-financial aspects. The regulatory authorities may prevent entry into a new market by not granting a license. In addition, regulatory authorities may preclude or delay our entry into markets by disapproving or withholding approval of our product filings.

Statutory Reporting and Examination

All insurance companies must file quarterly and annual statements with certain regulatory agencies in any state in which they are licensed to transact business and are subject to regular and special examinations by those agencies. The National Association of Insurance Commissioners mandates that all insurance companies be examined a minimum of once every five years. However, the FLOIRFlorida Department of Financial Services, Office of Insurance Regulation (“FLOIR”) has the authority to conduct an examination whenever it is deemed appropriate. With regard to Florida-domiciled insurance companies such as TypTap that have held a certificate of authority for less than three years, the FLOIR will conduct an examination at least once every year during the first three years of business. HCPCI’sThe latest financial examination of HCPCI and TypTap conducted by the FLOIR related towas for the year ended December 31, 2015. TypTap’s latest financial examination by the FLOIR covered the period ending December 31, 2016.2020.

Liability for Losses and Loss Adjustment Expenses

Our liability for losses and loss adjustment expenses represents our estimate of the total cost of (i) claims that have been incurred, but not yet paid (case reserves)(“case reserves”), (ii) losses that have been “incurred but not yet reported” to us (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which are intended to cover the ultimate cost of adjusting, investigating and settling claims, including investigation and defense of lawsuits resulting from such claims. We base our estimates on various assumptions and actuarial data we believe to be reasonable under the circumstances. The process of estimating the liability is inherently subjective and is influenced by many variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments.

Significant time can elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. Our liability for losses and LAE, which we believe represents the best estimate at a given point in time based on facts, circumstances and historical trends then known, may necessarily be adjusted to reflect additional facts that become available during the loss settlement period.

For a discussion and summary of the activity in the liability for losses and LAE for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, see Note 15 —14 -- “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Loss Development

Our liability for losses and LAE represents estimated costs ultimately required to settle all claims for a given period. The following table illustrates development of the estimated liability for losses and LAE as of December 31 for the years 2007 (inception) through 2017 (amounts in thousands):

Schedule of Loss Development

   2007   2008   2009   2010  2011  2012  2013  2014  2015  2016  2017 

Original net liability for losses and LAE (a)

  $1,688   $14,763   $19,178   $22,146  $27,424  $41,168  $43,686  $48,908  $51,690  $70,492  $97,818 

Re-estimated net losses and LAE (b) as of:

               

1 year later

   1,412    10,879    18,399    26,776   27,309   38,712   47,344   57,807   72,229   89,199  

2 years later

   1,236    10,991    19,866    26,003   28,536   40,015   50,280   65,367   78,511   

3 years later

   1,268    11,661    19,361    27,226   28,499   42,976   54,696   66,211    

4 years later

   1,327    11,528    19,617    26,544   29,038   45,279   52,404     

5 years later

   1,330    11,424    18,969    26,871   30,788   43,403      

6 years later

   1,330    11,361    19,020    27,732   29,505       

7 years later

   1,330    11,302    19,426    26,838        

8 years later

   1,331    11,459    18,961          

9 years later

   1,331    11,313            

10 years later

   1,334              

Cumulative net redundancy (deficiency) (c)

   354    3,450    217    (4,692  (2,081  (2,235  (8,718  (17,303  (26,821  (18,707 

Cumulative amount of net liability paid as of:

               

1 year later

   760    7,725    10,481    16,833   15,652   22,365   26,595   33,347   41,053   50,533  

2 years later

   1,108    9,229    15,336    20,708   21,707   31,824   38,695   49,122   61,947   

3 years later

   1,108    10,339    17,065    23,732   25,350   37,041   45,655   58,141    

4 years later

   1,327    10,947    17,992    25,063   26,772   40,152   49,924     

5 years later

   1,330    11,121    18,375    25,681   28,052   42,303      

6 years later

   1,330    11,167    18,465    26,238   29,967       

7 years later

   1,330    11,302    18,506    26,478        

8 years later

   1,331    11,305    18,653          

9 years later

   1,331    11,309            

10 years later

   1,333              

Gross premiums earned

  $9,546   $61,925   $110,011   $119,757  $143,606  $233,607  $337,113  $365,488  $423,120  $378,678  $358,253 

   2007   2008   2009   2010   2011   2012   2013   2014   2015   2016   2017 

Gross liability for unpaid losses and LAE

  $1,688   $14,763   $19,178   $22,146   $27,424   $41,168   $43,686   $48,908   $51,690   $70,492   $198,578 

Ceded liability for unpaid losses and LAE

   —      —      —      —      —      —      —      —      —      —      (100,760
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liability for unpaid losses and LAE

  $1,688   $14,763   $19,178   $22,146   $27,424   $41,168   $43,686   $48,908   $51,690   $70,492   $97,818 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a)Represents management’s original net estimated liability for (i) unpaid claims, (ii) IBNR, and (iii) loss adjustment expenses.
(b)Represents there-estimated net liabilities in later years for unpaid claims, IBNR and loss adjustment expenses for each of the respective years.
(c)Represents the difference between the latest netre-estimate and the original net estimate. A redundancy indicates the original net estimate is higher than the current net estimate whereas a deficiency indicates the original net estimate is lower than the current net estimate.

Reinsurance

We have a Bermuda domiciled wholly owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, displacing the need for HCPCI or TypTap to pay premiums to third party reinsurers. Claddaugh fully collateralizes its exposure to our insurance subsidiaries by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance tonon-affiliates.

For the years ended December 31, 2017, 2016 and 2015, revenues from insurance operations before intracompany elimination represented 96.2%, 95.5% and 97.5%, respectively, of total revenues of all operating segments. At December 31, 2017, 2016 and 2015, insurance operations’ total assets represented 87.1%, 87.9% and 91.8%, respectively, of the combined assets of all operating segments. See Note 16 — “Segment Information”14 -- “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K. 10-K for the net incurred and paid loss development tables for the years 2013 through 2022 and their reconciliation to the estimated liability for losses and LAE as of December 31, 2022.

Other Operations

Real Estate Operations

Our real estate operations consist of multiple properties we own and operate for investment purposes and also properties we own and use for our own operations.

Properties Used in Operations

Our real estate used in operations consists of our headquartersan office building which has alocated in the Sabal Palms Industrial Park in Tampa, Florida with gross area of 122,00067,289 square feet in Tampa, Florida, and our secondary insurance operations site with gross area of approximately 16,000 square feet in Ocala, Florida. At our headquarters, we lease available space tonon-affiliates at various terms. The Ocala location, in addition today-to-day operational use, serves as our alternative site in the event we experience any significant disruption at our headquarters building.Tampa offices.

Operations at 6


Investment Properties

Our portfolio of investment properties consistincludes two waterfront properties consisting of a combined 24total of 17.1 acres ofand a five-acre submerged land lease. One waterfront propertiesproperty contains a building structure that include one full-servicewe currently lease to Crabby Bill’s restaurant and two marinas, two retail shopping centers and one recently acquired office building. The combineda marina facilities offer to the general public: a) onedry-stack boat storage facility with capacity for approximately 263 boats; b) approximately 65 wet slips; c) two fuel facilities; and d) open areas for parking and storage.Dry-stack boat storage space is generally rented on a monthly or annual basis while the wet slips are rented onother houses retail space and a daily or monthly basis.marina with high and dry storage. We acquired the restaurant and marina operations in connection with our purchase of thosethe waterfront properties and we continue to operate themtwo marinas to enhance the property values. We also lease available space tonon-affiliates at one of these locations.The table below sets forth information concerning our investment properties.

One retail shopping center with 61,400 square feet of net rentable space is located in Sorrento, Florida and is anchored by a large, well-known grocery retailer. We acquired

 

Year

Net Rentable

 

Description/Location

Acquired

Space (SF)

Anchor Tenant

Waterfront property

Tierra Verde, Florida

2011

22,884

Tierra Verde Marina (a)

Waterfront property

Treasure Island, Florida

2012

12,790

Crabby Bill’s restaurant

Retail shopping center

Sorrento, Florida

2016

61,430

Publix supermarket

Retail shopping center

Melbourne, Florida

2016

49,995

Fresh Market supermarket

Office building

Tampa, Florida

2017

68,867

(b)

Retail shopping center

Riverview, Florida

2018

8,400

Thorntons, LLC

Retail shopping center

Clearwater, Florida

2018

54,296

ALDI supermarket

Vacant land

Tampa, Florida

2018

(c)

(c)

(a)
Affiliate.
(b)
Effective January 1, 2023, this property is used in 2016. See Note 6 — “Business Acquisitions”our operations and, as a result, is reclassified out of real estate investments to property and equipment on the consolidated balance sheet subsequent to December 31, 2022.
(c)
Not applicable.

Other Real Estate Investments

Melbourne FMA, LLC, our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Another retail shopping center with 49,995 square feet of net rentable space is located in Melbourne, Florida and also anchored by a large, well-known grocery retailer. In 2016, we acquired full ownership of the property in which wewholly owned subsidiary, had a 90%non-controlling interest from our 10%in a joint venture partner. This property had been developed through a limited liability company treated under U.S. GAAP as a joint venture.which was dissolved in December 2022. SeeInvestment in Unconsolidated Joint Venture in Note 4 -- “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K. 10-K for additional information.

Our portfolio7


Other Operations

Holding company operations

Activities of real estate investments also includes one commercial property with 68,867 square feet of net rentable space in Tampa, Florida. This property, which includes an office building fully leased toour holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a major financial institution, was acquired in October 2017.

Other Real Estate Investments

In January 2018, we acquired full ownership of one limited liability company which owns commercial real estate in Riverview, Florida. The commercial real estate includes a retail strip center with 8,400 square feet of net rentable space and a parcel of land adjacent toreportable segment comprise the retail center that is leased to a gas station and convenience store chain. SeeConsolidated Variable Interest Entity in Note 4 — “Investments” and Note 27 — “Subsequent Events” to our consolidated financial statements under Item 8operations of this Annual Report on Form10-K for additional information.segment.

In addition, Melbourne FMA, LLC, our wholly owned subsidiary, has a 90% interest in a company which owns three outparcels aggregating approximately 3.1 acres for sale or ground lease. SeeInvestment in Unconsolidated Joint Venture in Note 4 — “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K for additional information.

Information Technology

Our information technology operations include a team of experienced software developers with extensive knowledge in designing and creatingweb-based applications and products for mobile devices. The operations, which are located in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products and services that supportin-house operations as well as our third-party relationships with our agency partners and claim vendors.

PropletTM

Propletis an online platform for quoting homeowners policies for our subsidiary, HCPCI. This platform offers a map based solution for quoting.

TypTap®

TypTapis an online platform for quoting and binding residential flood policies for our subsidiary, TypTap Insurance Company. This platform focuses on simplifying the user experience, which is entirely online. It is designed to be accessible from a mobile phone or any other internet-capable device.

SAMSTM

SAMSis an online platform for supporting back-office policy and claims management for both of our insurance subsidiaries, HCPCI and TypTap Insurance Company.SAMS processes the full life cycle of a policy from policy quoting and issuance to agency management, cash receipts/disbursements, claims reserving and claim payments.

CasaClueTM

CasaClue is our proprietary database containing residential property data.

Some of the technologies originally developedin-house for our own insurance operations have been launched for use free of charge by third parties. These technologies include the following:

Exzeo®

Exzeois a cloud-based application available at Exzeo.com which provides a highly customizable environment to support automation and process management to high volume environments. Exzeo.com specifically supports property claim assignments, logistics, and accountability reporting with our third party partners. Exzeo.com has rich system integration through an application program interface (API), which allows hands-free data transfer from anyAPI-capable applications such asSAMS.

AtlasViewerTM

AtlasViewer is our interactive cloud-based data mapping and visualization application. An industry agnostic product,AtlasViewer allows users to combine data from multiple sources and leverage location coordinates to make more informed business decisions.AtlasViewer allowssystem-to-system integration through an API or allows users to upload documents to view and securely share data on a customized map.AtlasViewer is offered as a subscription-based service.

Financial Highlights

The following table summarizes our financial performance during the years ended December 31, 2017, 20162022, 2021 and 2015:2020:

(Amounts in millions except per share amounts)            

 

2022

 

 

2021

 

 

2020

 

For the year ended December 31:  2017   2016   2015 

 

 

 

 

 

 

 

 

 

Net premium earned

  $224.6   $243.6   $282.5 

Net premiums earned

 

$

463.6

 

 

$

377.3

 

 

$

262.5

 

Total revenue

  $244.4   $264.4   $286.0 

 

$

499.6

 

 

$

407.9

 

 

$

310.4

 

Losses and loss adjustment expenses

  $165.6   $124.7   $87.2 

 

$

371.5

 

 

$

227.5

 

 

$

160.0

 

(Loss) income before income taxes

  $(15.6  $46.9   $106.2 

 

$

(68.4

)

 

$

11.2

 

 

$

36.9

 

Net (loss) income

  $(6.9  $29.0   $65.9 

 

$

(54.6

)

 

$

7.2

 

 

$

27.6

 

(Loss) income available to stockholders

  $(6.9  $29.0   $65.9 

Net (loss) income after noncontrolling interests

 

$

(58.5

)

 

$

1.9

 

 

$

27.6

 

(Loss) earnings per share:

      

 

 

 

 

 

 

 

 

 

Basic

  $(0.75  $2.95   $6.51 

 

$

(6.24

)

 

$

0.23

 

 

$

3.55

 

Diluted

  $(0.75  $2.92   $5.90 

 

$

(6.24

)

 

$

0.21

 

 

$

3.49

 

Dividends per share

  $1.40   $1.20   $1.20 

 

$

1.60

 

 

$

1.60

 

 

$

1.60

 

Net cash provided by operating activities

  $16.4   $88.0   $45.2 

 

$

 

 

$

96.5

 

 

$

77.3

 

Cash dividends paid on common stock*

  $12.8   $11.7   $11.7 

 

$

15.2

 

 

$

13.8

 

 

$

12.4

 

At December 31:

      

 

 

 

 

 

 

 

 

 

Total investments

  $380.3   $298.7   $232.9 

 

$

615.6

 

 

$

196.7

 

 

$

225.7

 

Cash and cash equivalents

  $255.9   $280.5   $267.7 

 

$

234.9

 

 

$

628.9

 

 

$

431.3

 

Total assets

  $842.3   $670.1   $637.0 

 

$

1,803.3

 

 

$

1,176.9

 

 

$

941.3

 

Total stockholders’ equity

  $194.0   $243.7   $237.7 

Total liabilities

 

$

1,548.5

 

 

$

762.4

 

 

$

740.2

 

Redeemable noncontrolling interest

 

$

93.6

 

 

$

90.0

 

 

$

 

Total equity

 

$

161.3

 

 

$

324.5

 

 

$

201.1

 

Common shares outstanding (in millions)

   8.8    9.7    10.3 

 

 

8.6

 

 

 

10.1

 

 

 

7.8

 

*Net of cash dividends received under share repurchase forward contract

*Net of cash dividends received under share repurchase forward contract.

Environmental Matters

As a property owner, we are subject to regulations under various federal, state, and local laws concerning the environment, including laws addressing the discharge of pollutants into the air and water and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites.

Cybersecurity

We rely on digital technology to conduct our businesses and interact with customers, policyholders, agents, and vendors. With this reliance on technology comes the associated security risks from using today’s communication technology and networks.

To defend our computer systems from cyber-attacks, we utilize tools such as firewalls, anti-malware software, multifactor authentication,e-mail security services, virtual private networks, third partythird-party security experts, and timely applied software patches, among others. We also engage a third-party consultantconsultants to conduct penetration tests to identify any potential security vulnerabilities. Although we believe our defenses against cyber-intrusions are sufficient, we continually monitor our computer networks for new types of threats.

EmployeesWork Environment

We adhere to a harassment prevention policy which details how to report and respond to harassment issues and prohibits any form of retaliation. This includes mandatory harassment prevention training for all employees.

We are committed to paying a living wage to all of our full-time employees. We offer competitive benefits to our employees including options for health coverage and short-term and long-term disability insurance at no cost to the employee. We also award restricted stock to employees to align their interests with stockholder interests.

Additionally, our Bravo program allows employees to earn paid time off as well as cash bonuses for engaging in charitable causes, continued education and professional development activities.

8


Diversity

We value a diverse and inclusive work environment and accordingly our workforce consists of men and women of many races, religions, and national origins. We forbid any form of discrimination based upon race, gender, religion, or ethnicity.

Our Board is highly diverse in terms of gender, ethnicity, culture, education and business backgrounds, and our U.S.-based workforce is 61% female and approximately 47% non-white.

Employees

As of February 23, 2018,27, 2023, we employed a total of 334578 full-time individuals. In addition, we had 76employed 11 employees leased through a professional employer organization.

Available Information

We file annual, quarterly, and current reports with the U.S. Securities and Exchange Commission (“SEC”). These filings are accessible free of charge on our website, www.hcigroup.com (click “SEC filings” at the “Investor Information” tab), as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, which can be accessed via the SEC’s website at www.sec.gov. In addition, these filings are accessible at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, DC 20549-0213. Information on the operation of the Public Reference Room may be obtained by calling the SEC at1-800-SEC-0330.

ITEM 1A –Risk Factors

Our business is subject to a number of risks, including those described below, which could have a material effect on our results of operations, financial condition or liquidity and could cause our operating results to vary significantly from period to period.

Business and operational risks

Our historical revenue growth was derived primarily through policy assumptions and acquisitions. We cannot guarantee that future policy assumptions and acquisitions will be available to the extent they have in the past.

Substantially allA substantial portion of our historical revenue has been generated from policies assumed from Citizens and other insurance companies, our acquisition of policies from oneseveral Florida insurance companycompanies and subsequent renewals of these policies. Our ability to grow our premium base may depend upon the availability of future policy assumptions and acquisitions upon acceptable terms. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We cannot ensure youprovide assurance that such opportunities will arise in the future.

Although we plan to enter thehave begun providing insurance marketservices in other states, our insurance business is currentlyprimarily in Florida only.Florida. Thus, any catastrophic event or other condition affecting losses in Florida could adversely affect our financial condition and results of operations.

Any catastrophic event, a destructive weather pattern, a 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. While we actively manage our exposure to catastrophic events through our underwriting process and the purchase of reinsurance, the fact that our business is 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.tornadoes. 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 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/or results of operations.

Changing climate conditions could have an adverse impact on our business, results of operations or financial condition.

There is an emerging scientific consensus on global warming. Climate change, to the extent it produces rising temperatures and changes in weather patterns, may affect the frequency and severity of storms and other weather events, affect the affordability, availability and underwriting results of homeowners’ and property insurance, and, if frequency and severity patterns increase, negatively affect our business, results of operations, and/or financial condition.

Our results may fluctuate based on many factors including cyclical changes in the insurance industry.

The insurance industry historically has been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing and, thus, more favorable underwriting profits. As premium levels increase, there may be new entrants to the market, which could subsequently lead to a decrease in premium levels. Any of these factors could lead to a significant reduction in premium rates in future periods, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material, adverse effect on our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance business significantly.

9


We cannot predict whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If we cannot write insurance at appropriate rates, our business would be materially and adversely affected.

Our business could be harmedWe rely on highly skilled and experienced personnel and if we loseare unable to attract, retain or motivate key personnel or hire qualified personnel, our business may be seriously harmed. In addition, the servicesloss of our chief executive officer or other key personnel.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 chief executive officer, Paresh Patel, as well as our chief financial officer, Mark Harmsworth.Harmsworth, and the President of our Real Estate Division, Anthony Saravanos. The loss of their leadership, industry knowledge and experience could negatively impact our operations. However, we have management succession plans to lessen any such negative impact. Apart from Mr. Patel and Mr. Harmsworth, we have no employment agreements with any of our personnel nor do we offer any guarantee of any employee’s ongoing service. We maintainkey-man life insurance on Mr. Patel although such policy may be insufficient to cover the damage resulting from the loss of Mr. Patel’s services.

Our information technology systems may fail or be disrupted, 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.). 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.processing. The failure of these systems to function as planned could slow our growth and adversely affect our future business volume and results of operations.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 processing which could negatively affect our future 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. We currently provide a hybrid work from home strategy for a majority of our workforce. This availability is provided through our highly available redundant cloud infrastructure. The loss or significant impairment of functionality in these facilities for any reason could have a material, adverse effect on our business although webusiness. We believe we havethis hybrid work strategy and redundant cloud infrastructure provides sufficient redundancies to replace our facilities if functionality is impaired. We contract with a third-party vendor to maintain complete daily backups of our systems, which are stored at the vendor’s facility in Atlanta, Georgia. We additionally use industry leading Internet cloud infrastructure providers to host some of our data processing systems. These cloud providers ensure redundancy across geographic regions with additional daily system backups. Access to these databases and hosted environments is strictly controlled and limited to authorized personnel. In the event of a disaster causing a complete loss of functionality at our Tampa location,locations, we plan to temporarily use our secondaryalternative office in Ocala, Florida temporarily to continue our operations.

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

The property and casualty insurance industry is cyclical and highly competitive. We compete not only with other stock companies but also with mutual companies, the U.S. government, other underwriting organizations and alternative risk-sharing mechanisms. Our principal lines of business are written by numerous other insurance companies. Competition 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 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.

HCPCI and TypTap have each obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in the state of 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. Such a requirement could

10


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. A credit rating downgrade could also result in a significant reduction in the number of policies that our agency networks can sell.

There are inherent limitations and risks related to our projections and 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 property and casualty insurance industry may be negatively affected. In addition, industry developments could further increase competition in our industry. These developments could include—

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;
new programs or changes to existing programs in which federally or state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative markets;
changes in Florida’s or any other states’ regulatory climate; and
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 property and casualty 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 results of operations would be adversely affected.

If our actual losses from claims exceed our loss reserves, our financial results would be adversely affected.

Our objective is to establish loss reserves that are adequate and represent management’s best estimate of the ultimate cost to investigate and settle each specific claim. However, the process of establishing adequate reserves is complex and inherently uncertain, and the ultimate cost of a claim may vary materially from the amounts reserved. We regularly monitor and evaluate loss and loss adjustment expense reserve development to determine reserve adequacy.

Due to these uncertainties, the ultimate losses may vary materially from current loss reserves which could have a material, adverse effect on our future financial condition, results of operations and cash flows.

Our failure to pay claims accurately could adversely affect our insurance business, financial results and capital requirements.

We rely on our claims personnel to accurately evaluate and pay the claims made under our policies. Many factors could affect our ability to accurately evaluate and pay claims, including the accuracy of our independent adjusters 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 processing given the input by our independent adjusters; the ability of our claims department to translate the information provided by our independent adjusters into acceptable claims settlements; and the ability of our claims personnel to maintain and update our claims processing 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, undermine our reputation in the marketplace, impair our corporate image and negatively affect our financial results.

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.

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

Our insurance subsidiaries 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. Failure to maintain adequate risk-based capital at

11


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.

If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

Our future growth will depend on our ability to expand the number of insurance policies we write, to expand the kinds of insurance products we offer, and to expand the geographic markets in which we do business, all balanced by the insurance risks we choose to write and cede. Our existing sources of funds include operations, investment holdings, and a bank credit facility. Unexpected catastrophic events in our market areas, such as hurricanes, may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these unanticipated claims unless we can raise additional capital.

Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all and we risk non-collectability of reinsurance amounts due us from reinsurers with which we have contracted.

Reinsurance is a method of transferring part of an insurance company’s liability under an insurance policy to another insurance company, or reinsurer. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. The cost of such reinsurance is subject to prevailing market conditions beyond our control, such as the amount of capital in the reinsurance market and the occurrence of natural and man-made catastrophes. We cannot be assured that reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us. As a result, we may determine to increase the amount of risk we retain or look for other alternatives to reinsurance, which could in turn have a material, adverse effect on our financial position, results of operations and cash flows.

With respect to the reinsurance contracts we currently have in effect, our ability to recover amounts due from reinsurers is subject to such reinsurers’ ability and willingness to pay and to meet their obligations to us. 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 their ability to meet their obligations to us. Any failure on the part of any one reinsurance company to meet its obligations to us could have a material, adverse effect on our financial condition or results of operations.

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:

engaging in vigorous underwriting;
carefully evaluating terms and conditions of our policies;
focusing on our risk aggregations by geographic zones and other bases; and
ceding insurance risk to reinsurance companies.

However, there are inherent limitations in these strategies. 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 decline coverage in the event of a violation of that condition. 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.

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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.

Now and in the future, we may rely on independent agents to write our insurance policies, and if we are not able to contract with and retain independent agents, our revenues would be negatively affected.

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. If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract 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 revenues.

Our success depends on our ability to accurately price the risks we underwrite.

The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks, including risks associated with flood insurance and other new product offerings. 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 accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; 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 accurately, is subject to several risks and uncertainties, some of which are outside of our control, including—

the availability of sufficient reliable data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate rating and pricing techniques;
changes in legal standards, claim settlement practices, and restoration costs; and
legislatively imposed consumer initiatives.

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.

Our operations in India expose us to additional risks, which could negatively impact our business, operating results, and financial condition.

Our India operations expose us to additional risks including income tax risks, currency exchange rate fluctuations and risks related to other challenges caused by distance, language, and compliance with Indian labor laws and other complex foreign and U.S. laws and regulations that apply to our India operations. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, among others. Violations of these laws and regulations could result in fines and penalties, or criminal sanctions against us, our officers, or our employees. Although policies and procedures are designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.

Our acquired renewal rights intangible assets can be subject to impairment charges which can adversely affect our financial results.

We evaluate our renewal rights intangible assets when impairment indicators are present to determine if there has been any impairment in their carrying value. If we determine an impairment has occurred, we are required to record an impairment charge equal to the excess of the asset’s carrying value over its estimated fair value. The assumptions underlying our fair value estimates are subject to uncertainties including, but not limited to, policy attrition rates, changes in premium rates, marketplace competition, policyholder behavior, and regulatory changes. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the future cash flows estimated in our impairment analysis may materially differ from our actual results.

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The insolvency and receivership of United Property & Casualty Insurance Company could adversely affect our financial results.

On February 27, 2023, United Property & Casualty Insurance Company was placed into receivership by the State of Florida due to its financial insolvency. Under our agreements with United, United is responsible for payment of ceded premiums owed to us while the we are responsible for adjudicating and paying claims. We cannot predict the actions a receiver might take, which may include cancellation of policies subject to the quota share contracts, termination of the claims processing services agreement and restrictions on, or use of, funds held in trust. Any such actions could have a material adverse effect on our financial position and results of operations.

Financial risks

HCI Group, Inc. depends on the ability of its subsidiaries to generate and transfer funds to meet its debt obligations.

HCI Group, Inc. does not have significant revenue-generating operations of its own. Our ability to make scheduled payments on our debt obligations depends on the financial condition and operating performance of our subsidiaries. If the funds we receive from our subsidiaries, some of which are subject to regulatory restrictions on the payment of distributions, are insufficient to meet our debt obligations, we may be required to raise funds through the issuance of additional debt or equity securities, reduce or suspend dividend payments, or sell assets.

We may require additional capital in the future which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements or to cover losses, we may need to raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe current capital together with our anticipated retained income will support our operations. However, we cannot provide any assurance in that regard, since many factors will affect our capital needs and their amount and timing, including our growth and profitability, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we require additional capital, it is possible that equity or debt financing may not be available at all or may be available only on terms unfavorable to us. Equity financings could result in dilution to our shareholders, and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially affected.

Our credit agreement contains restrictions that can limit our flexibility in operating our business.

The agreement governing our revolving credit facility contains various covenants that limit our ability to engage in certain transactions. These covenants limit our and our subsidiaries’ ability to, among other things:

incur additional indebtedness;
declare or make any restricted payments;
create liens on any of our assets now owned or hereafter acquired;
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets now owned or hereafter acquired; and
enter into certain transactions with our affiliates.

An increase in interest rates may negatively impact our operating results and financial condition.

Borrowings under our revolving credit facility have a variable rate of interest. An increase in interest rate would have a negative impact on our results of operations attributable to increased interest expense.

Investment risks

There may be limited markets for and restrictions on certain holdings in our investment portfolio.

Certain holdings in our investment portfolio include limited partnership interests and commercial real estate. We may increase our holdings in these types of investments as we pursue further diversification. These investments may be illiquid in the near term as they are privately placed and are subject to certain restrictions or conditions that may limit our ability to immediately dispose of the investments. If it becomes necessary to sell any of these investments at a time when the fair market value is below our carrying value, we may incur significant losses which could have a material adverse effect on our net income and financial position.

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Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment of our available cash.

A portion of our income is, and likely will continue to be, generated by the investment of our available cash. The amount of income so generated is a function of our investment policy, available investment opportunities, and the amount of available cash invested. Fluctuating interest rates and other economic factors make it difficult to estimate accurately the amount of investment income that will be realized. In fact, we have realized and may in the future realize losses on sales of our investments as well as credit losses on our investment holdings. Any unfavorable change to the fair value of our equity securities will also impact our financial results.

Our revenue from real estate investments may be affected by the success and economic viability of our anchor retail tenants. Our reliance on a single or significant tenant at certain properties may impact our ability to lease vacated space and adversely affect returns on the specific property.

At certain retail centers, we may have tenants, commonly referred to as anchor tenants, occupying all or a large portion of the gross leasable space. In the event an anchor tenant becomes insolvent, suffers a downturn in business, ceases its operations at the retail center, or otherwise determines not to renew its lease, any reduction or cessation of rental payments to us could adversely affect the returns on our real estate investments. A lease termination or cessation of operations by an anchor tenant could also lead to the loss of other tenants at the specific retail location. We may then incur additional expenses to make improvements and prepare the vacated space to be leased to one or more new tenants.

Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases.

Our retail and other real estate properties may be subject to impairment charges which can adversely affect our financial results.

We periodically evaluate our long-lived assets and related intangible assets to determine if there has been any impairment in their carrying values. If we determine an impairment has occurred, we are required to record an impairment charge equal to the excess of the asset’s carrying value over its estimated fair value. As our real estate operations grow, there is an increased potential that the impairment of an asset could have a material adverse effect on our financial results. In addition, our fair value estimates are based on several assumptions that are subject to economic and market uncertainties including, but not limited to, demand for space, competition for tenants, changes in market rental rates and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the future cash flows estimated in our impairment analysis may not be achieved.

Our ongoing investments in real estate and information technology businesses have inherent risks and could burden our financial and human resources.

We have invested and expect to continue to invest in real estate and information technology. Despite our due diligence, these investments may still involve significant risks and uncertainties, including distraction of management and employees from current operations, insufficient revenues to offset liabilities assumed and incurred expenses, inadequate return of capital, and failure to realize the anticipated benefits. There can be no assurance that such investments will be successful and will not adversely affect our financial condition and operating results.

Legal and regulatory risks

Industry trends, such as increased litigation against the insurance industry and individual insurers, 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 subsidiaries.

Loss severity in the property and casualty 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 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.

As an insurance holding company, we are currently subject to state regulation and in the future may become subject to federal regulation.

All states regulate insurance holding company systems. State statutes and administrative rules generally require each insurance company in the holding company group to register with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies within the holding company system that may materially affect the operations, management

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or financial condition of the insurers within the group. As part of its registration, each insurance company must identify material agreements, relationships and transactions with affiliates, including without limitation, loans, investments, asset transfers, transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance transactions, dividends, and consolidated tax allocation agreements.

Insurance holding company regulations generally provide that transactions between an insurance company and its affiliates must be fair and equitable, allocated between the parties in accordance with customary accounting practices, and fully disclosed in the records of the respective parties. Many types of transactions between an insurance company and its affiliates, such as transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the system may be subject to prior approval by, or prior notice to, state regulatory authorities. If we are unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action, which could adversely affect our operations. In addition, state insurance regulations also frequently impose notice or approval requirements for the acquisition of specified levels of ownership in the insurance company or insurance holding company.

Regulations may vary from state to state, and states occasionally may have conflicting regulations. Currently, the federal government’s role in regulating or dictating the policies of insurance companies is limited. However, Congress, from time to time, considers proposals that would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state regulation. The impact of any future federal insurance regulation on our insurance operations is unclear and may adversely impact our business or competitive position.

Our insurance subsidiaries 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 suspensions, which may adversely affect our financial condition and results of operations.

The insurance industry is highly regulated and supervised. Our insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled and the states in which they transact insurance business. 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 —

the content and timing of required notices and other policyholder information;
the amount of premiums the insurer may write in relation to its surplus;
the amount and nature of reinsurance a company is required to purchase;
participation in guaranty funds and other statutorily created markets or organizations;
business operations and claims practices;
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers and their products;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of insurance company subsidiaries to pay dividends to their holding companies;
restrictions on transactions between insurance companies and their affiliates;
restrictions on the size of risks insurable under a single policy;
requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
the form and content of records of financial condition required to be filed; and
the level of reserves.

The Florida Office of Insurance Regulation and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic 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

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our ability to achieve some or all of our business objectives. These regulatory authorities also conduct periodic examinations into insurers’ 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 consolidated 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 deny 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.

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.

A regulatory environment that requires approval of rate increases 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 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. 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. Our results of operations and financial condition could be adversely affected by any of these factors.

Our real estate operations are subject to regulation under various federal, state, and local laws concerning the environment.

Our real estate operations own various properties including marina facilities, and commercial buildings. As a result, we are subject to regulation under various federal, state, and local laws concerning the environment, including laws addressing the discharge of pollutants into the air and water and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including remediation costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws relating to our real estate operations.

Security and fraud risks

An unauthorized disclosure or loss of policyholder or employee information or other sensitive or confidential information, including by cyber-attack or other security breach, could cause a loss of data, 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, process and retain certain sensitive and confidential information. We are subject to various federal and state privacy laws and rules regarding the use and disclosure of certain sensitive or confidential information, including the Gramm-Leach-Bliley Act and itsstate-law progeny.information. Despite the security measures we have implemented to help ensure data security and compliance with applicable laws and rules, 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, acts of vandalism, computer viruses, theft of data, misplaced or lost data, programming and human errors, physicalbreak-ins, or other disruptions. In addition, 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.

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Noncompliance with any privacy or security laws and regulations, 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 or confidential member 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. In addition, this could result in interruptions to our operations and damage to our reputation, and misappropriation of confidential information could also result in regulatory enforcement actions, 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 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 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 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.

Because We have acquired a cybersecurity insurance rates are heavily regulated by state governments, inflation could adversely affect ourpolicy to help mitigate any financial condition and results of operations

The rates an insurerimpact that may charge to its policyholders are controlled by laws and state regulators. Because our ability to raise rates is subject to regulation, our exposure toincur with a breach along with the risks of price inflation and other economic forces may be more profound than the exposure to which other industries may be subject. Inflation and economic forces could increase our costs (such as the cost to repair a damaged home) and lower our profitability, while we would be unable to respond with higher rates, except with regulatory approval. While we attempt to use new technology to lower our overall costs, increased rates of price inflation could nonetheless have an adverse effect on our business, financial conditionassistance for legal and/or results of operations.

media requirements during that time.

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

The property and casualty insurance industryAn overall decline in Florida is cyclical and highly competitive. We compete not only with other stock companies but also with mutual companies, the U.S. government, other underwriting organizations and alternative risk sharing mechanisms. Our principal lines of business are written by numerous other insurance companies. Competition 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 Florida market. Many of these competitors have greater financial resources, larger agency networks and greater name recognition than our company. 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.

Our ability to compete in the property and casualty insurance industry and our ability to expand our business may be negatively affected by the fact that we are not a long-established company. HCPCI and TypTap have each obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in the state of 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. 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 projections and 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 property and casualty insurance industry may be negatively affected. In addition, industry developments could further increase competition in our industry. These developments could include —

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;

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

changes in Florida’s or any other states’ regulatory climate; and

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 property and casualty 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 results of operations would be adversely affected.

If our actual losses from claims exceed our loss reserves, our financial results would be adversely affected.

Our objective is to establish loss reserves that are adequate and represent management’s best estimate of the ultimate cost to investigate and settle a specific claim. However, the process of establishing adequate reserves is complex and inherently uncertain, and the ultimate cost of a claim may vary materially from the amounts reserved. We regularly monitor and evaluate loss and loss adjustment expense reserve development to determine reserve adequacy.

Due to these uncertainties, the ultimate losses may vary materially from current loss reserves whicheconomic activity could have a material adverse effect on our futurethe 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 cash flows.

Our failuregenerally 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 pay claims accuratelyhome closing transactions, and major slowdowns in the various housing markets we serve could adversely affect our insurance business, financial results and capital requirements.

We rely on our claims personnel to accurately evaluate and pay the claims made under our policies. Many factors could affectimpact our ability to accurately evaluategenerate new business. The economic activity that impacts homeowners insurance is most closely correlated with employment levels, corporate revenue and pay claims, includingasset values.

Changing climate conditions could have an adverse impact on our business, results of operations or financial condition.

There is an emerging scientific consensus on climate change, which may affect the accuracyfrequency and severity of our external independent adjusters as they make their assessmentsstorms, floods 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 our external independent adjusters; the ability of our claims department to translate the information provided by our external independent 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, undermine our reputation in the marketplace, impair our corporate imageother weather events, and negatively affect our financial results.

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.

and/or financial condition.

If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

Our future growth will depend on our ability to expand the number of insurance policies we write, to expand the kinds of insurance products we offer, and to expand the geographic markets in which we do business, all balanced by the insurance risks we choose to assume and cede. Our existing sources of funds include operations, investment holdings, and possible sales of our investment securities. Unexpected catastrophic events in our market areas, such as hurricanes, may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these unanticipated claims unless we can raise additional capital.

HCI Group, Inc. depends on the ability of its subsidiaries to generate and transfer funds to meet its debt obligations.

HCI Group, Inc. does not have significant revenue generating operations of its own. Our ability to make scheduled payments on our debt obligations depends on the financial condition and operating performance of our subsidiaries. If the funds we receive from our subsidiaries, some of which are subject to regulatory restrictions on the payment of distributions, are insufficient to meet our debt obligations, we may be required to raise funds through the issuance of additional debt or equity securities, reduce or suspend dividend payments, or sell assets.

We may require additional capital in the future which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements or to cover losses, we may need to raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe current capital together with our anticipated retained income will support our operations. However, we cannot provide any assurance in that regard, since many factors will affect our capital needs and their amount and timing, including our growth and profitability, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we require additional capital, it is possible that equity or debt financing may not be available at all or may be available only on terms unfavorable to us. Equity financings could result in dilution to our shareholders, and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially affected.

There may be limited markets for and restrictions on certain holdings in our investment portfolio.

Certain holdings in our investment portfolio include limited partnership interests and real

estate joint ventures. We may increase our holdings in these types of investments as we pursue diversification. These investments may be illiquid in the near term as they are privately placed and are subject to certain restrictions or conditions that may limit our ability to immediately dispose of the investments. If it becomes necessary to sell any of these investments at a time when the fair market value is below our carrying value, we may incur significant losses which could have a material adverse effect on our net income and financial position.

Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment of our available cash.

A portion of our income is, and likely will continue to be, generated by the investment of our available cash. The amount of income so generated is a function of our investment policy, available investment opportunities, and the amount of available cash invested. We may alter our investment policy to accept higher levels of risk with the expectation of higher returns. Fluctuating interest rates and other economic factors make it difficult to estimate accurately the amount of investment income that will be realized. In fact, we have realized and may in the future realize losses on sales of our investments as well as other-than-temporary losses on our investment holdings.

Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all and we risknon-collectability of reinsurance amounts due us from reinsurers with which we have contracted.

Reinsurance is a method of transferring part of an insurance company’s liability under an insurance policy to another insurance company, or reinsurer. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. The cost of such reinsurance is subject to prevailing market conditions beyond our control, such as the amount of capital in the reinsurance market and the occurrence of natural andman-made catastrophes. We cannot be assured that reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us. As a result, we may determine to increase the amount of risk we retain or look for other alternatives to reinsurance, which could in turn have a material, adverse effect on our financial position, results of operations and cash flows.

With respect to the reinsurance contracts we currently have in effect, our ability to recover amounts due from reinsurers is subject to such reinsurers’ ability and willingness to pay and to meet their obligations to us. 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 their ability to meet their obligations to us. Any failure on the part of any one reinsurance company to meet its obligations to us could have a material, adverse effect on our financial condition or results of operations.

We have exposure to unpredictable catastrophes, which can materially and adversely affect our financial results.

We write insurance policies that cover homeowners, condominium owners, and tenants for losses that result from, among other things, catastrophes. We are therefore subject to losses, including claims under policies we have written, arising out of catastrophes that may have a significant effect on our business, results of operations, and financial condition. A significant catastrophe could also have an adverse effect on our reinsurers. Catastrophes can be caused by various events, including hurricanes, tropical storms, tornadoes, windstorms, earthquakes, hailstorms, explosions, power outages, fires, winter storms andman-made events. The incidence and severity of catastrophes are inherently unpredictable. 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. Our policyholders are currently concentrated in Florida and the northeast and southeast regions, which is especiallyare subject to adverse weather conditions such as hurricanes, tropical storms and tropicalwinter storms. Therefore, although we attempt to manage our exposure to catastrophes through our underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance protection and may have a material, adverse impact on our results of operations and financial condition.

Industry trends, such as increased litigation against the insurance industry and individual insurers, 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 subsidiaries.

Loss severity in the property and casualty 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 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.

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:

engaging in vigorous underwriting;

carefully evaluating terms and conditions of our policies;

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

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 decline coverage in the event of a violation of that condition. 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.

In the future, we may rely on independent agents to write our insurance policies, and if we are not able to contract with and retain independent agents, our revenues would be negatively affected.

Although voluntary policies comprise a small percentage of our business, we expect to increase the number of voluntary policies (policies not assumed or acquired from another company) we write as our business and product lines expand. An inability to sell our products through independent agents would negatively affect our revenues.

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. If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract 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 revenues.

Our growth may depend on the success of our residential flood offering.

Currently we offer residential flood insurance solely in Florida. We plan to expand our flood insurance business to other states and eventually establish ourselves as a leading alternative to the National Flood Insurance Program, administered by the Federal Emergency Management Agency, which has been the dominant provider of flood insurance in the United States for over 40 years.

The genesis of our flood insurance business was the enactment in 2012 of The Biggert–Waters Act which mandated that the National Flood Insurance Program establish actuarially sound premium rates. The national program’s rates thereafter soared. Congress reacted in 2014 by enacting the Homeowner Flood Insurance Affordability Act which limits the national

program’s annual rate increases to between 15% and 25% depending on particular circumstances.

We entered the residential flood market based upon our own analysis that in certain states and regions, with selective underwriting, we could profitably compete with the National Flood Insurance Program on the basis of lower rates. We are one of only a few private entrants into the flood insurance market. There is relatively little actuarial or historical data available relating to flood events. We have our own sophisticated underwriting algorithms for accepting flood insurance applications. Our algorithms, however, are untested.

There can be no assurance that future laws and regulations relating to flood insurance will not materially and adversely impact our ability to profitably compete in the residential flood market. Further there can be no assurance that our original analysis regarding residential flood insurance and its risks and costs will be proven correct over time or that our algorithms will deliver the anticipated underwriting results.

Our flood insurance offering features anon-line platform for quoting and binding residential flood policies that is designed to be quick and easy to use and accessible by any Internet capable device, such as a mobile phone. We have only recently begun to explore and develop methods to market our flood insurance andon-line platform. Since the federal flood program has dominated the flood insurance market for over 40 years, the market for private flood insurance is relatively new. There can be no assurance that our marketing efforts will be successful in producing substantial numbers of flood insurance policies for us or that prospective insureds will be receptive to our flood insurance or ouron-line platform.

Our success depends on our ability to accurately price the risks we underwrite.

The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks, including risks associated with flood insurance and other new product offerings. 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 accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; 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 accurately, is subject to several risks and uncertainties, some of which are outside our control, including —

the availability of sufficient reliable data;

the uncertainties that inherently characterize estimates and assumptions;

our selection and application of appropriate rating and pricing techniques;

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

legislatively imposed consumer initiatives.

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.

Use of current operating resources may be necessary to develop future new insurance products.

We may expand our product offerings by underwriting additional insurance products and programs. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products will also require regulatory approval, further increasing our costs and potentially affecting the speed with which we will be able to pursue new market opportunities. Claddaugh may offer reinsurance products to unaffiliated insurance companies. We cannot assure you that we will be successful bringing new insurance products to markets.

Use of current operating resources may be necessary to expand our insurance business geographically.

Although we currently conduct our homeowners’ insurance business in Florida, we plan to enter the homeowners’ insurance markets in other states. Geographic expansion of our insurance business will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software, personnel and regulatory compliance. Although we plan to enter other states judiciously with attention to profitability, we cannot assure you that our entry into other states will be successful.

As an insurance holding company, we are currently subject to state regulation and in the future may become subject to federal regulation.

All states regulate insurance holding company systems. State statutes and administrative rules generally require each insurance company in the holding company group to register with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the group. As part of its registration, each insurance company must identify material agreements, relationships and transactions with affiliates, including without limitation, loans, investments, asset transfers, transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance transactions, dividends, and consolidated tax allocation agreements.

Insurance holding company regulations generally provide that transactions between an insurance company and its affiliates must be fair and equitable, allocated between the parties in accordance with customary accounting practices, and fully disclosed in the records of the respective parties. Many types of transactions between an insurance company and its affiliates, such as transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the system may be subject to prior approval by, or prior notice to, state regulatory authorities. If we are unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action, which could adversely affect our operations. In addition, state insurance regulations also frequently impose notice or approval requirements for the acquisition of specified levels of ownership in the insurance company or insurance holding company.

HCPCI is approved as an admitted carrier in the states of Arkansas, California, Florida, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. TypTap is approved as an admitted carrier in Florida only. In addition, HCPCI is approved as anon-admitted carrier in Virginia. We may in the future seek authorization to transact business in other states as well. We will therefore become subject to the laws and regulatory requirements of those states. These regulations may vary from state to state, and states occasionally may have conflicting regulations. Currently, the federal government’s role in regulating or dictating the policies of insurance companies is limited. However, Congress, from time to time, considers proposals that would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state regulation. The impact of any future federal insurance regulation on our insurance operations is unclear and may adversely impact our business or competitive position.

Our insurance subsidiaries 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 suspensions, which may adversely affect our financial condition and results of operations.

The insurance industry is highly regulated and supervised. Our insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled and the states in which they transact insurance business. 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 —

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

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

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

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

business operations and claims practices;

approval of policy forms and premium rates;

standards of solvency, including risk-based capital measurements;

licensing of insurers and their products;

restrictions on the nature, quality and concentration of investments;

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

restrictions on transactions between insurance companies and their affiliates;

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

requiring deposits for the benefit of policyholders;

requiring certain methods of accounting;

periodic examinations of our operations and finances;

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

the level of reserves.

The FLOIR and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic 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’ business practices. These reviews may reveal deficiencies in our insurance operations ornon-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 deny 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.

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.

Our revenue from real estate investments may be affected by the success and economic viability of our anchor retail tenants. Our reliance on a single or significant tenant at certain properties may impact our ability to lease vacated space and adversely affect returns on the specific property.

At certain retail centers, we may have tenants, commonly referred to as anchor tenants, occupying all or a large portion of the gross leasable space. In the event an anchor tenant becomes insolvent, suffers a downturn in business, ceases its operations at the retail center, or otherwise determines not to renew its lease, any reduction or cessation of rental payments to us could adversely affect the returns on our real estate investments. A lease termination or cessation of operations by an anchor tenant could also lead to the loss of other tenants at the specific retail location. We may then incur additional expenses to make improvements and prepare the vacated space to be leased to one or more new tenants.

Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases.

Our retail and other real estate properties may be subject to impairment charges which can adversely affect our financial results.

We periodically evaluate our long-lived assets and related intangible assets to determine if there has been any impairment in their carrying values. If we determine an impairment has occurred, we are required to record an impairment charge equal to the excess of the asset’s carrying value over its estimated fair value. As our real estate operations grow, there is an increased potential that the impairment of an asset could have a material adverse effect on our financial results. In addition, our fair value estimates are based on several assumptions that are subject to economic and market uncertainties including, but not limited to, demand for space, competition for tenants, changes in market rental rates and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the future cash flows estimated in our impairment analysis may not be achieved.

Our real estate operations are subject to regulation under various federal, state, and local laws concerning the environment.

Our real estate operations own various properties including a restaurant, marina facilities, and commercial buildings. As a result, we are subject to regulation under various federal, state, and local laws concerning the environment, including laws addressing the discharge of pollutants into the air and water and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including remediation costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws relating to our real estate operations.

Our real estate operations include owning restaurant operations, which expose us to additional risks, which could negatively impact our operating results and financial condition.

Our restaurant operations expose us to unique business risks. For example, restaurant operations are dependent in large part on food, beverage, and supply costs that are not within our control. In addition, the restaurant industry is affected by changes in consumer preferences and discretionary spending patterns that could adversely affect revenues from restaurant operations. Moreover, the restaurant industry is affected by litigation and publicity concerning food quality, health, alcoholic beverages and other issues which can cause guests to avoid restaurants and that can result in liabilities. Any one of these risks, among others, could negatively impact our operating results and financial condition.

Our operations in India expose us to additional risks, which could negatively impact our business, operating results, and financial condition.

Our India operations expose us to additional risks including income tax risks, currency exchange rate fluctuations and risks related to other challenges caused by distance, language, and compliance with Indian labor laws and other complex foreign and U.S. laws and regulations that apply to our India operations. These numerous and sometimes conflicting laws and regulations

include anti-corruption laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, among others. Violations of these laws and regulations could result in fines and penalties, or criminal sanctions against us, our officers, or our employees. Although policies and procedures are designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.

Our ongoing investments in real estate and information technology businesses have inherent risks, and could burden our financial and human resources.

We have invested and expect to continue to invest in real estate and information technology. Despite our due diligence, these investments may still involve significant risks and uncertainties, including distraction of management and employees from current operations, insufficient revenues to offset liabilities assumed and incurred expenses, inadequate return of capital, and failure to realize the anticipated benefits. There can be no assurance that such investments will be successful and will not adversely affect our financial condition and operating results.

ITEM 1B –Unresolved Staff Comments

Not applicable.

18


ITEM 2 –Properties

Real Estate Owned and Used in Operations

Tampa, Florida. Florida. The real estate consists of 3.5 acres of land, a three-storytwo-story building which has awith gross area of 122,000approximately 67,300 square feet and a four-level parking garage. This facility is 57% occupied by us and our U.S. subsidiaries andcurrently serves as ourHCI Group, Inc.’s corporate headquarters. In addition, we lease approximately 40% tonon-affiliates and the remaining space is available for lease.

Ocala, Florida. The real estate consists of 1.6 acres of land and an office building with gross area of approximately 16,000 square feet. The facility is 100% designated for our insurance operations and will be used as an alternative location in the event a catastrophic event impacts our operations in Tampa, Florida.exclusively by TypTap Management Company.

Investment Real Estate

Treasure Island, Florida. The real estate consists of approximately 10 acres of waterfront property and land improvements, a restaurant and a marina facility. The marina facility and the restaurant areis currently owned and operated by us. The restaurant facility is leased to an unrelated party that operates several restaurants in the area.

Tierra Verde, Florida. The real estate consists of 7.1 acres of waterfront property, a dry rack storage building with gross area of 57,500 square feet, and two buildings with retail space having an aggregate gross area of approximately 23,000 square feet. This marina facility is owned and operated by us. Approximately 5%6% of the available retail space is occupied by us, 77%68% of the retail space is leased tonon-affiliates, and the remaining space is available for lease.

Riverview, Florida. The real estate consists of 2.57 acres of land, 1.27 acres of which is leased to Thorntons, LLC, a gas station and convenience store chain. Our retail structure with 8,400 square feet of net rentable space is situated on the remaining land. Approximately 88%100% of the rentable space is leased tonon-affiliates and the remaining space is available for lease. non-affiliates.

Sorrento, Florida. The real estate includes 5.42 acres of outparcel land intended for ground lease or resale and a retail shopping center with 61,40061,430 square feet of net rentable area. Approximately 74% of the rentable space is currently leased to a large, well-known grocery retailer. Approximately 96%Publix supermarket. 100% of the rentable space is leased tonon-affiliates and the remaining space is available for lease. non-affiliates. See Note 28 -- “Subsequent Events” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Melbourne, Florida. The real estate includes 2.26 acres of outparcel land intended for ground lease, resale or future development and a retail shopping center with 49,995 square feet of rentable area. Approximately 42% of the rentable space is currently leased to a large well-known grocery retailer.Fresh Market supermarket. Approximately 95% of the rentable space is leased tonon-affiliates and the remaining space is available for lease. See Note 28 -- “Subsequent Events” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Tampa, Florida. TheWe own investment properties in two different locations. One real estate consists of 7.866.38 acres of land and an office building with gross area of 68,867 square feet. The building iswas 100% leased to Bank of America through October 2022. Effective January 1, 2023, this property is used in our operations and, as anon-affiliated result, is reclassified out of real estate investments to property and equipment on the consolidated balance sheet subsequent to December 31, 2022. Another is approximately 9 acres of undeveloped land that we acquired in February 2019.

Clearwater, Florida. The real estate consists of 6.08 acres of land and a retail building with 54,296 square feet of rentable space. Approximately 59% of the rentable space is currently leased to ALDI supermarket. Approximately 94% of the rentable space is leased to non-affiliates and the remaining space is available for lease.

Leased Property

Tampa, Florida. We leased 52,693 square feet of office space and use of a four-level parking garage which primarily served as TTIG’s corporate headquarters and several of its subsidiaries’ offices until January 31, 2023. See Note 28 -- “Subsequent Events” to our consolidated financial institution.statements under Item 8 of this Annual Report on Form 10-K.

Leased Property

Noida, India. We lease 15,000 square feet of office space for our information technology operations. The original lease commencedexpired in 2013January 2022 and haswe entered into a new lease agreement for this lease effective February 2022 with an initial term of nine years.

Miami Lakes, Florida. We recently moved to a new location and now lease approximately 5,5655,600 square feet of office space for our claims related administration. The new lease commenced March 1, 2018 and has an initial term of approximately three years.is currently on a month-to-month basis.

Rental expense19


Expense under all facility leases was $336,000, $333,000$1,595,000, $1,945,000, and $304,000$1,259,000 during the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.

We are a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material, adverse effect on our consolidated financial position, results of operations or cash flows.

ITEM 4 –Mine Safety Disclosures

Not applicable.

20


PART II

ITEM 5 –Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Markets for Common Stock

Our common stock trades on the New York Stock Exchange under the symbol “HCI.” The following table represents the high and low sales prices for our common stock as reported by the New York Stock Exchange for the periods indicated:

   Common Stock
Price
 
   High   Low 

Calendar Quarter—2017

    

First Quarter

  $50.93    38.49 

Second Quarter

  $49.25    43.10 

Third Quarter

  $49.12    27.11 

Fourth Quarter

  $39.69    28.70 

Calendar Quarter—2016

    

First Quarter

  $35.75    29.30 

Second Quarter

  $33.95    26.82 

Third Quarter

  $33.04    26.43 

Fourth Quarter

  $40.45    24.35 

Holders

As of February 23, 2018,27, 2023, the market price for our common stock was $35.57$53.49 and there were 231176 holders of record of our common stock.

Dividends

The declaration and payment of dividends is at the discretion of our board of directors. Our ability to pay dividends depends on many factors, including the Company’s operating results, financial condition, capital requirements, the availability of cash from our subsidiaries and legal and regulatory constraints and requirements on the payment of dividends and such other factors asthat our board of directors deems relevant. The following table represents the frequency and amount of all cash dividends declared on our common stock for the two most recent fiscal years:

Declaration

Date

  

Payment

Date

  

Date of

Record

  

Per Share

Amount

 

1/16/2017

  3/17/2017  2/17/2017  $0.35 

4/17/2017

  6/16/2017  5/19/2017  $0.35 

7/6/2017

  9/15/2017  8/18/2017  $0.35 

10/19/2017

  12/15/2017  11/17/2017  $0.35 

1/8/2016

  3/18/2016  2/19/2016  $0.30 

4/14/2016

  6/17/2016  5/20/2016  $0.30 

7/8/2016

  9/16/2016  8/19/2016  $0.30 

10/13/2016

  12/16/2016  11/18/2016  $0.30 

Declaration Date

 

Payment Date

 

Date of Record

 

Per Share Amount

 

10/13/2022

 

12/16/2022

 

11/18/2022

 

$

0.40

 

7/14/2022

 

9/16/2022

 

8/19/2022

 

$

0.40

 

4/26/2022

 

6/17/2022

 

5/17/2022

 

$

0.40

 

1/20/2022

 

3/18/2022

 

2/18/2022

 

$

0.40

 

10/15/2021

 

12/17/2021

 

11/19/2021

 

$

0.40

 

7/7/2021

 

9/17/2021

 

8/20/2021

 

$

0.40

 

4/28/2021

 

6/18/2021

 

5/21/2021

 

$

0.40

 

1/15/2021

 

3/19/2021

 

2/19/2021

 

$

0.40

 

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders unless certain requirements, which are discussed in Note 24 —25 -- “Regulatory Requirements and Restrictions” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K, are met. Hence, Florida law may limit the availability of cash from our insurance subsidiaries for the payment of dividends to our shareholders.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes our equity compensation plans as of December 31, 2017.2022. We currently have no equity compensation plans not approved by our stockholders.

Plan Category  

(a)

Number of
Securities To be
Issued Upon
Exercise of
Outstanding Options

   (b)
Weighted-Average
Exercise Price of
Outstanding Options
   

(c)

Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))

 

 

(a)
Number of Securities
To be Issued Upon
Exercise of
Outstanding Options

 

 

(b)
Weighted-Average
Exercise Price of
Outstanding Options

 

 

(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))

 

Equity Compensation Plans Approved by Stockholders

   130,000   $34.82    1,995,655 

 

 

440,000

 

 

$

45.25

 

 

 

1,116,205

 

  

 

     

 

 

21


Performance Graph

The following graph compares the5-year cumulative total dollar return to shareholders on our common stock relative to the cumulative total returns of the Russell 2000 Index and the NASDAQ Insurance Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 20122017 and its relative performance is tracked through December 31, 2017.2022. The returns shown are based on historical results and are not intended to suggest future performance.

img68355676_0.jpg 

22


Recent Sales of Unregistered Securities

All information related to sales of unregistered securities hashave been reported in a current reportCurrent Report on Form8-K. 8-K filings.

Issuer Purchases of Equity Securities

The table below summarizes the number of common shares of common stock repurchased during the three months ended December 31, 2017 under the 2022 repurchase plan approved by our Board of Directors, in December 2016 and also the number of shares of common stockshares surrendered by employees to satisfy minimum federal incomepayroll tax liabilities associated with the vesting of restricted shares in December 2017 (dollar amounts in thousands, except share and per share amounts):

For the Month Ended

  Total Number
of Shares
Purchased
   Average
Price Paid
Per Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
   Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under
The Plans
or Programs
 

October 31, 2017

   77,708   $38.03    77,708   $10,863 

November 30, 2017

   92,540   $32.42    92,540   $7,863 

December 31, 2017

   102,397   $30.09    99,662   $4,863 
  

 

 

     

 

 

   
   272,645   $33.14    269,910   
  

 

 

     

 

 

   

For the Month Ended

 

Total Number
of Shares
Purchased

 

 

Average
Price Paid
Per Share

 

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (a)

 

 

Maximum Dollar
Value of Shares That
May Yet Be Purchased
Under The Plans
or Programs (b)

 

October 31, 2022

 

 

160,826

 

 

$

38.17

 

 

 

80,487

 

 

$

8,941

 

November 30, 2022

 

 

78,123

 

 

$

38.40

 

 

 

78,123

 

 

$

5,941

 

December 31, 2022

 

 

83,614

 

 

$

35.88

 

 

 

83,614

 

 

$

2,941

 

 

 

 

322,563

 

 

$

37.63

 

 

 

242,224

 

 

 

 

a)
In December 2017,March 2022, our Board of Directors approvedauthorized aone-year plan announced March 14, 2022 to repurchase up to $20 million$20,000 of ourthe Company’s common shares before commissions and fees during 2018. The approved amounts in2022 with this share repurchase plan expiring December 31, 2022.
b)
Represents the balances before commissions and fees at the end of each year exclude brokerage fees.month. See Note 19 — “Stockholders’ Equity”20 -- “Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

10-K for additional information.

ITEM 6 –Selected Financial DataReserved

The following selected consolidated financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form10-K. The consolidated statements of income data for the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheet data at December 31, 2017 and 2016 are derived from our audited consolidated financial statements appearing in Item 8 of this Annual Report on Form10-K. The consolidated statements of income data for the years ended December 31, 2014 and 2013, and the consolidated balance sheet data at December 31, 2015, 2014, and 2013, are derived from our audited consolidated financial statements that are not included in this Annual Report on Form10-K. The historical results are not necessarily indicative of the results to be expected in any future period.Not applicable.

23

   As of or for the Years Ended December 31, 
   2017  2016  2015  2014  2013 
   (Dollar amounts in thousands, except per share amounts) 

Operating Revenue

      

Gross premiums earned

  $358,253  $378,678  $423,120  $365,488  $337,113 

Premiums ceded

   (133,635  (135,051  (140,614  (113,423  (102,865
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net premiums earned

   224,618   243,627   282,506   252,065   234,248 

Net investment income

   11,439   9,087   3,978   4,888   1,469 

Net realized investment gains (losses)

   4,346   2,601   (608  4,735   80 

Net unrealized investment gains

   92   —     —     —     —   

Net other-than-temporary impairment losses recognized in income:

      

Total other-than-temporary impairment losses

   (1,116  (2,252  (5,275  (107  —   

Portion of loss recognized in other comprehensive income, before taxes

   (351  (230  594   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net other-than-temporary impairment losses

   (1,467  (2,482  (4,681  (107  —   

Policy fee income

   3,622   3,914   3,496   2,820   3,098 

Gain on repurchases of convertible senior notes

   —     153   —     —     —   

Gain on bargain purchase

   —     2,071   —     —     —   

Gain on remeasurement of previously held interest

   —     4,005   —     —     —   

Other income

   1,756   1,470   1,261   1,707   2,193 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating revenue

   244,406   264,446   285,952   266,108   241,088 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating Expenses

      

Losses and loss adjustment expenses

   165,629   124,667   87,224   79,468   65,123 

Policy acquisition and other underwriting expenses

   39,663   42,642   41,984   37,952   31,619 

General and administrative personnel expenses*

   25,127   26,200   28,276   26,960   21,808 

Interest expense

   16,767   11,079   10,754   10,453   3,607 

Loss on repurchases of senior notes

   743   —     —     —     —   

Impairment losses

   38   388   —     —     —   

Other operating expenses

   12,063   12,614   11,522   10,313   12,478 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   260,030   217,590   179,760   165,146   134,635 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income before income taxes

   (15,624  46,856   106,192   100,962   106,453 

Income tax (benefit) expense

   (8,731  17,835   40,331   38,298   40,891 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(6,893 $29,021  $65,861  $62,664  $65,562 

Preferred stock dividends

   —     —     —     4   (104
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income available to common stockholders

  $(6,893 $29,021  $65,861  $62,668  $65,458 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

*For the years ended December 31, 2016, 2015, 2014 and 2013, we reclassified certain payroll-related costs such as share-based compensation expense, payroll taxes and employee benefits previously reported in other operating expenses to general and administrative personnel expenses to conform with our 2017 presentation.

   As of or for the Years Ended December 31, 
   2017  2016  2015  2014  2013 
   (Dollar amounts in thousands, except per share amounts) 

Per Share Data:

      

Basic (loss) earnings per common share

  $(0.75 $2.95  $6.51  $5.90  $5.82 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted (loss) earnings per common share

  $(0.75 $2.92  $5.90  $5.36  $5.63 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Dividends per common share

  $1.40  $1.20  $1.20  $1.10  $0.95 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios to Net Premium Earned:

      

Loss Ratio

   73.74  51.17  30.88  31.53  27.80

Expense Ratio

   42.03  38.14  32.76  33.99  29.67
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Combined Ratio

   115.77  89.31  63.64  65.52  57.47
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios to Gross Premiums Earned:

      

Loss Ratio

   46.23  32.92  20.61  21.74  19.32

Expense Ratio

   26.35  24.54  21.87  23.45  20.62
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Combined Ratio

   72.58  57.46  42.48  45.19  39.94
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated Balance Sheet Data:

      

Total investments

  $380,286  $298,734  $232,917  $168,799  $146,028 

Total cash and cash equivalents

  $255,884  $280,531  $267,738  $314,416  $293,098 

Total assets

  $842,264  $670,064  $636,986  $598,557  $522,011 

Long-term debt

  $237,835  $138,863  $129,429  $125,886  $122,627 

Total stockholders’ equity

  $193,975  $243,746  $237,722  $182,585  $160,521 

ITEM 7 –Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual reportAnnual Report on Form 10-K.

Forward-Looking Statements

In addition to historical information, this annual reportAnnual Report on Form10-K contains forward-looking statements as defined under federal securities laws. Such statements, including statements about our plans, objectives, expectations, assumptions or future events, involve risks and uncertainties. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. Typically, forward-looking statements can be identified by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions. The important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited to the effecteffects of governmental regulation; changes in insurance regulations; the frequency and extent of claims; uncertainties inherent in reserve estimates; catastrophic events; changes in the demand for, pricing of, availability of or collectability of reinsurance; restrictions on our ability to change premium rates; increased rate pressure on premiums; the severity and impact of a pandemic; and other risks and uncertainties and other factors listed under Item 1A—“Risk1A – “Risk Factors” and elsewhere in this annual reportAnnual Report on Form10-K and in our other Securities and Exchange Commission filings.

OVERVIEW

General

HCI Group, Inc. is a Florida-based InsurTech company which through its subsidiaries is engaged in a variety of business activities, including property and casualty insurance, reinsurance,information technology services, insurance management, real estate and information technology.reinsurance. Its principal business is property and casualty insurance.

Based on our organizational structure, revenue sources, and evaluation of financial and operating performances by management, we manage four operating divisions, which includes the following operations:

a)Insurance Operations

Property and casualty insurance

Reinsurance

b)Other Operations

Real estate

Information technology

We began insurance operations in 2007 by participating in a“take-out “take-out program” which is a legislatively mandated program designed to encourage private companies to assume policies from Citizens, a Florida state sponsoredstate-sponsored insurance carrier. Our growth since inception has resulted primarily from a seriesOpportunities to acquire large numbers of policy assumptionspolicies from Citizens and policies assumed from one Florida insurance company. This growth track was beneficial to usmeeting our strict underwriting criteria have diminished in terms of reduced policy acquisition costs and, depending on the timing of the transaction, temporarily lower reinsurance costs.recent years. We may, however, selectively pursue additional assumption transactions with Citizens.

Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. Our growth strategies also include assumption of policies from other insurance companies with the intention of renewing and/or replacing them with our policies.

Recent DevelopmentsEvents

On December 22, 2017, the Tax CutsSince January 1, 2023, our Tampa office building property that was previously leased to an unaffiliated company has been used in our operations. As a result, it is reclassified out of real estate investments to property and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Significant changes in the 2017 Tax Act affecting us include the reduction of the federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017 and a limitationequipment on the consolidated basis of the carryback as well as the carryforward of net operating losses (“NOL”) arising afterbalance sheet subsequent to December 31, 2017. In addition, the 2017 Tax Act eliminates the deductibility exception for performance-based executive compensation and expands the definition of covered executives to include the chief financial officer. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is enacted. Because the enactment of the 2017 Tax Act was close to the end of the fiscal year, measurement of certain income tax effects relied on estimates that we believed to be reasonable. Deviation from these estimates may arise as relevant information becomes available and, as a result, we may recognize material adjustments to income tax expense during 2018. See Note 17 — “Income Taxes” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.2022.

On January 15, 2018,11, 2023, our Board of Directors declared a quarterly dividend of $0.35$0.40 per common share. The dividends are to be paidpayable on March 16, 201817, 2023 to stockholders of record on February 16, 2018.17, 2023.

On January 26, 2018,12, 2023, we entered into an agreementreceived approval from the FLOIR to lease office space atdiscontinue our flood insurance policies written in Florida with policy cancellation effective dates no later than May 31, 2023. The reason for discontinuation is primarily attributable to the increased costs and reduced availability of flood reinsurance. The discontinuation will not have a new locationmaterial impact to our results of operations.

On January 17, 2023, we received the final distribution of $18,000 from FMKT Mel JV, the unconsolidated joint venture that we had a 90% equity interest in Miami Lakes, Florida for our claims related administration. The lease commencedwhich was liquidated on March 1, 2018 and has an initial term of approximately three years.December 31, 2022.

On February 8, 2018, we granted 40,000 shares5, 2023, our Board of restricted stockDirectors extended the maturity date for the principal and options to purchase 110,000 of our common shares at an exercise price of $40 per share to our chief executive officer, Paresh Patel. The options will expire on February 8, 2028. These share-based awards were granted pursuant to our 2012 Omnibus Incentive Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by us. The grant date fair valuesunpaid accrued interest of the restricted stock and options were approximately $1,397,000 and $939,000, respectively.$40,000,000 demand promissory note with TTIG to June 30, 2025.

On February 20, 2018,14, 2023, we entered into a subscriptionconditional agreement with another limited partnershipto sell our retail shopping center investment property in Sorrento, Florida to a non-affiliate for a price of $13,418,000. Subject to due diligence, the sale is expected to be completed within 45

24


days after the contract date.

On February 16, 2023, we entered into a conditional agreement to sell our retail shopping center investment property in Melbourne, Florida to a non-affiliate for a price of $18,500,000. Subject to due diligence, the sale is expected to be completed within 45 days after the contract date.

On February 27, 2023, United’s Florida-domiciled residential insurance subsidiary was placed into receivership by the State of Florida due to its financial insolvency. Under the existing contracts, United is responsible for payment of ceded premiums owed to us while we are responsible for adjudicating and committedpaying claims. At December 31, 2022, we had a net amount due to provide $5,000,000United of capital$1,114,000 and funds withheld for investment. The capital is callable atassumed business in trust accounts totaling $48,772,000 for the discretionbenefit of policies assumed from, and third-party administrator (“TPA”) services provided to, United. We cannot predict the actions a receiver might take, which may include cancellation of policies subject to the quota share contracts, termination of the general partner duringTPA service agreement and restrictions on, or use of, funds held in trust. Any such actions could have a commitment period.

material adverse effect on our financial position and results of operations.

RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 20172022 with the Year Ended December 31, 20162021

Our results of operations for the year ended December 31, 20172022 reflect net loss of $6,893,000,approximately $54,603,000, or $0.75$6.24 loss per common share, compared with net income of $29,021,000,approximately $7,242,000, or $2.92$0.21 diluted earnings per diluted common share, for the year ended December 31, 2016.2021. The year-over-year declinedecrease was primarily attributable to a $40,962,000$143,938,000 increase in losses and loss adjustment expenses, primarily from Hurricane Irma, a decreasean $11,245,000 increase in grosspolicy acquisition and other underwriting expenses, and an $11,083,000 increase in general and administrative personnel expenses, offset by an $86,269,000 increase in net premiums earned of $20,425,000 and ana $3,937,000 net increase in interest expenseincome from our investment portfolio (consisting of $5,688,000 resulting from the issuance of long-term debt in March 2017. These factors contributed to $15,624,000pre-tax operating losses in 2017net investment income and as a result, we recognized $8,731,000 of income tax benefit, the amount of which included net positive tax effects of approximately $1,400,000 due to the 2017 Tax Act.realized and unrealized gains or losses).

Revenue

Gross Premiums Earned on a consolidated basis for the years ended December 31, 20172022 and 20162021 were approximately $358,253,000$724,716,000 and $378,678,000,$577,044,000, respectively. The decrease$147,672,000 increase in 20172022 was primarily attributable to the increased policies in force from the growth in TypTap’s business, offset by a normal decrease due to policy attrition as well as a rate decrease effective on new and renewalattrition. Gross premiums earned from the United policies beginningassumed were $73,261,000 in January 2016.2022 compared with $98,498,000 in 2021. HCPCI’s gross premiums earned were $426,501,000 in 2022 compared with $401,137,000 in 2021. TypTap’s gross premiums earned were $298,215,000 in 2022 compared with $175,907,000 in 2021.

Premiums Ceded for the years ended December 31, 20172022 and 20162021 were approximately $133,635,000$261,144,000 and $135,051,000,$199,741,000, respectively, representing 37.3%36.0% and 35.7%34.6%, respectively, of gross premiums earned. The percentage increase from 2016 was primarily attributable to adjustments related to retrospective provisions under certain reinsurance contracts due to losses incurred by Hurricane Irma. The increase was offset in part by lower reinsurance costs during the first five months of 2017 as compared with the corresponding period in 2016.

Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses defined in a quota share arrangement.agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. For the year ended December 31, 2017, premiums ceded includedThe $61,403,000 increase was primarily attributable to increased reinsurance costs effective June 1, 2022 and an increased overall reinsurance coverage amount as a net increaseresult of approximately $5,740,000 related to retrospective provisions. For the year ended December 31, 2016, premiums ceded reflectpremium growth and expansion, offset by a net reduction in premiums ceded attributable to retrospective provisions under multi-year reinsurance contracts. In addition, premiums ceded were increased by a reversal of approximately $12,677,000.$12,600,000 of previously accrued benefits attributable to retrospective provisions under multi-year reinsurance contracts due to the effects of Hurricane Ian. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the years ended December 31, 20172022 and 20162021 totaled approximately $213,711,000$464,875,000 and $232,140,000,$474,648,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The $9,773,000 decrease in 2022 resulted primarily from an increase in premiums ceded to reinsurers as described above, offset by an increase in gross premiums written from the growth of TypTap business of approximately $100,680,000. HCPCI’s and TypTap’s gross premiums written were approximately $377,860,000 and $348,159,000, respectively, for 2022 compared with approximately $426,910,000 and $247,479,000, respectively, for 2021. We had approximately 139,000210,400 policies in force at December 31, 20172022 (excluding policies assumed from United) as compared with approximately 150,000180,700 policies in force at December 31, 2016.2021.

Net Premiums Earned for the years ended December 31, 20172022 and 20162021 were approximately $224,618,000$463,572,000 and $243,627,000,$377,303,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

25


The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 20172022 and 20162021 (amounts in thousands):

  Years Ended
December 31,
 

 

Years Ended December 31,

 

  2017   2016 

 

2022

 

 

2021

 

Net Premiums Written

  $213,711   $232,140 

 

$

464,875

 

 

$

474,648

 

Decrease in Unearned Premiums*

   10,907    11,487 
  

 

   

 

 

Increase in Unearned Premiums

 

 

(1,303

)

 

 

(97,345

)

Net Premiums Earned

  $224,618   $243,627 

 

$

463,572

 

 

$

377,303

 

  

 

   

 

 

*Unearned premiums are impacted by the timing and size of any takeout completed during the year net of attrition.

Net Investment Income for the years ended December 31, 20172022 and 20162021 was approximately $11,439,000$32,447,000 and $9,087,000,$12,335,000, respectively. The year-over-year increase in 2017 was primarily dueattributable to year-over-year increasesa $12,040,000 increase in income from limited partnershipreal estate investments, a $4,992,000 increase in income from available-for-sale fixed-maturity securities and fixed-maturity securities.a $4,142,000 increase in interest income from cash and cash equivalents. SeeNet Investment Income under Note 4 -- “Investments” underNet Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Net Realized Investment GainsLosses for the year ended December 31, 2022 were approximately $1,187,000 compared with approximately $6,472,000 of net realized investment gains for the year ended December 31, 2021. The decrease was primarily attributable to net realized losses of approximately $996,000 from sales of equity securities during the year ended December 31, 2022 compared with net realized gains of approximately $4,123,000 from sales of equity securities during the year ended December 31, 2021.

Net Unrealized Investment Losses for the year ended December 31, 2022 were approximately $7,153,000 compared with approximately $1,363,000 of net unrealized investment gains for the year ended December 31, 2021. Net unrealized investment gains or losses represent the net change in the fair value of equity securities. The decrease in 2022 was primarily attributable to an overall deterioration in the equity market compared with 2021.

Gain from Remeasurement of Contingent Liabilities for the year ended December 31, 2022 was approximately $3,117,000, resulting from the decrease in the balance of contingent liabilities in connection with the renewal rights agreements entered into with United. See Note 9 -- “Intangible Assets, Net” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K for additional information.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $371,463,000 and $227,525,000 for the years ended December 31, 20172022 and 2016 were approximately $4,346,000 and $2,601,000,2021, respectively. The gains in 2017 resulted primarily from sales intended to take advantagelosses and loss adjustment expenses of an upturn in the security market.

Net Other-Than-Temporary Impairment LossesHCPCI Insurance Operations were $204,549,000 and $147,198,000 for the years ended December 31, 20172022 and 2016 were2021, respectively. The increase was primarily attributable to approximately $1,467,000$42,100,000 of losses from Hurricane Ian and $2,482,000, respectively. During 2017, we recognized impairmenta $20,338,000 net increase in losses specificattributable to four fixed-maturity securities and six equity securities. Threethe United policies due to an increase in the number of these fixed-maturity securities were written down before being sold. Six equity securities were impaired because eachpolicies assumed from United or any subsequent renewal or replacement of them had been in an unrealized loss position for a length of time with no near term prospect for recovery.

Expenses

OurUnited policies. Losses and Loss Adjustment Expensesamounted to approximately $165,629,000loss adjustment expenses for TypTap were $173,828,000 and $124,667,000$80,863,000 for the years ended December 31, 20172022 and 2016,2021, respectively. Our 2017The increase was primarily attributable to $45,365,000 of losses due to the greater number of TypTap policies in force, approximately $23,200,000 of losses from Hurricane Ian, a $14,389,000 net increase in losses attributable to the United policies due to an increase in the number of policies assumed from United or any subsequent renewal or replacement of United policies, and $13,544,000 of prior period loss adjustment expenses included approximately $54,000,000 of net losses related to Hurricane Irma and additional losses of approximately $2,500,000 related to Hurricane Matthew. In addition, our losses and loss adjustment expenses included approximately $16,200,000 of additional losses, which reflected the continuation of reserve strengthening in response to trends involving assignment of insurance benefits and related litigation. Our losses and loss adjustment expenses were also impacted by weather-related events.development. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 20172022 and 20162021 were approximately $39,663,000$104,977,000 and $42,642,000, respectively. The decrease from 2016 was$93,732,000, respectively, and primarily attributablereflect the amortization of deferred acquisition costs such as commissions payable to decreased commissionsagents for production and renewal of policies, catastrophe allowance payable to United, and premium taxes resulting from policy attritiontaxes. Policy acquisition expenses for HCPCI were $59,398,000 and the effect of the rate decrease.

General and Administrative Personnel Expenses$59,321,000 for the years ended December 31, 20172022 and 20162021, respectively. TypTap policy acquisition expenses were approximately $25,127,000$45,733,000 and $26,200,000,$34,593,000 for the years ended December 31, 2022 and 2021, respectively. The $1,073,000 decrease in 2017increase was primarily attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force during 2022 and the policies assumed from United or any subsequent renewal or replacement of United policies.

General and Administrative Personnel Expenses for the years ended December 31, 2022 and 2021 were approximately $56,511,000 and $45,428,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-based compensation expense, and employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to aprojects to develop software development project for internal use.use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The year-over-year increase of $11,083,000 was primarily attributable to a $9,607,000 increase in salaries and wages expense due to an increase in the headcount of temporary and full-time employees and merit increases for non-executive employees and a $1,353,000 increase in stock-based compensation expense.

Loss on repurchases of26


Interest Expense for the years ended December 31, 2022 and 2021 was approximately $7,768,000 and $6,400,000, respectively. The increase primarily resulted from interest expense related to our 4.75% Convertible Senior Notes issued in May 2022, offset by conversions of our 4.25% Convertible Senior Notes during the second half of 2021.

Impairment Loss for the year ended December 31, 20172022 was approximately $743,000,$2,284,000, resulting from the early extinguishmentreview of our 8% Senior Notes. See Note 13 — “Long-Term Debt” under8% Senior Notes to our consolidated financial statements under Item 8the Northeast and Southeast Regions’ policies in-force as well as the impairment assessment of this Annual Report on Form10-K.the renewal rights intangible assets associated with the renewal rights agreements entered into with United.

Income Tax Benefit for the year ended December 31, 20172022 was approximately $8,731,000 versus approximately $17,835,000 of$13,815,000 for federal, state, and foreign income taxes compared with income tax expense of approximately $3,991,000 for the year ended December 31, 2016,2021, resulting in an effective tax rate of 55.9%20.2% for 20172022 and 38.1%35.5% for 2016.2021. The year-over-year changedecrease in the effective tax rate was primarily attributable to our 2017 operating lossesa valuation allowance established as of December 31, 2022 and the recognition of $1,400,000 in beneficial tax effects on our net deferred tax liabilities duebenefits attributable to the lower future corporate income tax rates enacted by the 2017 Tax Act.restricted stock that vested during 2022.

Ratios:

The loss ratio applicable to the year ended December 31, 20172022 (losses and loss adjustment expenses incurred related to net premiums earned) was 73.8%80.1% compared with 51.2%60.3% for the year ended December 31, 2016.2021. The increase was primarily attributabledue to the increase in losses relatedand loss adjustment expenses due to Hurricane Irma combined with the decreaseIan, offset in net premiums earned which was driven in large part by the increase in cedednet premiums due to the aforementioned adjustments.earned.

The expense ratio applicable to the year ended December 31, 20172022 (defined as underwritingtotal expenses generalexcluding losses and administrative personnel expenses, interest and other operatingloss adjustment expenses related to net premiums earned) was 42.0%42.4% compared with 38.1%44.8% for the year ended December 31, 2016.2021. The increasedecrease in our 2017 expense ratio was primarily attributable to the decreaseincrease in 2017 net premiums earned anand the decrease in debt conversion expense, offset in part by the increase in interest expense,policy acquisition, underwriting and the loss on repurchases of our senior notes, as described above.personnel expenses.

The combined ratio (total of all expenses in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the year ended December 31, 20172022 was 115.8%122.5% compared with 89.3%105.1% for the year ended December 31, 2016. Our combined ratio2021. The increase was negatively impacted by increased expenses forprimarily attributable to the increase in losses and loss adjustment expenses increased interest expense,combined with the loss on repurchases of our senior notesincreases in reinsurance costs and a reduction in 2017 net premiums earned.policy acquisition, underwriting and personnel expenses.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the year ended December 31, 20172022 was 72.6%78.4% compared with 57.5%68.7% for the year ended December 31, 2016.2021. The increase in 20172022 was primarily attributable to the factors described above.

increase in losses and loss adjustment expenses due to Hurricane Ian, offset in part by the increase in gross premiums earned.

Comparison of the Year Ended December 31, 20162021 with the Year Ended December 31, 20152020

Our results of operations for the year ended December 31, 20162021 reflect net income available to common stockholders of $29,021,000,approximately $7,242,000, or $2.92$0.21 diluted earnings per diluted common share, compared with a net income available to common stockholders of $65,861,000,approximately $27,580,000, or $5.90$3.49 diluted earnings per diluted common share, for the year ended December 31, 2015.2020. The year over year decline in our income available to stockholdersyear-over-year decrease was primarily attributable to a $44,442,000 decreaseone-time gain on involuntary conversion of approximately $36,969,000 included in gross premiums earned, andour 2020 results, offset by a $37,443,000net increase in losses and loss adjustment expenses. These factors contributed to a $59,336,000 decrease inpre-taxincome from our investment portfolio (consisting of net investment income and as a result, our income tax expense decreased $22,496,000 year over year.net realized and unrealized gains or losses) of approximately $14,538,000.

Revenue

Gross Premiums Earned for the years ended December 31, 20162021 and 20152020 were approximately $378,678,000$577,044,000 and $423,120,000,$415,918,000, respectively. The decrease$161,126,000 increase in 20162021 was primarily attributable to the policies assumed from United and increased policies in force from the growth in TypTap’s business, offset by a normal decrease due to policy attrition as well as a rate decrease effective on new and renewalattrition. Gross premiums earned in 2021 related to the United policies beginningassumed were $98,498,000. HCPCI’s gross premiums earned in January 2016.2021 were $401,137,000 compared with $337,082,000 in 2020. TypTap’s gross premiums earned in 2021 were $175,907,000 compared with $78,836,000 in 2020.

Premiums Ceded for the years ended December 31, 20162021 and 20152020 were approximately $135,051,000$199,741,000 and $140,614,000,$153,458,000, respectively, representing 35.7%34.6% and 33.2%36.9%, respectively, of gross premiums earned. The $5,563,000 decrease$46,283,000 increase was primarily attributable to the lowerincreased reinsurance costs of our 2016/17 reinsurance program, which beganeffective June 1, 2016, as compared with the costs2021 and a higher level of the 2015/16 program that began June 1, 2015. In addition, thereinsurance coverage, offset by a reduction to ourin premiums ceded premiums attributable to retrospective provisions under certain reinsurance contracts for calendar year 2016 was lower by approximately $5,645,000 as compared with calendar year 2015.

Our reinsurance program for 2016/17 provides coverage, which according to catastrophe models approved by the FLOIR, is sufficient to cover the probable maximum loss resulting from a 1 in 165 year event. Our reinsurance program for 2015/16 provided coverage for a probable maximum loss resulting from a 1 in 260 year event. As a result of our program and pricing changes, we expect our reinsurance costs for the 2016/17 program year to be approximately $48,000,000 below the cost for 2015/16.

Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance treaties and to assume a proportional share of losses defined in one quota share arrangement, which was cancelled effective May 31, 2016. For the years ended December 31, 2016 and 2015, premiums ceded reflect net reductions of $12,677,000 and $18,322,000, respectively, related to provisions under certain multi-year catastrophe reinsurance contracts. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.” The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.

Net Premiums Written for the years ended December 31, 20162021 and 20152020 totaled approximately $232,140,000$474,648,000 and $255,724,000,$350,696,000, respectively. NetThe $123,952,000 increase in 2021 resulted primarily from an increase in gross premiums written representfrom the growth of TypTap business of approximately $142,624,000 and the assumed business from United of approximately $128,948,000. HCPCI’s and TypTap’s gross premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.written were approximately $426,910,000 and $247,479,000, respectively, for 2021 compared with

27


approximately $399,299,000 and $104,855,000, respectively, for 2020. We had approximately 150,000180,700 policies in force at December 31, 2016 as compared with2021 versus approximately 160,000154,000 policies in force at December 31, 2015.

2020.

Net Premiums Earned for the years ended December 31, 20162021 and 20152020 were approximately $243,627,000$377,303,000 and $282,506,000,$262,460,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 20162021 and 20152020 (amounts in thousands):

  Years Ended
December 31,
 

 

Years Ended December 31,

 

  2016   2015 

 

2021

 

 

2020

 

Net Premiums Written

  $232,140   $255,724 

 

$

474,648

 

 

$

350,696

 

Decrease in Unearned Premiums*

   11,487    26,782 
  

 

   

 

 

Increase in Unearned Premiums

 

 

(97,345

)

 

 

(88,236

)

Net Premiums Earned

  $243,627   $282,506 

 

$

377,303

 

 

$

262,460

 

  

 

   

 

 

*Unearned premiums are impacted by the timing and size of any takeout completed during the year net of attrition.

Net Investment Income for the years ended December 31, 20162021 and 20152020 was approximately $9,087,000$12,335,000 and $3,978,000,$4,564,000, respectively. The year-over-year increase in 2016 was primarily dueattributable to $1,207,000 ofan increase in income from limited partnership investments of approximately $6,542,000 and a net gain of $2,790,000 recognized in 2016 versus losses of $3,244,000 in 2015.2021 for a legal settlement received from The Kroger Co. SeeNet Investment Income under Note 4 -- “Investments” underNet Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Net Realized Investment Gains for the year ended December 31, 2016 were approximately $2,601,000 as compared with $608,000 of net realized investment losses for the year ended December 31, 2015. The losses in 2015 resulted primarily from sales intended to rebalance the mix of our investment portfolio to meet our long-term investment goals and strategies.

Net Other-Than-Temporary Impairment Losses for the years ended December 31, 20162021 and 20152020 were approximately $2,482,000$6,472,000 and $4,681,000,$1,000,000, respectively. During 2016, we recognized impairment losses specific to four fixed-maturity securities, threeThe gains in 2021 resulted primarily from sales of which were subject to credit loss impairment, and 17 equity securities. Three fixed-maturity securities were subject to credit related loss impairments resulting from our analysis of their expected cash flows. Seventeen equity securities were impaired because each of them had been in an unrealized loss position for a length of time with no near term prospect for recovery.

Policy Fee IncomeNet Unrealized Investment Gains for the years ended December 31, 20162021 and 2015 was2020 were approximately $3,914,000$1,363,000 and $3,496,000,$679,000, respectively. BeginningThe increase in March 2015, we have used actual policy cancellations2021 reflected an overall improvement in our calculation of policy fee income whereas estimated attrition rates were used in this calculation prior to March 2015. In addition, the unearned portion of nonrefundable policy fee income was fully recognized for policies that were cancelled during 2016. As a result, our 2016 policy fee income was higher than in 2015 despite the decline in gross premiums earned.

equity market compared with 2020.

Expenses

Our consolidated Losses and Loss Adjustment Expensesamounted to approximately $124,667,000$227,525,000 and $87,224,000, respectively,$160,036,000 for the years ended December 31, 20162021 and 2015. Our 20162020, respectively. The increase was primarily attributable to losses associated with the assumption of policies from United, the organic growth in TypTap’s homeowners business, and the unfavorable loss adjustment expenses were impacted by weather-related events in both years and two hurricanes, Hermine and Matthew, in 2016. Hurricane Matthew accounteddevelopment for approximately $21,000,000 of our 2016 losses. In addition, trends involving assignment of insurance benefits and related litigation has caused us to continue strengthening ourthe 2020 loss reserves.year. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 20162021 and 20152020 were approximately $93,732,000 and $53,859,000, respectively. The increase was primarily attributable to amortization of approximately $42,642,000increased costs associated with the policies assumed from United and $41,984,000, respectively, primarily reflect commissions and premium taxesthe amortization of increased commission costs related to the growth of TypTap’s policies that have renewed.in force during 2021.

Debt Conversion Expense for the year ended December 31, 2021 was approximately $1,754,000, representing costs associated with certain of the conversions of our 4.25% Convertible Senior Notes.

General and Administrative Personnel Expensesfor the years ended December 31, 20162021 and 20152020 were approximately $26,200,000$45,428,000 and $28,276,000,$33,829,000, respectively. The $2,076,000 decrease in 2016year-over-year increase of $11,599,000 was primarily attributable to an $8,042,000 increase in salaries and wages expense due to an increase in the headcount of temporary and full-time employees and merit increases for non-executive employees, and a $5,621,000 increase in stock-based compensation expense, offset by a decrease in discretionaryemployee incentive pay in 2016. The level of discretionary incentive pay in 2016 was influenced in large part by our financial resultsbonus and higher capitalized and recoverable payroll costs.

Interest Expense for the year, which were negatively impacted by Hurricane Matthew in the fourth quarter of 2016.years ended December 31, 2021 and 2020 was approximately $6,400,000 and $11,734,000, respectively. The decrease primarily resulted from conversions of our 4.25% Convertible Senior Notes during the second half of 2021 and the early adoption of ASU 2020-06 “Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity.” ASU 2020-06 allows the reversal of discounts previously recorded to account for the cash conversion feature of convertible debt instruments. Our 4.25% Convertible Senior Notes contain such a cash conversion feature and accordingly the discount was offset in part by increased payroll costs resulting from our growing workforce.reversed on January 1, 2021. As a result, interest expense no longer includes amounts representing the amortization of the discount.

Impairment lossIncome Tax Expense for the year ended December 31, 20162021 was approximately $388,000. The loss resulted from the write-down$3,991,000 for federal, state, and foreign income taxes compared with income tax expense of lease intangibles and other assets associated with the unexpected closure of one tenant’s business at one of our retail shopping centers.

Income Tax Expenseapproximately $9,348,000 for the yearsyear ended December 31, 2016 and 2015 was approximately $17,835,000 and $40,331,000, respectively, for state, federal and foreign income taxes2020, resulting in an effective tax rate of 38.1%35.5% for 20162021 and 38.0%25.3% for 2015.2020. The increase in the effective tax rate was primarily due to the non-deductibility of certain executive compensation and the increase in deferred tax expense due to the increased Florida corporate tax rate effective January 1, 2022.

Ratios:28


Ratios:

The loss ratio applicable to the year ended December 31, 20162021 was 51.2%60.3% compared with 30.9%61.0% for the year ended December 31, 2015.2020. The increasedecrease was primarily attributabledue to lossesan increase in October 2016 from Hurricane Matthew as well as reserve strengthening throughout 2016.net premiums earned.

The expense ratio applicable to the year ended December 31, 20162021 was 38.1%44.8% compared with 32.7%43.2% for the year ended December 31, 2015.2020. The increase in our expense ratio was primarily attributable to the increase in policy acquisition, underwriting and personnel expenses, offset by the increase in net premiums earned and the decrease in 2016interest expense.

The combined ratio to net premiums earned.

Our combined ratioearned for the year ended December 31, 20162021 was 89.3%105.1% compared with 63.6%104.2% for the year ended December 31, 2015. Our combined ratio2020. The increase was negatively impacted by increased expenses forprimarily attributable to the increase in losses and loss adjustment expenses and a reductioncombined with the increases in 2016 net premiums earned.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. and policy acquisition and other underwriting expenses.

The combined ratio to gross premiums earned for the year ended December 31, 20162021 was 57.5%68.7% compared with 42.5%65.8% for the year ended December 31, 2015.2020. The increase in 20162021 was primarily attributable to the factors described above.increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.

Seasonality of Our Business

Our insurance business is seasonal as hurricanesseasonal. Hurricanes and tropical storms affecting Florida, our primary market, and other southeastern states typically occur during the period from June 1st through November 30th of each year. Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. Also, with our reinsurance treaty year typically effective on June 1st of each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates, coverage levels or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning on June 1st of each year.

LIQUIDITY AND CAPITAL RESOURCES

Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by our insurance subsidiaries from premiums written and investment income. We may consider raising additional capital through debt and/or equity offerings to support our growth and future investment opportunities.

Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. Substantially all of our losses and loss adjustment expenses, excluding litigated claims, are fully settled and paid within approximately 100 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.

We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses. In addition, we intend to continue investing inexpenses and real estate to maximize returns and diversify our sources of income, pursue acquisition opportunities, or consider other strategic opportunities.

acquisitions.

Revolving Credit Facility, Convertible Senior Notes, and Promissory Notes, and Finance Leases

The following table summarizes ourthe principal and interest payment obligations for long-term debtour indebtedness at December 31, 2017:2022:

Maturity Date

Interest Payment Due Date

3.875%4.75% Convertible Senior NotesNotes*

March 2019

June 2042

March 15

June 1 and September 15December 1**

4.25% Convertible Senior NotesNotes***

March 2037

March 1 and September 1

4%3.75% Callable Promissory Note

Through February 2031September 2036

1st

1st day of each month

3.75% Callable3.90% Promissory Note

Through September 2036April 2032

1st

1st day of each month

3.95%4.55% Promissory Note

Through February 2020August 2036

17th

1st day of each month

Finance leases

Through October 2024

Various

Revolving credit facility

Through December 2023

January 1, April 1, July 1, October 1

29


*

At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on June 1, 2027, June 1, 2032 or June 1, 2037.

**

The cash interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022.

***

At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on March 1, 2027 or March 1, 2032.

See Note 13 —12 -- “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Share Repurchase Plan

In December 2017, our Board of Directors approved aone-year plan for 2018 under which we may purchase up to $20,000,000 of our common shares in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. The approved amount excludes brokerage fees. See Note 19 — “Stockholders’ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Limited Partnership Investments

Our limited partnership investments consist of foursix private equity funds managed by their general partners. TheseTwo of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Under certain circumstances, we may be required to provide additional capital for the four remaining funds with expired capital commitments. At December 31, 2017,2022, there was an aggregate unfunded capital balance of $14,328,000.$5,661,000. SeeLimited Partnership Investments under Note 4 — “Investment”-- “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

Real Estate AcquisitionInvestment

Real estate has long been a significant component of our overall investment portfolio. It diversifies our portfolio and helps offset the volatility of other higher-risk assets. Thus, we may consider expanding our real estate investment portfolio should an opportunity arise.

We currently havehad a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we arewere not the primary beneficiary. In June 2022, FMKT Mel JV’s real estate portfolio consistsJV sold its last outparcel and recognized a net gain of outparcels for ground lease or sale,$572,000. FMKT Mel JV distributed its earnings in July 2022 and the values of which have increased since the opening of an adjacent retail shopping center which we acquiredsubsidiary was liquidated in December 2016. We have the option to take full ownership of these outparcels by acquiring the remaining 10% interest. Alternatively, we may sell these outparcels and allocate the profits from the sale before liquidating FMKT Mel JV.

2022.

Sources and Uses of Cash

Our cash flows from operating, investing and financing activities for the years ended December 31, 2017, 20162022, 2021 and 20152020 are summarized below.

Cash Flows for the Year Ended December 31, 2022

Net cash used in operating activities for the year ended December 31, 20172022 was approximately $12,000, which consisted primarily of cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments less cash received from net premiums written and reinsurance recoveries of approximately $200,551,000. Net cash used in investing activities of $434,537,000 was primarily due to the purchases of fixed-maturity and equity securities of $637,730,000, the purchases of property and equipment of $6,341,000, and the purchase of intangible assets from United of $3,800,000, offset by the proceeds from calls, repayments and maturities of fixed-maturity securities of $151,415,000, the proceeds from sales of fixed-maturity and equity securities of $43,321,000, $14,500,000 of compensation received for the property relinquished through eminent domain, and distributions received from limited partnership investments of $5,360,000. Net cash provided by financing activities totaled $41,067,000, which was primarily due to the proceeds from issuance of 4.75% Convertible Senior Notes of $172,500,000, offset by $88,312,000 of share repurchases, $15,157,000 of net cash dividend payments, net repayment of our revolving credit facility of $15,000,000, debt issuance costs paid of $6,041,000, cash dividends paid to redeemable noncontrolling interest of $5,508,000, and repayments of long-term debt of $1,009,000.

Cash Flows for the Year Ended December 31, 2021

Net cash provided by operating activities for the year ended December 31, 20172021 was approximately $16,426,000,$96,503,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $48,921,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used inprovided by investing activities of $80,164,000$36,852,000 was primarily due to the purchasesproceeds from sales ofavailable-for-sale fixed-maturity and tradingequity securities of $165,196,000, the limited partnership investments of $4,226,000, and the real estate investments of $11,878,000, offset by$135,365,000, the proceeds from salescalls, repayments and maturities ofavailable-for-sale fixed-maturity securities of $74,416,000,$23,430,000, and the distributions of $11,758,000$4,657,000 received from limited partnership investments, offset by the purchases of fixed-maturity and equity securities of $121,104,000, additional investments in limited partnership interests of $3,756,000, and the redemptionspurchases of property and repaymentsequipment of fixed-maturity securities of $14,897,000.$3,318,000. Net cash provided by financing activities totaled $39,030,000,$64,301,000, which was primarily due to thenet proceeds of $93,738,000 from issuance of 4.25% Convertible Senior Notes of $143,750,000,Centerbridge for investment in TTIG, offset by $40,250,000 used in the repurchases of our 8% senior notes, $4,975,000 of related underwriting and issuance costs, $45,872,000 used in our share repurchases and $12,833,000$13,759,000 of net cash dividend payments.payments, net repayment of our revolving credit facility of $8,750,000, cash dividends paid to redeemable noncontrolling interest of $2,542,000, $1,895,000 of debt conversion expense paid and $1,314,000 used in share repurchases.

30


Cash Flows for the Year endedEnded December 31, 20162020

Net cash provided by operating activities for the year ended December 31, 20162020 was approximately $87,975,000,$77,311,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $56,860,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used inprovided by investing activities of $49,028,000$143,215,000 was primarily due to the purchasesproceeds from sales ofavailable-for-sale fixed-maturity and equity securities of $107,964,000, $12,056,000$128,745,000, the proceeds from calls, repayments and maturities of net cash used in acquiring one business,fixed-maturity securities of $84,459,000, $44,000,000 of compensation received for the property relinquished through eminent domain, and the distributions of $2,086,000 received from limited partnership investments, of $4,670,000, offset by the proceeds from salespurchases ofavailable-for-sale fixed-maturity and equity securities of $63,581,000$103,174,000, the purchases of property and equipment of $6,437,000, additional investments in limited partnership interests of $4,241,000, and the $10,200,000 proceeds from the acquisition, development and construction arrangement.purchases of real estate investments of $3,020,000. Net cash used in financing activities totaled $26,157,000,$16,705,000, which was primarily due to $11,347,000 used in the repurchasesrepayment of our convertible senior notes, $20,026,000long-term debt of $17,048,000, $6,708,000 used in our share repurchases, $4,459,000 used to repurchase plana portion of our 4.25% Convertible Senior Notes, and $11,691,000$12,388,000 of net cash dividend payments, offset by $18,200,000 in aggregate proceeds$14,000,000 of net borrowings from the issuance of two promissory notes.

Cash Flows for the Year ended December 31, 2015

Net cash provided by operating activities for the year ended December 31, 2015 was approximately $45,282,000, which consisted primarily of cash received from net premiums written less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $80,374,000 was primarily due to the funding of the limited partnership investments of $24,636,000, the purchases ofavailable-for-sale securities of $131,379,000, the funding of the acquisition, development and construction arrangement of $6,968,000, and $4,871,000 used to purchase real estate investments, decreased by redemptions and repayments of fixed-maturity securities of $9,344,000,our revolving credit facility and the proceeds from salesissuance ofavailable-for-sale

a 3.90% promissory note of $10,000,000.

securities of $79,406,000. Net cash used in financing activities totaled $11,525,000, which was primarily due to $1,610,000 used in our share repurchase plan and $11,681,000 of net cash dividend payments, offset by $2,295,000 of tax benefits on stock-based compensation.Investments

Investments

The main objective of our investment policy is to maximize ourafter-tax investment income with a reasonable level of risk given the current financial market. Our excess cash is invested primarily in money market accounts, certificates of deposit, andavailable-for-sale investments. fixed-maturity and equity securities.

At December 31, 2017,2022, we had $297,440,000$518,484,000 ofavailable-for-sale fixed-maturity and tradingequity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

With the exception of large national banks, it is our current policy not to maintain cash deposits of more than an aggregate of $10,000,000 in any one bank at any time. From time to time, we may have in excess of $10,000,000 of cash designated for investment and on deposit at a single national brokerage firm. In the future, we may alter our investment policy aswith regard to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2017,2022, we had unexpired capital commitments for four limited partnershippartnerships in which we hold interests. Such commitments are not recognized in the consolidated financial statements but are required to be disclosed in the notes to the consolidated financial statements. See Note 22 —23 -- “Commitments and Contingencies” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K andContractual Obligations and Commitments below for additional information.

10-K.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of December 31, 2017 (amounts in thousands):

   Payment Due by Period 
   Total   Less than
1 Year
   1-3 Years   3-5 Years   More than
5 Years
 

Operating lease (1)

  $596    147    292    157    —   

Service agreement (1)

   105    24    53    28    —   

Reinsurance contracts (2)

   25,380    21,792    2,392    1,196    —   

Unfunded capital commitment (3)

   14,328    14,328    —      —      —   

Long-term debt obligations (4)

   300,129    12,163    116,665    155,828    15,473 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $340,538    48,454    119,402    157,209    15,473 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)Represents the lease for office space in Miami, Florida and the lease and maintenance service agreement for office space in Noida, India. Liabilities related to our India operations were converted from India Rupees to U.S. dollars using the January 2, 2018 exchange rate, the first available rate subsequent to December 31, 2017, which was anon-business day.
(2)Represents the minimum payment of reinsurance premiums under multi-year reinsurance contracts. Reinsurance premiums payable after December 31, 2017 under one contract are estimated and subject to subsequent revision as the premiums are determined on a quarterly basis based on the premiums associated with the applicable flood total insured value on the last day of the preceding quarter.
(3)Represents the unfunded balance of capital commitments under the subscription agreements related to four limited partnerships in which we hold interests.
(4)Amounts represent principal and interest payments over the lives of various long-term debt obligations. See Note 13 — “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments to develop amounts reflected and disclosed in our consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. We base our estimates on various assumptions and actuarial data we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates.

We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective provisions, deferred income taxes, and stock-based compensation expense, limited partnership investments, acquired intangible assets, warrants, and redeemable noncontrolling interest involve our most significant judgments and estimates material to our consolidated financial statements.

Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (LAE). Loss and LAE reserves reflect 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 (“IBNR”). Reserves established by us represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent we believe, management’s best estimate of our company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves using judgment that is affected by many variables such as past loss experience, current claim trends and the prevailing social changes in our claims adjusting process, economic and legal environments.estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. Our exposure is impacted by both the risk characteristics of the physical locations where we write policies, such as hurricane and tropical storm-related risks, as well as risks associated with varying social, judicial and legislative characteristics in the locations in which we have exposure. In determining loss and LAE reserves, we give careful consideration to all available data and actuarial analyses.

Reserves represent estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported to our insurance companies. The amount of loss reserves for reported claims consist of case reserves established by our claims department (based on acase-by-case evaluation of the kind of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss) and bulk reserves for additional growth on carried case reserves on known claims established by senior management (based on historical patterns of development on aggregate claims grouped by loss date). The amounts of reserves for unreported claims and LAE (incurred but not reported claims, or IBNR) are determined using our historical information for each line of business adjusted to reflect current conditions. Inflation is ordinarily implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.31


Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior years. As we continue to expand historical data regarding paid and incurred losses, we use this data to develop expected ultimate loss and loss adjustment expense ratios. We then apply these expected loss and loss adjustment expense ratios to earned premium to derive a reserve level for each line of business. In connection with the determination of these reserves, we will also consider other specific factors such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability. Therefore, we use the loss ratio method, among other methods, to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses.

When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate amount payable to settle the claim. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the claims adjuster. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, location, and the policy provisions relating to the type of loss. Case reserves are adjusted by us as more information becomes available. It is our policy to settle each claim as expeditiously as possible.

We maintain IBNR reserves to provide for claims that have been incurred but have not been reported and subsequent development on reported claims. The IBNR reserve is determined by estimating our insurance company’s ultimate net liability for both reported and unreported claims and then subtracting the case reserves and payments made to date for reported claims.

Loss Reserve Estimation Methods. We apply the following general methods in projecting reserves for losses and LAE:

Reported loss development;

Paid loss development;

Reported Bornhuetter-Ferguson method;

Paid Bornhuetter-Ferguson method;

Loss ratio method; and

Frequency-Severity method.

Selected reserves are based on a review of the indications from these methods as well as other considerations such as emergence since the most recent evaluation and number of open claims for a given accident period.

Description of Ultimate Loss Estimation Methods. The reported loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be reasonably predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor derived from development patterns observed in the historical reported data. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy for the historical experience that is considered. In order to derive loss development patterns that are predictive for our business, we compile and review loss development triangles of our experience on an accident quarter basis, and select loss development factors based on indications from this analysis of our data. We also consider industry data found in SNL Financial – Property/Casualty Insurance as a reasonability measure for these selected development patterns.

The paid loss development method is mechanically identical to the reported loss development method described above, but applied to loss payments only. The paid method does not rely on case reserves or claim reporting patterns in making projections.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in our mix of business from year to year. Also, since the percentage of losses paid for immature accident quarters is often low, development factors for these maturities can be volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant distortions in estimated ultimate losses for these highly leveraged accident quarters. Therefore, ultimate values for immature accident quarters are often based on alternative estimation techniques than more mature accident quarters.

The loss ratio method used by us relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of currently reported losses. The expected loss ratio is multiplied by earned premium to produce ultimate losses. Reported incurred losses are then subtracted from this estimate to produce expected unreported losses.

The loss ratio method is most useful as an alternative to other models for immature loss years. For these immature years, the amounts reported or paid may be small and unstable, and therefore, not fully predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when variations in reporting or payment patterns distort the historical development of losses.

The paid and reported Bornhuetter-Ferguson methods are a weighting of the loss ratio method and the corresponding development method. Outstanding reserves or IBNR reserves are derived by applying the loss ratio estimate to the estimated unpaid or unreported percent of losses based on the development patterns from the development methods.

Finally, we employ the frequency/severity method for exposures that do not tend to follow historical payment and reported patterns, such as catastrophes. For such exposures, we estimate future development of reported claims and average severities on IBNR claims. We combine this estimate with our open claims in order to derive an estimate of expected unreported losses. Paid losses are added to this estimate in order to derive an estimate of ultimate losses. This method is based on the assumption that future unreported claims and the average severity of open claims and unreported claims can be reasonably estimated from the experience available.

While the property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and mold, and other uncertain or environmental exposures, we have not experienced significant losses from these types of claims. We have experienced material losses associated with sinkholes in past years, but the materiality of this hazard has decreased significantly since the passing of Florida Senate Bill 408. We continue to segregate this data in our derivation of estimated required reserves. While the losses we have experienced from exposures to catastrophes have not historically been material, we have experienced significant losses related to recent catastrophes. These losses have followed materially different development patterns than the balance of our experience. To address this situation, we separate this exposure from the remainder of the business and derive reserves specific to each catastrophe event. Total reserves are determined by adding the reserves related to each line of business.

Currently, our estimated ultimate liability is calculated monthly using the principles and procedures described above,in Note 14 -- “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K, which are applied to the lines of business written. However, because the establishment of loss and LAE reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss and LAE reserves and have a material, adverse effect on our results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine our net loss reserves. Management does not believe that any reasonably likely changes in the frequency of claims would affect our loss and LAE reserves. However, management believes that a reasonably likely increase or decrease in the severity of claims could impact our net loss and LAE reserves. The table below summarizes the effect on net loss and LAE reserves and equity in the event of reasonably likely changes in the severity of claims considered in establishing loss and loss adjustment expenseLAE reserves. The range of reasonably likely changes in the severity of our claims was established based on a review of changes in loss year development and applied to loss and LAE reserves as a whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios:

Year Ended December 31, 2017

 

Year Ended December 31, 2022

Year Ended December 31, 2022

 

Change in Reserves

  Reserves   Percentage
change in
equity, net of tax
 

 

Reserves

 

 

Percentage
Change in
Equity,
Net of Tax

 

-20.0%

   158,862    12.58

 

 

691,012

 

 

 

107.13

%

-15.0%

   168,791    9.43

 

 

734,200

 

 

 

80.35

%

-10.0%

   178,720    6.29

 

 

777,389

 

 

 

53.57

%

-5.0%

   188,649    3.14

 

 

820,577

 

 

 

26.78

%

Base

   198,578    —   

 

 

863,765

 

 

 

 

5.0%

   208,507    - 3.14

 

 

906,953

 

 

 

(26.78

)%

10.0%

   218,436    - 6.29

 

 

950,142

 

 

 

(53.57

)%

15.0%

   228,365    - 9.43

 

 

993,330

 

 

 

(80.35

)%

20.0%

   238,294    - 12.58

 

 

1,036,518

 

 

 

(107.13

)%

Reinsurance Recoverable. Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss adjustment expenses that is recoverable from reinsurers. This estimate is determined in a manner consistent with the terms of the applicable reinsurance contracts and based on the ultimate losses and loss adjustment expenses we expect to incur. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimate may vary significantly from the eventual outcome.

Economic Impact of Reinsurance Contracts with Retrospective Provisions. Certain of From time to time, our reinsurance contracts may include retrospective provisions that adjust premiums increase the amount of future coverage, or result in profit commissions in the event losses are minimal or zero. As described earlier, there is considerable uncertainty regarding the estimation of future losses. In accordance with U.S. GAAP, we will recognize an asset in the period in which the absence of loss experience gives rise to an increase in future coverage or obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

As described in Note 14 — “Reinsurance”Due to our consolidated financial statements under Item 8Hurricane Ian, the balance of this Annual Report on Form10-K, we adjusted the balances ofpreviously accrued benefits and deferredunder one multi-year reinsurance premiums during the third quarter of 2017 due to the impact of Hurricane Irma.contract with retrospective provisions was decreased by $12,600,000 in September 2022. For the year ended December 31, 2017,2022, we derecognized $3,413,000accrued benefits of net accrued benefits. We

also recognized ceded premiums of $2,327,000, including the reversal of the majority of previously deferred reinsurance costs. In contrast, for$18,710,000. For the year ended December 31, 2016,2021, we accrued benefits of $13,610,000 and recognized net ceded premiums of $933,000, representing amortization of $1,219,000 of previously deferred reinsurance costs for increased coverage offset by $2,152,000 of ceded premiums deferred for the period. In combination, for$10,864,000. For the year ended December 31, 2017,2020, we recognized a net increase in ceded premiumsaccrued benefits of $5,740,000 as opposed to a net reduction in ceded premiums of $12,677,000$15,120,000. In combination, for the yearyears ended December 31, 2016.2022 and 2021, we recognized decreases in premiums ceded of $18,710,000 and $10,864,000, respectively.

In June 2016, we received cash totaling $37,800,000 in connection with the benefits accrued under two retrospective reinsurance contracts that were terminated effective May 31, 2016. In September 2016, we received the final cash payment of $5,716,000 under the terms of the remaining retrospective reinsurance contract which terminated May 31, 2016. As of December 31, 2017,2022, we had $2,393,000$16,317,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limitslimit provided under such agreements andagreement. In October 2022, we received a $5,457,000 premium refund in connection with the period that the increased coverage is applicable.previous two multi-year reinsurance contracts which were commuted in May 2022. As of December 31, 2016,2021, we had $5,810,000$3,064,000 of accrued benefits, and $2,152,000 of ceded premiums deferred relatedthe amount that would be charged to theseearnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreements.

In June 2021, we received an $18,720,000 premium refund under the retrospective reinsurance contract that ended May 31, 2021. We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the individual reinsurer’s financial position.position and the reinsurer’s demonstrated ability to comply with contract terms.

Income Taxes. We account for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense:expense (benefit): current and deferred. Current income tax expense (benefit) reflects taxes to be paid or refunded for the current period

32


by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. ValuationDeferred tax assets, representing future reductions in taxable income, are recorded with the assumption that taxable income will be present in the future. Given the uncertainty regarding future taxable income, valuation allowances are provided against deferred tax assets that are not likely to be realized, if any. We concluded that the negative evidence outweighed the positive evidence and therefore a valuation allowance on our deferred tax assets is established as of December 31, 2022. We have elected to classify the related interest and penalties, if any, as income tax expense as permitted by current accounting standards.

Stock-Based Compensation. We account for stock-based compensation awards under our shareholder approvedstockholder-approved incentive plans in accordance with the fair value recognition provisions of U.S. GAAP, which require the measurement, and recognition of compensation for all stock-based awards made to employees, non-employee directors, andnon-employee directors third-party award recipients including stock options, and restricted stock and warrant issuances based on estimated fair values. We recognize stock-based compensation inFor restricted stock with service-based vesting conditions, fair value is determined by the consolidated statementsmarket price of incomethe stock on a straight-line basisthe grant date. Compensation expense is then recognized ratably over the requisite or derived service period of the award. Restricted stock awards with market-based vesting conditions require the use of a Monte Carlo simulation model with the assistance of a third-party valuation specialist to estimate the fair value and derived service period of the award. We then recognize the compensation expense ratably over this derived service period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility and derived service periods. We develop our estimates based on historical data and market information. We primarily use the Black-Scholes option-pricing model, which requires the following variables for input to calculate the fair value of each stock award on the option grant date: 1) expected volatility of our stock price, 2) the risk-free interest rate, 3) expected term of each award, 4) expected dividends, and 5) an expected forfeiture rate. For restrictedstock-based awards granted by non-public subsidiaries, we determine the fair value with the assistance of an independent valuation specialist who may use different valuation methods such as a Monte Carlo simulation model and a binomial distribution model. Inputs such as an estimated stock awardsprice of our private subsidiary and expected price volatility used in these valuation methods are derived mathematically from a data analysis of many public peer companies with market-basedsimilar characteristics.

Limited Partnership Investments. The valuation of our limited partnership investments is prepared by the general partner of each fund. We use net asset value (“NAV”) provided by the general partner to estimate our share of the fair value of these investments. However, the timing of the delivery of the fund’s financial statements and NAV information is on a three-month lag which results in a three-month delay in the recognition of our share of the limited partnership’s earnings or losses. But because this is the best information available, we use it as an estimate for the fair value at our reporting dates, unless conditions have changed significantly in the economy or securities markets since the previous quarter due to an event such as the onset of COVID-19 or changes in the government’s fiscal or monetary policies. In such a case, we will adjust our estimate with the assistance from the general partner.

Acquired Intangible Assets. Acquired intangible assets represent the fair value of consideration we paid and are estimated to pay in exchange for the renewal rights and non-compete intangible assets acquired from the seller. In the renewal rights transactions, we purchased the right, but not the obligation, to offer homeowners insurance coverage to all policyholders of the seller in certain states on the agreed-upon policy replacement date. The renewal rights agreements also contain a non-compete clause whereby the seller agrees not to offer homeowners insurance policies in these states through a specified date. We record intangible assets based on the fair value of the consideration we paid and are estimated to pay to the seller as provided in the renewal rights agreements with the seller. We engaged a third-party valuation specialist to assist with the allocation of the renewal rights and non-compete intangible assets acquired. Uncertainty is inherent in the estimates of future payments and in the assumptions made in allocating value to separate intangible assets. Intangible assets are amortized over their estimated useful lives. Intangible assets are evaluated to ensure that there is no impairment to carrying value and no change required in the amortization period. During the fourth quarter of 2022, all available information pertaining to the policies in-force associated with the renewal rights intangible assets was reviewed, and additionally, we engaged an independent valuation specialist to assess for possible impairment of the renewal rights intangible assets. Based on the review and the assessment, we recognized an impairment loss of $2,284,000 related to the renewal right intangible assets and, simultaneously, recorded a decrease in the contingent liabilities associated with the renewal rights resulting in a remeasurement gain of $3,117,000.

33


Warrants and Redeemable Noncontrolling Interest. In the capital investment transaction completed by TTIG in 2021 with a fund associated with Centerbridge Partners, L.P., TTIG issued 10,000,000 total shares of Series A Preferred Stock and HCI issued warrants to purchase 750,000 shares of HCI common stock, in exchange for proceeds of $100,000,000. Both the fair values byvalue and expected term of the warrants were estimated with assistance from a third-party valuation specialist using a Monte Carlo simulation model, which requiresmodel. Total proceeds from the following variablescapital investment transaction were allocated using the residual fair value method, first to the warrants issued based on their estimated fair value, with the residual proceeds being allocated to the fair value of Series A Preferred Stock. See Note 19 -- “Redeemable Noncontrolling Interest” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K for input: 1) expected dividends per share, 2) expected volatility, 3) risk-free interest rate, 4) estimated cost of capital, and 5) expected term of each award.

additional information.

ITEM 7A –Quantitative and Qualitative Disclosures About Market Risk

Our investment portfolio at December 31, 20172022 included fixed-maturity and equity securities, the primary purposes of which are not for value preservation.speculation. Our main objective is to maximizeafter-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our boardBoard of directors.Directors. From time to time, our investment committee may decide to invest in low risk assets such as U.S. government bonds.

Our investment portfolios areportfolio is exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios.portfolio.

We classify our fixed-maturity securities and the majority of equity securities asavailable-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. In addition, we recognize any unrealized gains and losses related to our equity securities in our statement of income. As a result, our results of operations can be materially affected by the volatility in the equity market.

Interest Rate Risk

Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 20172022 (amounts in thousands):

Hypothetical Change in Interest Rates

  Estimated
Fair Value
   Change in
Estimated
Fair Value
   Percentage
Increase
(Decrease) in
Estimated
Fair Value
 

 

Estimated
Fair Value

 

 

Change in
Estimated
Fair Value

 

 

Percentage
Increase
(Decrease)
in Estimated
Fair Value

 

300 basis point increase

  $215,625   $(21,860   (9.20)% 

 

$

467,711

 

 

$

(16,190

)

 

 

-3.35

%

200 basis point increase

   222,908    (14,577   (6.14)% 

 

 

473,107

 

 

 

(10,794

)

 

 

-2.23

%

100 basis point increase

   230,195    (7,290   (3.07)% 

 

 

478,504

 

 

 

(5,397

)

 

 

-1.12

%

100 basis point decrease

   244,778    7,293    3.07

 

 

489,298

 

 

 

5,397

 

 

 

1.12

%

200 basis point decrease

   251,945    14,460    6.09

 

 

494,694

 

 

 

10,793

 

 

 

2.23

%

300 basis point decrease

   256,229    18,744    7.89

 

 

500,091

 

 

 

16,190

 

 

 

3.35

%

Credit Risk

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment

portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.

34


The following table presents the composition of our fixed-maturity securities, by rating, at December 31, 20172022 (amounts in thousands):

Comparable Rating

  Amortized
Cost
   % of
Total
Amortized
Cost
   Estimated
Fair Value
   % of
Total
Estimated
Fair Value
 

 

Cost or
Amortized
Cost

 

 

% of Total
Amortized
Cost

 

 

Estimated
Fair Value

 

 

% of Total
Estimated
Fair Value

 

AAA

  $2,520    1   $2,514    1 

 

$

220,544

 

 

 

45

 

 

$

220,574

 

 

 

46

 

AA+, AA, AA-

   67,387    29    67,514    29 

 

 

246,156

 

 

 

50

 

 

 

236,970

 

 

 

49

 

A+, A, A-

   95,178    40    95,346    40 

 

 

13,931

 

 

 

3

 

 

 

13,376

 

 

 

3

 

BBB+, BBB, BBB-

   57,320    24    58,561    25 

 

 

11,285

 

 

 

2

 

 

 

10,888

 

 

 

2

 

BB+, BB, BB-

   4,466    2    4,625    2 

 

 

1,993

 

 

 

 

 

 

1,814

 

 

 

 

B+, B, B-

   3,117    1    3,211    1 

CCC+, CC and Not rated

   5,842    3    5,713    2 

 

 

288

 

 

 

 

 

 

279

 

 

 

 

  

 

   

 

   

 

   

 

 

Total

  $235,830    100   $237,484    100 

 

$

494,197

 

 

 

100

 

 

$

483,901

 

 

 

100

 

  

 

   

 

   

 

   

 

 

Equity Price Risk

Our equity investment portfolio at December 31, 20172022 included common stocks, perpetual preferred stocks, mutual funds and exchange tradedexchange-traded funds. We may incur potential losses due to declinesadverse changes in equity security prices. We manage the risk primarily through industry and issuer diversification and asset mix.

The following table illustrates the composition of our equity securities at December 31, 20172022 (amounts in thousands):

  Estimated
Fair Value
   % of Total
Estimated
Fair Value
 

 

Estimated
Fair Value

 

 

% of Total
Estimated
Fair Value

 

Stocks by sector:

    

 

 

 

 

 

 

Consumer

 

$

6,655

 

 

 

19

 

Financial

  $25,194    42 

 

 

4,795

 

 

 

14

 

Industrial

   6,385    11 

Consumer

   6,216    10 

Technology

 

 

1,766

 

 

 

5

 

Other (1)

   7,959    14 

 

 

2,397

 

 

 

7

 

  

 

   

 

 

 

 

15,613

 

 

 

45

 

   45,754    77 
  

 

   

 

 

Mutual funds and Exchange traded funds by type:

    

Mutual funds and exchange-traded funds by type:

 

 

 

 

 

 

Debt

   12,173    20 

 

 

16,089

 

 

 

47

 

Equity

   2,029    3 

 

 

2,557

 

 

 

7

 

  

 

   

 

 
   14,202    23 

Alternative

 

 

324

 

 

 

1

 

  

 

   

 

 

 

 

18,970

 

 

 

55

 

Total

  $59,956    100 

 

$

34,583

 

 

 

100

 

  

 

   

 

 

(1)Represents an aggregate of less than 5% sectors.

(1) Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At December 31, 2017,2022, we did not have any material exposure to foreign currency related risk.

35


ITEM 8 –Financial Statements and Supplementary Data

Index to Financial Statements

Page

Reports of Dixon Hughes Goodman LLP, Independent Registered Public Accounting firmFirm

37-39

59-60

Consolidated Balance Sheets at December 31, 20172022 and 20162021

40-41

61-62

Consolidated Statements of Income for the Years Ended December 31, 2017, 20162022, 2021 and 20152020

42

63

Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2017, 20162022, 2021 and 20152020

43

64

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 20162022 and 20152021

44-46

65-67

Consolidated Statement of Stockholders’ Equity for the Year Ended December 31, 2020

47

Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162022, 2021 and 20152020

48-50

68-70

Notes to Consolidated Financial Statements for the Years Ended December 31, 2017, 20162022, 2021 and 20152020

51-112

71-140

36


Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors, and Stockholders ofAudit Committee

HCI Group, Inc. and Subsidiaries:Subsidiaries

Tampa, Florida

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of HCI Group, Inc. and Subsidiaries (the Company)“Company”) as of December 31, 20172022 and 2016,2021, the related consolidated statements of income, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 2017,2022, and the related notes (collectively referred to as the financial statements)“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.States.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated March 7, 201810, 2023 expressed an unqualified opinion.opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedinclude examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2013.
Clearwater, Florida
March 7, 2018
Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Reserves for Losses and Loss Adjustment Expenses

As described in Note 2 - Summary of Significant Accounting Policies and Note 14 - Losses and Loss Adjustment Expenses to the consolidated financial statements, the Company’s reserves for losses and loss adjustment expenses (LAE) reported in the consolidated balance sheet were $863.8 million at December 31, 2022. Reserves for losses and LAE reflect management’s best estimate regarding the Company’s ultimate losses, resulting in a liability for claims that have been incurred, but not yet paid, and claims that have been incurred but not yet reported. The reserves are based on the application of actuarial techniques and other projection methodologies, taking into consideration other facts and circumstances known at the balance sheet date. The methods used by management in determining the reserves for losses and LAE are complex and subjective with various key inputs and assumptions. Judgement is required to determine the inputs and assumptions used and these can significantly impact the reserves recognized. The most significant judgments include the choice of the appropriate standard actuarial reserving methods, the selection of loss development factors that place reliance on actual historical loss experience, current claim trends, and the prevailing social, economic and legal environments, and reserves derived specific to catastrophe events.

37


The principal considerations for our determination of the reserves for losses and LAE as a critical audit matter are the complexity and subjectivity of the judgments, estimates and assumptions that management utilized in determining their ultimate loss estimates. This required a high degree of effort and judgment in selecting the auditor procedures to evaluate management’s estimates and assumptions as it relates to the reserves for losses and LAE, including the use of an auditor’s specialist.

The primary procedures we performed to address this critical audit matter included:

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to management’s determination of the reserves for losses and LAE, including controls over the actuarial methods and assumptions utilized to support the reserve calculations, and controls over the completeness and accuracy of historical loss data utilized in the reserves calculations.
We tested the completeness and accuracy of the historical loss data used in the development of the reserves.
We performed analytical procedures over the Company’s recorded reserves in relation to the Company’s consulting actuary’s range of reserve estimates.
We engaged an actuary as an auditor’s specialist to independently assess the Company’s consulting actuary’s selection of actuarial methods and assumptions and the resulting reserve ranges and point estimates.

Valuation of Limited Partnership Investments

As described in Note 2 - Summary of Significant Accounting Policies and Note 4 – Investments to the consolidated financial statements, the Company’s limited partnership investments reported in the consolidated balance sheet were $25.7 million at December 31, 2022. For the investments with ownership interest at five percent or less, the Company uses the net asset value method to estimate the fair value of these investments. Due to a reporting lag, the Company may record an adjustment to the Company’s most recent share of net asset value when the amount can be reasonably estimated and a significant adverse impact on the net asset value is expected as a result of a major economic event. The methods used by management in determining if an adjustment to the Company’s most recent share of net asset value is necessary are complex and subjective based on the judgement that is required to determine the key inputs and assumptions which can significantly impact the adjustments recognized.

The principal considerations for our determination of the valuation of limited partnership investments as a critical audit matter are the subjectivity of the inputs and assumptions that management utilized in determining the adjustment to the Company’s most recent share of net asset value. This required a high degree of effort and judgment in selecting the auditor procedures to evaluate management’s estimates and assumptions as it relates to the valuation of limited partnership investments, including the use of an auditor’s specialist.

The primary procedures we performed to address this critical audit matter included:

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the valuation of limited partnership investments, including controls over management’s estimate of the adjustment to the Company’s most recent share of net asset value of the limited partnership investments.
We tested the completeness and accuracy of the data utilized by management and evaluated the reasonableness of management’s assumptions used to develop an estimate of fair value.
We engaged a specialist to develop an independent estimate of fair value of the limited partnership investments and comparison of management’s estimate to the independently developed estimate of fair value.

/s/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

We have served as the Company’s auditor since 2013.

Tampa, Florida

March 10, 2023

38


Report of Independent Registered Public Accounting Firm on Internal Control

To the Shareholders, Board of Directors, and Stockholders ofAudit Committee

HCI Group, Inc. and Subsidiaries

Tampa, Florida

Opinion on Internal Control Over Financial Reporting

We have audited HCI Group, Inc. and Subsidiaries’Subsidiaries (the Company’s)“Company”)’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established inInternal Control—Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the consolidated financial statements of the Company as of December 31, 2017 and 2016, and for each of the three years in the period ended December 31, 2017,2022, and our report dated March 7, 2018,10, 2023, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Dixon Hughes Goodman LLP
Clearwater, Florida
March 7, 2018
/s/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

Tampa, Florida

March 10, 2023

39


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

   December 31, 
   2017   2016 
Assets    

Fixed-maturity securities, available for sale, at fair value (amortized cost: $235,830 and $167,231, respectively)

  $237,484   $166,248 

Equity securities, available for sale, at fair value (cost: $53,132 and $47,750, respectively)

   58,911    53,035 

Equity securities, trading, at fair value (cost: $953 and $0, respectively)

   1,045    —   

Limited partnership investments, at equity

   23,184    29,263 

Investment in unconsolidated joint venture, at equity

   1,304    2,102 

Real estate investments (Note 4 — Consolidated Variable Interest Entity)

   58,358    48,086 
  

 

 

   

 

 

 

Total investments

   380,286    298,734 

Cash and cash equivalents (Note 4 — Consolidated Variable Interest Entity)

   255,884    280,531 

Accrued interest and dividends receivable

   1,983    1,654 

Income taxes receivable

   16,192    2,811 

Premiums receivable

   17,807    17,276 

Prepaid reinsurance premiums

   22,286    24,554 

Reinsurance recoverable:

    

Paid losses and loss adjustment expenses

   2,344    —   

Unpaid losses and loss adjustment expenses

   100,760    —   

Deferred policy acquisition costs

   16,712    16,639 

Property and equipment, net

   12,465    11,374 

Intangible assets, net

   4,995    4,899 

Deferred income taxes, net

   —      250 

Other assets (Note 4 — Consolidated Variable Interest Entity)

   10,550    11,342 
  

 

 

   

 

 

 

Total assets

  $842,264   $670,064 
  

 

 

   

 

 

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Fixed-maturity securities, available for sale, at fair value (amortized cost: $494,197
  and $
41,953, respectively and allowance for credit losses: $0 and $0, respectively)

 

$

483,901

 

 

$

42,583

 

Equity securities, at fair value (cost: $36,272 and $46,276, respectively)

 

 

34,583

 

 

 

51,740

 

Limited partnership investments

 

 

25,702

 

 

 

28,133

 

Investment in unconsolidated joint venture, at equity

 

 

18

 

 

 

363

 

Real estate investments

 

 

71,388

 

 

 

73,896

 

Total investments

 

 

615,592

 

 

 

196,715

 

Cash and cash equivalents

 

 

234,863

 

 

 

628,943

 

Restricted cash

 

 

2,900

 

 

 

2,400

 

Accrued interest and dividends receivable

 

 

1,952

 

 

 

353

 

Income taxes receivable

 

 

2,807

 

 

 

4,084

 

Premiums receivable, net (allowance: $5,362 and $1,750, respectively)

 

 

34,998

 

 

 

68,157

 

Prepaid reinsurance premiums

 

 

66,627

 

 

 

26,355

 

Reinsurance recoverable, net of allowance for credit losses:

 

 

 

 

 

 

Paid losses and loss adjustment expenses (allowance: $0 and $0, respectively)

 

 

71,594

 

 

 

11,985

 

Unpaid losses and loss adjustment expenses (allowance: $454 and $90, respectively)

 

 

616,765

 

 

 

64,665

 

Deferred policy acquisition costs

 

 

45,522

 

 

 

57,695

 

Property and equipment, net

 

 

17,910

 

 

 

14,232

 

Right-of-use assets - operating leases

 

 

777

 

 

 

2,204

 

Intangible assets, net

 

 

10,578

 

 

 

10,636

 

Funds withheld for assumed business

 

 

48,772

 

 

 

73,716

 

Other assets

 

 

31,671

 

 

 

14,717

 

Total assets

 

$

1,803,328

 

 

$

1,176,857

 

(continued)

(continued)40


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets—continuedSheets – (Continued)

(Dollar amounts in thousands)

   December 31, 
   2017   2016 
Liabilities and Stockholders’ Equity    

Losses and loss adjustment expenses

  $198,578   $70,492 

Unearned premiums

   164,896    175,803 

Advance premiums

   4,948    4,651 

Assumed reinsurance balances payable

   15    3,294 

Accrued expenses (Note 4 — Consolidated Variable Interest Entity)

   6,035    6,513 

Reinsurance recovered in advance on unpaid losses

   13,885    —   

Deferred income taxes, net

   1,890    —   

Long-term debt

   237,835    138,863 

Other liabilities (Note 4 — Consolidated Variable Interest Entity)

   20,207    26,702 
  

 

 

   

 

 

 

Total liabilities

   648,289    426,318 
  

 

 

   

 

 

 

Commitments and contingencies (Note 22)

    

Stockholders’ equity:

    

7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued and outstanding)

   —      —   

Series B junior participating preferred stock (no par value, 400,000 shares authorized, no shares issued or outstanding)

   —      —   

Preferred stock (no par value, 18,100,000 shares authorized, no shares issued or outstanding)

   —      —   

Common stock (no par value, 40,000,000 shares authorized, 8,762,416 and 9,662,761 shares issued and outstanding in 2017 and 2016, respectively)

   —      —   

Additionalpaid-in capital

   —      8,139 

Retained income

   189,409    232,964 

Accumulated other comprehensive income, net of taxes

   4,566    2,643 
  

 

 

   

 

 

 

Total stockholders’ equity

   193,975    243,746 
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $842,264   $670,064 
  

 

 

   

 

 

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Liabilities and Equity

 

 

 

 

 

 

Losses and loss adjustment expenses

 

$

863,765

 

 

$

237,165

 

Unearned premiums

 

 

368,047

 

 

 

366,744

 

Advance premiums

 

 

18,587

 

 

 

13,771

 

Reinsurance payable on paid losses and loss adjustment expenses

 

 

8,606

 

 

 

4,017

 

Ceded reinsurance premiums payable

 

 

17,646

 

 

 

19,318

 

Accrued expenses

 

 

14,534

 

 

 

15,453

 

Reinsurance recovered in advance on unpaid losses

 

 

19,863

 

 

 

 

Deferred income taxes, net

 

 

1,704

 

 

 

11,739

 

Revolving credit facility

 

 

 

 

 

15,000

 

Long-term debt

 

 

211,687

 

 

 

45,504

 

Lease liabilities - operating leases

 

 

721

 

 

 

2,203

 

Other liabilities

 

 

23,361

 

 

 

31,485

 

Total liabilities

 

 

1,548,521

 

 

 

762,399

 

Commitments and contingencies (Note 23)

 

 

 

 

 

 

Redeemable noncontrolling interest (Note 19)

 

 

93,553

 

 

 

89,955

 

Equity:

 

 

 

 

 

 

Common stock (no par value, 40,000,000 shares authorized, 8,598,682 and
   
10,131,399 shares issued and outstanding in 2022 and 2021, respectively)

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

76,077

 

Retained income

 

 

172,482

 

 

 

246,790

 

Accumulated other comprehensive (loss) income, net of taxes

 

 

(9,886

)

 

 

498

 

Total stockholders’ equity

 

 

162,596

 

 

 

323,365

 

Noncontrolling interests

 

 

(1,342

)

 

 

1,138

 

Total equity

 

 

161,254

 

 

 

324,503

 

Total liabilities, redeemable noncontrolling interest and equity

 

$

1,803,328

 

 

$

1,176,857

 

See accompanying Notes to Consolidated Financial Statements.

41


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar amounts in thousands, except per share amounts)

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017 2016 2015 

 

2022

 

 

2021

 

 

2020

 

Revenue

    

 

 

 

 

 

 

 

 

 

Gross premiums earned

  $358,253  $378,678  $423,120 

 

$

724,716

 

 

$

577,044

 

 

$

415,918

 

Premiums ceded

   (133,635 (135,051 (140,614

 

 

(261,144

)

 

 

(199,741

)

 

 

(153,458

)

  

 

  

 

  

 

 

Net premiums earned

   224,618  243,627  282,506 

 

 

463,572

 

 

 

377,303

 

 

 

262,460

 

Net investment income

   11,439  9,087  3,978 

 

 

32,447

 

 

 

12,335

 

 

 

4,564

 

Net realized investment gains (losses)

   4,346  2,601  (608

Net unrealized investment gains

   92   —     —   

Net other-than-temporary impairment losses recognized in income:

    

Total other-than-temporary impairment losses

   (1,116 (2,252 (5,275

Portion of loss recognized in other comprehensive income, before taxes

   (351 (230 594 
  

 

  

 

  

 

 

Net other-than-temporary impairment losses

   (1,467 (2,482 (4,681

Net realized investment (losses) gains

 

 

(1,187

)

 

 

6,472

 

 

 

1,000

 

Net unrealized investment (losses) gains

 

 

(7,153

)

 

 

1,363

 

 

 

679

 

Credit losses on investments

 

 

 

 

 

 

 

 

(611

)

Policy fee income

   3,622  3,914  3,496 

 

 

4,279

 

 

 

3,995

 

 

 

3,522

 

Gain on repurchases of convertible senior notes

   —    153   —   

Gain on bargain purchase

   —    2,071   —   

Gain on remeasurement of previously held interest

   —    4,005   —   

Gain on involuntary conversion

 

 

 

 

 

 

 

 

36,969

 

Gain from remeasurement of contingent liabilities

 

 

3,117

 

 

 

 

 

 

 

Other

   1,756  1,470  1,261 

 

 

4,488

 

 

 

6,447

 

 

 

1,854

 

  

 

  

 

  

 

 

Total revenue

   244,406  264,446  285,952 

 

 

499,563

 

 

 

407,915

 

 

 

310,437

 

  

 

  

 

  

 

 

Expenses

    

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

   165,629  124,667  87,224 

 

 

371,463

 

 

 

227,525

 

 

 

160,036

 

Policy acquisition and other underwriting expenses

   39,663  42,642  41,984 

 

 

104,977

 

 

 

93,732

 

 

 

53,859

 

General and administrative personnel expenses

   25,127  26,200  28,276 

 

 

56,511

 

 

 

45,428

 

 

 

33,829

 

Interest expense

   16,767  11,079  10,754 

 

 

7,768

 

 

 

6,400

 

 

 

11,734

 

Loss on repurchases of senior notes

   743   —     —   

Impairment loss

   38  388   —   

 

 

2,284

 

 

 

 

 

 

 

Loss on repurchases of convertible senior notes

 

 

 

 

 

 

 

 

150

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

98

 

Debt conversion expense

 

 

 

 

 

1,754

 

 

 

 

Other operating expenses

   12,063  12,614  11,522 

 

 

24,978

 

 

 

21,843

 

 

 

13,803

 

  

 

  

 

  

 

 

Total operating expenses

   260,030  217,590  179,760 
  

 

  

 

  

 

 

Total expenses

 

 

567,981

 

 

 

396,682

 

 

 

273,509

 

(Loss) income before income taxes

   (15,624 46,856  106,192 

 

 

(68,418

)

 

 

11,233

 

 

 

36,928

 

Income tax (benefit) expense

   (8,731 17,835  40,331 

 

 

(13,815

)

 

 

3,991

 

 

 

9,348

 

  

 

  

 

  

 

 

Net (loss) income

  $(6,893 $29,021  $65,861 

 

 

(54,603

)

 

 

7,242

 

 

 

27,580

 

Net income attributable to redeemable noncontrolling
interest (Note 19)

 

 

(9,106

)

 

 

(7,399

)

 

 

 

Net loss attributable to noncontrolling interests

 

 

5,198

 

 

 

2,013

 

 

 

 

Net (loss) income after noncontrolling interests

 

$

(58,511

)

 

$

1,856

 

 

$

27,580

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

  $(0.75 $2.95  $6.51 

 

$

(6.24

)

 

$

0.23

 

 

$

3.55

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share

  $(0.75 $2.92  $5.90 

 

$

(6.24

)

 

$

0.21

 

 

$

3.49

 

  

 

  

 

  

 

 

Dividends per share

  $1.40  $1.20  $1.20 
  

 

  

 

  

 

 

See accompanying Notes to Consolidated Financial Statements.

42


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(Amounts in thousands)

   Years Ended December 31, 
   2017  2016  2015 

Net (loss) income

  $(6,893 $29,021  $65,861 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss):

    

Change in unrealized gain (loss) on investments:

    

Net unrealized gain (loss) arising during the period

   5,996   7,317   (9,366

Other-than-temporary impairment loss charged to investment income

   1,467   2,482   4,681 

Call and repayment losses charged to investment income

   14   20   77 

Reclassification adjustment for net realized (gain) loss

   (4,346  (2,601  608 
  

 

 

  

 

 

  

 

 

 

Net change in unrealized gain (loss)

   3,131   7,218   (4,000

Deferred income taxes on above change

   (1,208  (2,784  1,543 
  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss), net of income taxes

   1,923   4,434   (2,457
  

 

 

  

 

 

  

 

 

 

Comprehensive (loss) income

  $(4,970 $33,455  $63,404 
  

 

 

  

 

 

  

 

 

 

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Net (loss) income

 

$

(54,603

)

 

$

7,242

 

 

$

27,580

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Change in unrealized loss on investments:

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains arising during the period

 

 

(11,355

)

 

 

(692

)

 

 

86

 

Credit losses charged to income

 

 

 

 

 

 

 

 

611

 

Call and repayment gains charged to investment income

 

 

 

 

 

(36

)

 

 

(374

)

Reclassification adjustment for net realized losses (gains)

 

 

429

 

 

 

(687

)

 

 

(1,163

)

Net change in unrealized losses

 

 

(10,926

)

 

 

(1,415

)

 

 

(840

)

Deferred income taxes on above change

 

 

154

 

 

 

347

 

 

 

206

 

Total other comprehensive loss, net of income taxes

 

 

(10,772

)

 

 

(1,068

)

 

 

(634

)

Comprehensive (loss) income

 

 

(65,375

)

 

 

6,174

 

 

 

26,946

 

Comprehensive loss attributable to noncontrolling interests

 

 

5,586

 

 

 

2,035

 

 

 

 

Comprehensive (loss) income after noncontrolling interests

 

$

(59,789

)

 

$

8,209

 

 

$

26,946

 

See accompanying Notes to Consolidated Financial Statements.

43


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Year Ended December 31, 20172022

(Dollar amounts in thousands)thousands, except per share amount)

   Common Stock   Additional
Paid-In
  Retained  Accumulated
Other
Comprehensive
Income,
   Total
Stockholders’
 
   Shares  Amount   Capital  Income  Net of Tax   Equity 

Balance at December 31, 2016

   9,662,761  $—     $8,139  $232,964  $2,643   $243,746 

Net loss

   —     —      —     (6,893  —      (6,893

Total other comprehensive income, net of income taxes

   —     —      —     —     1,923    1,923 

Issuance of restricted stock

   154,936   —      —     —     —      —   

Exercise of common stock options

   30,000   —      75   —     —      75 

Forfeiture of restricted stock

   (23,766  —      —     —     —      —   

Repurchase and retirement of common stock

   (437,240  —      (21,318  —     —      (21,318

Repurchase and retirement of common stock under share repurchase plan

   (433,175  —      (15,154  —     —      (15,154

Repurchase of common stock under prepaid forward contract

   (191,100  —      (9,400  —     —      (9,400

Equity component on 4.25% convertible senior notes (net of offering costs of $543)

   —     —      15,151   —     —      15,151 

Deferred taxes on debt discount

   —     —      (5,845  —     —      (5,845

Common stock dividends

   —     —      —     (12,833  —      (12,833

Stock-based compensation

   —     —      4,523   —     —      4,523 

Additionalpaid-in capital shortfall allocated to retained income

   —     —      23,829   (23,829  —      —   
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Balance at December 31, 2017

   8,762,416  $—     $—    $189,409  $4,566   $193,975 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Retained

 

 

Accumulated
Other
Comprehensive
Income (Loss),

 

 

Total
Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Net of Tax

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at December 31, 2021

 

 

10,131,399

 

 

$

 

 

$

76,077

 

 

$

246,790

 

 

$

498

 

 

$

323,365

 

 

$

1,138

 

 

$

324,503

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(50,097

)

 

 

 

 

 

(50,097

)

 

 

(4,506

)

 

 

(54,603

)

Net income attributable to redeemable
    noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(8,414

)

 

 

 

 

 

(8,414

)

 

 

(692

)

 

 

(9,106

)

Total other comprehensive loss, net of
    income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,384

)

 

 

(10,384

)

 

 

(388

)

 

 

(10,772

)

Issuance of restricted stock

 

 

7,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(11,230

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common
    stock

 

 

(1,137,336

)

 

 

 

 

 

(71,242

)

 

 

 

 

 

 

 

 

(71,242

)

 

 

 

 

 

(71,242

)

Repurchase and retirement of common
    stock under share repurchase plan

 

 

(391,151

)

 

 

 

 

 

(17,070

)

 

 

 

 

 

 

 

 

(17,070

)

 

 

 

 

 

(17,070

)

Dilution from subsidiary stock-based
    compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,106

 

 

 

3,106

 

Common stock dividends
    ($
1.60 per share)

 

 

 

 

 

 

 

 

 

 

 

(15,157

)

 

 

 

 

 

(15,157

)

 

 

 

 

 

(15,157

)

Stock-based compensation

 

 

 

 

 

 

 

 

11,595

 

 

 

 

 

 

 

 

 

11,595

 

 

 

 

 

 

11,595

 

Additional paid-in capital shortfall
    allocated to retained income

 

 

 

 

 

 

 

 

640

 

 

 

(640

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

8,598,682

 

 

$

 

 

$

 

 

$

172,482

 

 

$

(9,886

)

 

$

162,596

 

 

$

(1,342

)

 

$

161,254

 

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity – (Continued)

For the Year Ended December 31, 2016

(Dollar amounts in thousands)

       Additional     Accumulated
Other
Comprehensive
  Total 
   

Common Stock

   Paid-In
Capital
  Retained
Income
  (Loss) Income,
Net of Tax
  Stockholders’
Equity
 
   Shares  Amount      

Balance at December 31, 2015

   10,292,256  $—     $23,879  $215,634  $(1,791 $237,722 

Net income

   —     —      —     29,021   —     29,021 

Total other comprehensive income, net of income taxes

   —     —      —     —     4,434   4,434 

Issuance of restricted stock

   142,440   —      —     —     —     —   

Exercise of common stock options

   60,000   —      150   —     —     150 

Forfeiture of restricted stock

   (13,298  —      —     —     —     —   

Cancellation of restricted stock

   (160,000  —      —     —     —     —   

Repurchase and retirement of common stock

   (14,934  —      (464  —     —     (464

Repurchase and retirement of common stock under share repurchase plan

   (643,703  —      (20,026  —     —     (20,026

Common stock dividends

   —     —      —     (11,691  —     (11,691

Tax benefits on stock-based compensation

   —     —      641   —     —     641 

Tax shortfalls on stock-based compensation

   —     —      (239  —     —     (239

Stock-based compensation

   —     —      4,198   —     —     4,198 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2016

   9,662,761  $—     $8,139  $232,964  $2,643  $243,746 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity – (Continued)

For the Year Ended December 31, 2015

(Dollar amounts in thousands)

          Additional     Accumulated
Other
Comprehensive
  Total 
   Common Stock   Paid-In  Retained  Income (Loss),  Stockholders’ 
   Shares  Amount   Capital  Income  Net of Tax  Equity 

Balance at December 31, 2014

   10,189,128  $—     $20,465  $161,454  $666  $182,585 

Net income

   —     —      —     65,861   —     65,861 

Total other comprehensive loss, net of income taxes

   —     —      —     —     (2,457  (2,457

Issuance of restricted stock

   83,260   —      —     —     —     —   

Exercise of common stock options

   120,000   —      263   —     —     263 

Shares surrendered upon exercising common stock options

   (2,013  —      —     —     —     —   

Forfeiture of restricted stock

   (42,757  —      —     —     —     —   

Repurchase and retirement of common stock

   (17,493  —      (792  —     —     (792

Repurchase and retirement of common stock under share repurchase plan

   (37,869  —      (1,610  —     —     (1,610

Common stock dividends

   —     —      —     (11,681  —     (11,681

Tax benefits on stock-based compensation

   —     —      2,295   —     —     2,295 

Tax shortfalls on stock-based compensation

   —     —      (1,954  —     —     (1,954

Stock-based compensation

   —     —      5,212   —     —     5,212 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

   10,292,256  $—     $23,879  $215,634  $(1,791 $237,722 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements.

44


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Equity – (Continued)

For the Year Ended December 31, 2021

(Dollar amounts in thousands, except per share amount)

45


 

 

Common Stock

 

 

Additional
Paid-In

 

 

Retained

 

 

Accumulated
Other
Comprehensive
Income,

 

 

Total
Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Net of Tax

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at December 31, 2020

 

 

7,785,617

 

 

$

 

 

$

 

 

$

199,592

 

 

$

1,544

 

 

$

201,136

 

 

$

 

 

$

201,136

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

8,779

 

 

 

 

 

 

8,779

 

 

 

(1,537

)

 

 

7,242

 

Net income attributable to redeemable
    noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(6,923

)

 

 

 

 

 

(6,923

)

 

 

(476

)

 

 

(7,399

)

Cumulative effect of change in
    accounting principle

 

 

 

 

 

 

 

 

 

 

 

(3,018

)

 

 

 

 

 

(3,018

)

 

 

 

 

 

(3,018

)

Total other comprehensive loss, net of
    income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,046

)

 

 

(1,046

)

 

 

(22

)

 

 

(1,068

)

Issuance of restricted stock

 

 

564,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(55,665

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of restricted stock

 

 

(142,760

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common
    stock

 

 

(17,193

)

 

 

 

 

 

(1,308

)

 

 

 

 

 

 

 

 

(1,308

)

 

 

 

 

 

(1,308

)

Issuance of common stock

 

 

100,000

 

 

 

 

 

 

5,410

 

 

 

 

 

 

 

 

 

5,410

 

 

 

 

 

 

5,410

 

Common stock issued on conversions
    of
4.25% senior notes

 

 

1,896,974

 

 

 

 

 

 

114,928

 

 

 

 

 

 

 

 

 

114,928

 

 

 

 

 

 

114,928

 

Dilution from subsidiary stock-based
    compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,173

 

 

 

3,173

 

Issuance of warrants, net of issuance
    costs (Note 19)

 

 

 

 

 

 

 

 

8,640

 

 

 

 

 

 

 

 

 

8,640

 

 

 

 

 

 

8,640

 

Common stock dividends
    ($
1.60 per share)

 

 

 

 

 

 

 

 

 

 

 

(13,759

)

 

 

 

 

 

(13,759

)

 

 

 

 

 

(13,759

)

Stock-based compensation

 

 

 

 

 

 

 

 

10,526

 

 

 

 

 

 

 

 

 

10,526

 

 

 

 

 

 

10,526

 

Additional paid-in capital shortfall
    adjustment allocated to retained
    income

 

 

 

 

 

 

 

 

(62,119

)

 

 

62,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

10,131,399

 

 

$

 

 

$

76,077

 

 

$

246,790

 

 

$

498

 

 

$

323,365

 

 

$

1,138

 

 

$

324,503

 

See accompanying Notes to Consolidated Financial Statements.

46


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Year Ended December 31, 2020

(Dollar amounts in thousands, except per share amount)

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Retained

 

 

Accumulated
Other
Comprehensive
Income,

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Net of Tax

 

 

Equity

 

Balance at December 31, 2019

 

 

7,764,564

 

 

$

 

 

$

 

 

$

183,365

 

 

$

2,178

 

 

$

185,543

 

Net income

 

 

 

 

 

 

 

 

 

 

 

27,580

 

 

 

 

 

 

27,580

 

Total other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(634

)

 

 

(634

)

Cumulative effect on adoption of credit loss standard

 

 

 

 

 

 

 

 

 

 

 

(453

)

 

 

 

 

 

(453

)

Exercise of common stock options

 

 

10,000

 

 

 

 

 

 

63

 

 

 

 

 

 

 

 

 

63

 

Issuance of restricted stock

 

 

192,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of restricted stock

 

 

(18,852

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(33,633

)

 

 

 

 

 

(1,547

)

 

 

 

 

 

 

 

 

(1,547

)

Repurchase and retirement of common stock under
   share repurchase plan

 

 

(129,142

)

 

 

 

 

 

(5,161

)

 

 

 

 

 

 

 

 

(5,161

)

Common stock dividends ($1.60 per share)

 

 

 

 

 

 

 

 

 

 

 

(12,388

)

 

 

 

 

 

(12,388

)

Stock-based compensation

 

 

 

 

 

 

 

 

8,133

 

 

 

 

 

 

 

 

 

8,133

 

Additional paid-in capital shortfall allocated to
   retained income

 

 

 

 

 

 

 

 

(1,488

)

 

 

1,488

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

7,785,617

 

 

$

 

 

$

 

 

$

199,592

 

 

$

1,544

 

 

$

201,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

47


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017 2016 2015 

 

2022

 

 

2021

 

 

2020

 

Cash flows from operating activities:

    

 

 

 

 

 

 

 

 

 

Net (loss) income after noncontrolling interests

 

$

(58,511

)

 

$

1,856

 

 

$

27,580

 

Net income attributable to noncontrolling interests

 

 

3,908

 

 

 

5,386

 

 

 

 

Net (loss) income

  $(6,893 $29,021  $65,861 

 

 

(54,603

)

 

 

7,242

 

 

 

27,580

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Stock-based compensation

   4,523  4,198  5,212 

Net amortization of premiums on investments in fixed-maturity securities

   1,252  726  855 

Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

15,107

 

 

 

13,754

 

 

 

8,133

 

Net (accretion of discount) amortization of premiums on investments
in fixed-maturity securities

 

 

(961

)

 

 

169

 

 

 

(100

)

Depreciation and amortization

   9,591  5,408  5,251 

 

 

8,010

 

 

 

5,549

 

 

 

8,747

 

Deferred income tax (benefit) expense

   (4,913 155  (1,101

 

 

(9,881

)

 

 

1,142

 

 

 

8,123

 

Net realized investment (gains) losses

   (4,346 (2,601 608 

Net unrealized investment gains

   (92  —     —   

Other-than-temporary impairment losses

   1,467  2,482  4,681 

Income from real estate investment under acquisition, development and construction arrangement

   —     —    (344

Loss from unconsolidated joint venture

   234   —    125 

Distribution received from unconsolidated joint venture

   147   —     —   

Gain on repurchases of convertible senior notes

   —    (153  —   

Gain on bargain purchase

   —    (2,071  —   

Loss on repurchases of senior notes

   743   —     —   

Gain on remeasurement of previously held investment

   —    (4,005  —   

Impairment loss

   38  388   —   

Net realized investment losses (gains)

 

 

1,187

 

 

 

(6,472

)

 

 

(1,000

)

Net unrealized investment losses (gains)

 

 

7,153

 

 

 

(1,363

)

 

 

(679

)

Credit loss expense - investments

 

 

 

 

 

 

 

 

611

 

Credit loss expense - reinsurance recoverable

 

 

364

 

 

 

5

 

 

 

(368

)

Net (income) loss from unconsolidated joint venture

 

 

(495

)

 

 

(417

)

 

 

57

 

Distributions received from unconsolidated joint venture

 

 

489

 

 

 

114

 

 

 

 

Net (income) loss from limited partnership interests

   (2,334 (1,207 3,244 

 

 

(3,963

)

 

 

(4,947

)

 

 

1,595

 

Distributions received from limited partnership interests

   881  544  12 

 

 

3,001

 

 

 

3,604

 

 

 

1,215

 

Foreign currency remeasurement (gain) loss

   (60 29  66 

Other

   134  18  26 

Impairment loss

 

 

2,284

 

 

 

 

 

 

 

Loss on repurchases of convertible senior notes

 

 

 

 

 

 

 

 

150

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

98

 

Debt conversion expense

 

 

 

 

 

1,754

 

 

 

 

Gain on involuntary conversion

 

 

(13,402

)

 

 

 

 

 

(36,969

)

Gain on sale of real estate investments

 

 

(376

)

 

 

 

 

 

 

Gain from remeasurement of contingent liabilities

 

 

(3,117

)

 

 

 

 

 

 

Foreign currency remeasurement loss

 

 

108

 

 

 

64

 

 

 

32

 

Other non-cash items

 

 

(47

)

 

 

61

 

 

 

46

 

Changes in operating assets and liabilities:

    

 

 

 

 

 

 

 

 

 

Accrued interest and dividends receivable

   (329 (300 (331

 

 

(1,599

)

 

 

235

 

 

 

1,028

 

Income taxes

   (13,381 (1,192 766 

 

 

1,277

 

 

 

470

 

 

 

(3,514

)

Premiums receivable

   (531 2,355  (3,807

Premiums receivable, net

 

 

33,159

 

 

 

225

 

 

 

(48,127

)

Prepaid reinsurance premiums

   2,268  16,193  (6,651

 

 

(40,272

)

 

 

10,021

 

 

 

(18,393

)

Reinsurance recoverable

   (103,104  —     —   

 

 

(612,073

)

 

 

8,491

 

 

 

47,447

 

Deferred policy acquisition costs

   (73 1,963  (3,588

 

 

12,173

 

 

 

(13,837

)

 

 

(22,195

)

Funds withheld for assumed business

 

 

24,944

 

 

 

(73,716

)

 

 

 

Other assets

   574  29,054  (7,230

 

 

(15,581

)

 

 

4,487

 

 

 

(4,578

)

Losses and loss adjustment expenses

   128,086  18,802  2,782 

 

 

626,600

 

 

 

24,996

 

 

 

(2,528

)

Unearned premiums

   (10,907 (11,487 (26,781

 

 

1,303

 

 

 

97,345

 

 

 

88,236

 

Advance premiums

   297  (332 603 

 

 

4,816

 

 

 

2,401

 

 

 

5,781

 

Assumed reinsurance balances payable

   (3,279 2,210  866 

 

 

 

 

 

(87

)

 

 

11

 

Reinsurance payable on paid losses and loss adjustment expenses

 

 

4,589

 

 

 

4,017

 

 

 

 

Reinsurance recovered in advance on unpaid losses

   13,885   —     —   

 

 

19,863

 

 

 

 

 

 

 

Ceded reinsurance premiums payable

 

 

(1,672

)

 

 

9,554

 

 

 

(3,431

)

Accrued expenses and other liabilities

   2,548  (2,223 4,157 

 

 

(8,397

)

 

 

1,642

 

 

 

20,303

 

  

 

  

 

  

 

 

Net cash provided by operating activities

   16,426  87,975  45,282 
  

 

  

 

  

 

 

Net cash (used in) provided by operating activities

 

 

(12

)

 

 

96,503

 

 

 

77,311

 

(continued)

(continued)48


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Amounts in thousands)

   Years Ended December 31, 
   2017  2016  2015 

Cash flows from investing activities:

    

Investment in real estate under acquisition, development, and construction arrangement

   —     —     (6,968

Proceeds from investment in real estate under acquisition, development and construction arrangement

   —     10,200   —   

Acquisition of real estate business, net of cash acquired

   —     (11,651  —   

Investments in limited partnership interests

   (4,226  (4,670  (24,636

Distributions received from limited partnership interests

   11,758   —     —   

Investment in unconsolidated joint venture

   —     (90  (435

Distribution from unconsolidated joint venture

   417   —     —   

Purchase of property and equipment

   (2,340  (865  (840

Purchase of intangible assets

   (637  —     —   

Purchase of real estate investments

   (11,878  (2,261  (4,871

Purchase of fixed-maturity securities

   (114,743  (85,530  (98,501

Purchase of equity securities—available for sale

   (46,909  (22,434  (32,878

Purchase of equity securities—trading

   (3,544  —     —   

Proceeds from sales of fixed-maturity securities

   31,759   40,454   53,711 

Proceeds from calls, repayments and maturities of fixed-maturity securities

   14,897   4,692   9,344 

Proceeds from sales of equity securities—available for sale

   42,657   23,127   25,695 

Proceeds from sales of equity securities—trading

   2,625   —     —   

Proceeds from sales of real estate investments

   —     —     5 
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (80,164  (49,028  (80,374
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

    

Net borrowing under revolving credit facility

   —     1,238   —   

Proceeds from the exercise of common stock options

   75   150   263 

Cash dividends paid

   (13,906  (12,438  (12,428

Cash dividends received under share repurchase forward contract

   1,073   747   747 

Proceeds from the issuance of long-term debt

   143,859   18,200   —   

Repurchases of convertible senior notes

   —     (11,347  —   

Repurchases of senior notes

   (40,250  —     —   

Repayment of long-term debt

   (974  (455  —   

Repurchases of common stock

   (30,718  (464  (792

Repurchases of common stock under share repurchase plan

   (15,154  (20,026  (1,610

Purchase ofnon-controlling interest

   —     (2,064  —   

Debt issuance costs

   (4,975  (339  —   

Tax benefits on stock-based compensation

   —     641   2,295 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   39,030   (26,157  (11,525
  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash

   61   3   (61
  

 

 

  

 

 

  

 

 

 

Net (decrease) increase in cash and cash equivalents

   (24,647  12,793   (46,678

Cash and cash equivalents at beginning of year

   280,531   267,738   314,416 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

  $255,884  $280,531  $267,738 
  

 

 

  

 

 

  

 

 

 

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Investments in limited partnership interests

 

 

(1,967

)

 

 

(3,756

)

 

 

(4,241

)

Distributions received from limited partnership interests

 

 

5,360

 

 

 

4,657

 

 

 

2,086

 

Distributions received from unconsolidated joint venture

 

 

351

 

 

 

623

 

 

 

 

Purchase of property and equipment

 

 

(6,341

)

 

 

(3,318

)

 

 

(6,437

)

Purchase of real estate investments

 

 

(841

)

 

 

(1,367

)

 

 

(3,020

)

Purchase of intangible assets

 

 

(3,800

)

 

 

 

 

 

 

Purchase of fixed-maturity securities

 

 

(614,843

)

 

 

(18,303

)

 

 

(34,951

)

Purchase of equity securities

 

 

(22,887

)

 

 

(102,801

)

 

 

(68,223

)

Purchase of short-term and other investments

 

 

(42

)

 

 

(1,307

)

 

 

(200

)

Compensation received for property relinquished through eminent
   domain

 

 

14,500

 

 

 

 

 

 

44,000

 

Proceeds from sales of real estate investments

 

 

667

 

 

 

 

 

 

 

Proceeds from sales of fixed-maturity securities

 

 

11,716

 

 

 

23,055

 

 

 

81,433

 

Proceeds from calls, repayments and maturities of fixed-maturity
   securities

 

 

151,415

 

 

 

23,430

 

 

 

84,459

 

Proceeds from sales of equity securities

 

 

31,605

 

 

 

112,310

 

 

 

47,312

 

Proceeds from sales, redemptions and maturities of short-term and
   other investments

 

 

570

 

 

 

3,629

 

 

 

997

 

Net cash (used in) provided by investing activities

 

 

(434,537

)

 

 

36,852

 

 

 

143,215

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Cash dividends paid

 

 

(15,233

)

 

 

(14,065

)

 

 

(12,694

)

Cash dividends received under share repurchase forward contract

 

 

76

 

 

 

306

 

 

 

306

 

Net (repayment) borrowing under revolving credit facility

 

 

(15,000

)

 

 

(8,750

)

 

 

14,000

 

Proceeds from exercise of common stock options

 

 

 

 

 

 

 

 

63

 

Proceeds from issuance of redeemable noncontrolling interest and
   warrants

 

 

 

 

 

100,000

 

 

 

 

Issuance costs - redeemable noncontrolling interest

 

 

 

 

 

(6,262

)

 

 

 

Cash dividends paid to redeemable noncontrolling interest

 

 

(5,508

)

 

 

(2,542

)

 

 

 

Proceeds from issuance of long-term debt

 

 

172,500

 

 

 

 

 

 

10,000

 

Repayment of long-term debt

 

 

(1,009

)

 

 

(970

)

 

 

(17,048

)

Repurchases of convertible senior notes

 

 

 

 

 

 

 

 

(4,459

)

Repurchases of common stock

 

 

(71,242

)

 

 

(1,314

)

 

 

(1,547

)

Repurchases of common stock under share repurchase plan

 

 

(17,070

)

 

 

 

 

 

(5,161

)

Purchase of noncontrolling interests

 

 

(406

)

 

 

(55

)

 

 

 

Debt conversion expense paid

 

 

 

 

 

(1,895

)

 

 

 

Debt issuance costs

 

 

(6,041

)

 

 

(152

)

 

 

(165

)

Net cash provided by (used in) financing activities

 

 

41,067

 

 

 

64,301

 

 

 

(16,705

)

Effect of exchange rate changes on cash

 

 

(98

)

 

 

(54

)

 

 

2

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(393,580

)

 

 

197,602

 

 

 

203,823

 

Cash, cash equivalents, and restricted cash at beginning of year

 

 

631,343

 

 

 

433,741

 

 

 

229,918

 

Cash, cash equivalents, and restricted cash at end of year

 

$

237,763

 

 

$

631,343

 

 

$

433,741

 

(continued)

(continued)49


HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Amounts in thousands)

   Years Ended December 31, 
   2017   2016  2015 

Supplemental disclosure of cash flow information:

     

Cash paid for income taxes

  $11,506   $18,857  $38,371 
  

 

 

   

 

 

  

 

 

 

Cash paid for interest

  $8,906   $7,222  $7,211 
  

 

 

   

 

 

  

 

 

 

Non-cash investing and financing activities:

     

Unrealized gain (loss) on investments inavailable-for-sale securities, net of tax

  $1,923   $4,434  $(2,457
  

 

 

   

 

 

  

 

 

 

Details of business acquisition:

     

Fair value of assets acquired

  $—     $32,569  $—   

Less:Purchase price

   —      (14,514  —   

Carrying value of previously held interest

   —      (2,859  —   

Gain on remeasurement of previously held interest

   —      (4,005  —   

Gain on bargain purchase

   —      (2,071  —   
  

 

 

   

 

 

  

 

 

 

Liabilities assumed

  $—     $9,120  $—   
  

 

 

   

 

 

  

 

 

 

Conversion of revolving credit facility to long-term debt

  $9,441   $—    $—   
  

 

 

   

 

 

  

 

 

 

Receivable from sales ofavailable-for-sale securities

  $255   $350  $—   
  

 

 

   

 

 

  

 

 

 

Payable on purchases ofavailable-for-sale securities

  $4   $50  $1 
  

 

 

   

 

 

  

 

 

 

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

146

 

 

$

2,379

 

 

$

6,202

 

Cash paid for interest

 

$

6,155

 

 

$

7,110

 

 

$

7,476

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Unrealized loss on investments in available-for-sale securities,
   net of tax

 

$

(10,772

)

 

$

(1,068

)

 

$

(634

)

Receivable from sales of equity securities

 

$

 

 

$

 

 

$

5,240

 

Payable on purchases of equity securities

 

$

 

 

$

 

 

$

7

 

Common stock issued on conversions of 4.25% senior notes

 

$

 

 

$

114,928

 

 

$

 

Warrants issued in Centerbridge transaction

 

$

 

 

$

9,217

 

 

$

 

Asset acquired under finance lease

 

$

 

 

$

6

 

 

$

 

Acquisition of intangibles:

 

 

 

 

 

 

 

 

 

Common stock issued

 

$

 

 

$

5,410

 

 

$

 

Contingent consideration payable

 

$

1,069

 

 

$

2,419

 

 

$

 

See accompanying Notes to Consolidated Financial Statements.

50


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 1 -- Nature of Operations

HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), its principal operating subsidiary, and TypTap Insurance Company (“TypTap”). Both HCPCI isand TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsedFlorida and wind-only policies to Florida customers. During 2017, HCPCI received regulatory approval to write residential property and casualtyin other states. The operations of both insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. HCPCI has yet to commence operations in these states. TypTap, on the other hand, primarily offers standalone flood policies to Florida homeowners. HCPCI’s and TypTap’s operationssubsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries.

The Company emphasizes the use of internally developed technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries. In addition, HCI includes various subsidiaries predominantlyGreenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the businesses of owning and leasing real estate and operating marina facilitiesfacilities.

Assumed Business

Northeast Region

Effective December 31, 2020, the Company began providing 69.5% quota share reinsurance on all in-force, new and one restaurant,renewal policies issued by United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), in the states of Connecticut, New Jersey, Massachusetts, and developing software products. See Note 16 — “Segment Information.”

Rhode Island (collectively “Northeast Region”) through May 31, 2021. The Company obtainedalso entered into a majority of its policies through participationrenewal rights agreement with United in a“take-out program”connection with Citizens Property Insurance Corporation (“Citizens”), a Florida state supported insurer. Policies were obtained in separate assumption transactions with Citizens that took place from July 2007 through December 2017. The Company is required to offer renewals on the policies acquired for a period of three years subsequent to the initial expiration of theNortheast Region assumed policies. During the first full year after assumption, such renewals are required to have rates that are equivalent to or less than the rates charged by Citizens. Substantially all of the Company’s premium revenue since inception comes from these assumptions and one additional assumption throughbusiness, under which, the Company acquiredhas the right to renew and/or replace United’s insurance policies at the end of their respective policy periods. The policy replacement date was set for June 1, 2021 or such other date as mutually agreed by both parties. In return, United received 100,000 shares of HCI’s common stock and will receive a renewal rights ceding commission of 6% on any replacement premium in excess of $80,000. The aggregate ceding commission amount will not exceed $3,100.

Effective June 1, 2021, the Company, through HCPCI and TypTap, began providing 100% quota share reinsurance on all of United’s in-force, new and renewal policies in the Northeast Region through May 31, 2022. Under this agreement, each insurance subsidiary assumed 50% of the business and paid United a ceding commission of 24% of premium. Through its insurance subsidiaries, the Company began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022. See Note 9 -- “Intangible Assets, Net” for additional information.

Southeast Region

In February 2022, HCPCI entered into another reinsurance agreement with United where HCPCI provides 85% quota share reinsurance on all of United’s personal lines insurance business in the states of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”) from December 31, 2021 through May 31, 2022. Under this agreement, HCPCI paid United a catastrophe allowance of 9% of premium and a provisional ceding commission of 25% of premium.

The Company also entered into a renewal rights agreement with United in connection with the Southeast Region assumed business. Under the renewal rights agreement, the Company has the right to renew and/or replace United’s insurance policies at the end of their respective policy periods. The policy replacement date was set for June 1, 2022 or such other date as mutually agreed by both parties. As part of the transaction, United will receive a renewal rights ceding commission of 6%, with a portion of the ceding commission paid up-front, and the aggregate ceding commission amount will not exceed $6,000. See Note 9 -- “Intangible Assets, Net” for additional information.

The Company, through TypTap, entered into a new quota share reinsurance agreement in June 2022 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in the Southeast Region from June 1, 2022 through May 31, 2023. In exchange, TypTap pays United a ceding commission of 16% of premium. The Company began renewing United’s policies in South Carolina on June 1, 2022. On October 1, 2022, the Company began renewing and/or replacing United’s policies in Georgia. On December 1, 2022, the Company began renewing United’s policies in North Carolina.

Implications of Florida Senate Bill 2-A

In December 2022, the Florida policieslegislature passed Senate Bill 2-A (“SB 2-A”). The primary purpose of another FloridaSB 2-A is to address the affordability and availability of residential property insurance carrier.

in Florida. The bill also requires insurers to communicate, investigate, and pay valid claims more promptly. Key provisions in SB 2-A are-

51


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The establishment of a new program called the Florida Optional Reinsurance Assistance Program. The program is intended to make available additional reinsurance coverage to residential property insurers against catastrophic losses at reasonable rates.
The repeal of Florida’s one-way attorney’s fee provision, which entitled an insured to reasonable attorney’s fees in any lawsuit in which any amount of recovery was awarded.
The requirement of an expedited claims process. Reduced time limits for insurers to respond to policyholders throughout the claims resolution process will be mandated.
The prohibition of an Assignment of Benefits (“AOB”) contract from being applied to residential property insurance policies. This provision is intended to prevent AOBs from being used as a tool for fraud and abuse and will help enforce the law passed in May 2022 prohibiting contractor solicitation of roof claims without proper disclosure to a consumer.
The reduction in the required time limit for filing a claim. The time limit for providing a notice of loss to an insurer is reduced from two years to one year for initial or reopened claims and from three years to 18 months for supplemental claims.

Note 2 -- Summary of Significant Accounting Policies

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

Adoption of New Accounting Standards.

Effective January 1, 2017, the Company adopted Accounting Standards UpdateNo. 2016-09, Compensation—Stock Compensation (Topic 718), which amends the accounting for share-based payment transactions including the related income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures, which is applied using a modified retrospective transition method, have no impact on the Company’s comparative consolidated financial statements. In addition, the retrospective application of the amendments related to the presentation of employee taxes paid does not have an impact on the Company’s comparative consolidated statement of cash flows. Upon adoption of this standard, the Company elected to account for forfeitures of share-based awards when they occur and apply the amendments related to the presentation of excess tax benefits on the statement of cash flows prospectively. Under the new standard, the Company is required to recognize any excess tax benefits and tax deficiencies in the Company’s consolidated statement of income.

In addition, The Company early adopted Accounting Standards UpdateNo. 2017-01, Business Combinations (Topic 805), which clarifies the definition of business and provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The Company applied this standard prospectively. SeeReal Estate Investments in Note 4 — “Investments” for the application of this standard in the acquisition of a commercial property in Tampa, Florida.

Principles of Consolidation.The accompanying consolidated financial statements include the accounts of HCI Group, Inc. and its majority-owned and controlled subsidiaries. All significant intercompany accountsbalances and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships or investments for consolidation pursuant to authoritative accounting guidance related to the consolidation of variable interest entities under the Variable Interest Model prescribed by the Financial Accounting Standards Board (“FASB”).FASB. A variable interest entity is consolidated when the Company has the power to direct activities that most significantly impact the economic performance of the variable interest entity and has the obligation to absorb losses or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity. When a variable interest entity is not consolidated, the Company uses the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income.

The Company has a 100% equity interest in one venture (treated as a joint venture under U.S. GAAP) that owns a commercial property in Riverview, Florida. The Company consolidates this joint venture as its primary beneficiary (seeConsolidated Variable Interest Entity in Note 4 — “Investments”).

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Use of Estimates.The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Material estimates that are particularly susceptible to significant change in the near term are primarily related to losses and loss adjustment expenses, reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments, intangible assets acquired from United, allowance for credit losses, and stock-based compensation expense.

Business Acquisitions. The Company accounts for business acquisitions using the acquisition method, which requires it to measure and recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition date fair values. In the event that the fair value of net assets acquired exceeds the purchase price, a bargain purchase gain is recorded. In a step acquisition in which there is a change in ownership interest and control is obtained when there is a previously held equity interest, a gain or loss from remeasurement of the previously held equity interest to fair value is recorded.

Before the adoption of Accounting Standards UpdateNo. 2017-01, acquisitions of income-producing real properties were typically considered business acquisitions. As such, the Company allocated the purchase price to land, land improvements, buildings, tenant improvements, intangibles such as the value of significant tenant (i.e. anchor tenant) relationships,in-place leases, and assumed liabilities, if any. Tangible assets are presented as real estate investments on the Company’s consolidated balance sheet. Buildings subject to leases are valued as if vacant. The value attributable toin-place leases reflects the costs we would have incurred to lease the property to the occupancy level that existed at the acquisition date. These costs include leasing commissions, tenant improvement allowances, and other direct costs required to lease the property. In addition, the estimated fair value ofin-place leases reflects the value of base rental revenues that would have been earned during the assumed periods of vacancy and the related carrying costs that would have been incurred to lease the vacant property to its existing occupancy. The Company also reviews terms of the assumed leases to evaluate whether the terms are favorable or unfavorable relative to the market at the acquisition date. In the event the assumed leases are not at market terms, the Company recognizes an intangible asset for a lease with favorable terms and a liability if the terms of the lease are unfavorable.

After the adoption of the aforementioned guidance, the Company evaluates whether substantially all of the fair value of the gross assets acquired in a real estate transaction is concentrated in a single identifiable asset or group of similar identifiable assets. If such concentration is substantial, the transaction is accounted for as an asset acquisition. As a result, the cost of acquiring real estate is allocated to the individual assets based on the relative fair values of the individual assets. Acquisition related costs are capitalized and allocated among the assets acquired.

Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less than three months to be cash and cash equivalents. At December 31, 20172022 and 2016,2021, cash and cash equivalents consisted of cash on deposit with financial institutions and securities brokerage firms, and certificates of deposit.

Restricted Cash. Restricted cash represents funds in the Company’s sole ownership held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements and not available for immediate business use. Funds withheld in an account for which the Company is a co-owner but not the named beneficiary are not considered restricted cash and are included in funds withheld for assumed business on the consolidated balance sheets.

52


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Investments inAvailable-for-Sale Securities.Available-for-sale investments consist of fixed-maturity and equity securities. Fixed-Maturity Securities. Fixed-maturity securities that are available for sale include debt securities and redeemable preferred stock. The Company’savailable-for-sale securities are carried at fair value. Temporary changesChanges in the fair value ofavailable-for-sale securities representing unrealized gains or losses, other than impairments, are excluded from net investment income and reported in stockholders’ equity as a component of accumulated other comprehensive income (loss), net of deferred income taxes. Realized investment gains and losses from sales are recorded on the trade date and are determined using thefirst-infirst-out (FIFO) first-in first-out (“FIFO”) method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt securities are recognized in investment income using the interest method over the estimated remaining term of the security. Gains and losses from call redemptions and repayments are charged to investment income.

The Company reviews allfixed-maturity securities for other-than-temporary impairment on a monthly basis. WhenEffective January 1, 2020, net unrealized loss in the fair value of any investmentan available-for-sale fixed-maturity security is lower than its cost, an assessment is made to determine whether the decline is temporary or other-than-temporary. If the decline is determined to be other-than-temporary, the investment is written down to fair value and an impairment loss is recognized in income in the period in which the Company makes such determination.

evaluated for impairment. When reviewing impaired fixed-maturity securities, the Company considers its ability and intent to hold these securities and whether it is probable that the Company will be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intends to sell or it is probable that the Company will have to sell before recovery or maturity, the unrealized losses are recognized as other-than-temporaryimpairment losses in income. In instances

Impaired securities where there are credit related losses associated with the impaired fixed-maturity securities for which the Company asserts that it does not havehas the ability and intent to sell,hold until recovery and believes it is not probable that the Company will not be required to sell until a market pricethese securities prior to their anticipated recovery or maturity, are evaluated for the amountexistence of the other-than-temporary impairment loss related to credit losses is recognized in income, and the amount of the other-than-temporary impairment loss related to othernon-credit factors such as changes in interest rates or market conditions is recorded as a component of accumulated other comprehensive income.

credit-related losses. When determining impairment due to a credit relatedcredit-related loss, the Company carefully considers factors such as the issuer’s financial ratios and condition, the security’s current ratings and maturity date, the failure of the issuer to make a scheduled payment, and overall market conditions in estimating the cash flows expected to be collected. The expected cash flows discounted at the effective interest rate of the security implicit at the date of acquisition isare then compared with the security’s amortized cost at the measurement date. A credit loss is incurred when the present value of the expected cash flows is less than the security’s amortized cost. If such credit-related losses exist, an allowance for credit losses is established with a charge in the statement of income. Subsequent changes in the allowance, whether favorable or unfavorable, are recorded on the statement of income. See additional information in the Allowance for Credit Losses section within this note. Any remaining impairment loss related to other non-credit factors such as changes in interest rates or market conditions is reflected as a component of accumulated other comprehensive income (loss).

Allowance for Credit Losses. Allowance for credit losses represents an estimation of potential losses that the Company may experience due to credit risk. The allowance for credit losses account is a contra account of a financial asset to reflect the net amount expected to be collected. Any increase or decrease in the allowance for credit losses related to investments is recognized and reflected as credit losses on investments in the Company’s consolidated statement of income. For all other financial assets, credit loss expense is included in other operating expenses. When the risk of credit loss becomes certain, the allowance for credit losses account will be written off against the financial asset. Under the CECL model, the Company measures all expected credit losses related to relevant financial assets based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. The Company considers various factorsprimarily uses a discounted cash flow method and a rating-based method in estimating credit losses at a reporting date for financial assets under the scope of the CECL model. The discounted cash flow method is a valuation method used to estimate the value of a financial asset based on its future cash flows. The Company uses this method to determine the expected credit losses for available-for-sale fixed-maturity securities. In addition, the Company elected not to measure an allowance for credit losses for accrued interest receivable as any uncollectible amount is adjusted to interest income on a monthly basis. At present, the exposure to credit losses for certain financial assets related to non-insurance business is considered immaterial to the Company’s financial position.

53


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

For certain financial assets related to insurance business such as reinsurance recoverable and reinsurance receivable for premium refund, the Company uses a rating-based method, which is a modified version of the probability of default method. It requires two key inputs: a) the liquidation rate and b) the amount of loss exposure. The liquidation rate, which is published annually, is the ratio of impaired insurance companies that were eventually liquidated to the group of insurance companies considered by A.M. Best in its study. The amount of loss exposure represents the future billing balance, net of any collateral, spread over the projected periods that are based on the Company’s historical claim payment pattern. The rating-based method measures credit losses by multiplying the future billings grouped by insurance rating over the projected periods by their corresponding liquidation rates by insurance rating.

For paid reinsurance recoverable which is due within 90 days after billing, the Company will rely heavily on each reinsurer’s credit rating, recent financial condition, and historical collection problems, if any, in determining whetherthe expected credit loss. For risk attributable to disagreements between an individual security is other-than-temporarily impaired (seeAvailable-for-Sale Securitiesinsurer and reinsurer regarding a difference in Note 4 — “Investments”).

Investmentsinterpretation of provisions in Trading Securities. Thea reinsurance agreement (“dispute risk”), the Company holds certain equity securitieswill continue to use an incurred loss method to estimate losses. At December 31, 2022, there was no dispute risk associated with the intention of selling themreinsurance recoverable balance.

Equity Securities. Equity securities represent ownership interests held by the Company in a short period of timeentities for investment purposes. Unrealized holding gains and losses related to generate profits. As such, these equity securities are classifiedreported in the consolidated statements of income as tradingnet unrealized investment gains and carried at fair value.losses. Realized investment gains and losses from sales are recorded on the trade date and are determined using the FIFO method. Unrealized holding gains and losses from the changes in the fair value are reported in the consolidated statement of income as net unrealized investment gains or lossesmethod (see TradingEquity Securities in Note 4 -- “Investments”).

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Limited Partnership Investments. The Company has interests in limited partnerships that are not registered under the United StatedStates Securities Act of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public market and any withdrawal is subject to the terms and conditions of the partnership agreement.agreements. The Company has no influence over partnership operating and financial policies. The Company did not elect the fair value option and, therefore, uses the equity method to account for the investments with ownership interest greater than five percent. For the investments with ownership interest at five percent or less, the Company uses the net asset value method to estimate the fair value of these investments (see Limited Partnership Investments in Note 4 — “Investments”).investments. The Company will generally recognizerecognizes its share of the limited partnership’spartnerships’ earnings or losses on a three-month lag. Due to the lag, the Company may record an adjustment to the Company’s most recent share of net asset value when the amount can be reasonably estimated and a significant adverse impact on the net asset value is expected as a result of a major economic event.

Net investment income or loss from limited partnerships represents a net aggregate amount of operating results allocated to the Company based on the percentage of ownership interest in each limited partnership.

Pursuant to U.S. GAAP, these limited partnerships which are private equity funds must measure their investments at fair value and reflect the unrealized gains and losses in the fair value of their investments on their statementstatements of income. As a result, the carrying value of limited partnership investments at each reporting date approximates their estimated fair value.

Investment in Unconsolidated Joint Venture. The Company hashad a 90%90% equity interest in a limited liability company (treated as a joint venture under U.S. GAAP) that ownsowned land for lease or for sale and, until December 2016, owned and operated a retail shopping center.sale. The joint venture was determined to be a variable interest entity as it lackslacked sufficient equity to finance its activities without additional subordinated financial support. Despite having a majority equity interest, the Company doesdid not have the power to direct the activities that most significantly impact the economic performance of the joint venture and, accordingly, iswas not required to consolidate the joint venture as its primary beneficiary. As a result, the Company usesused the equity method to account for this investment.

When evidence indicates an impairment may occur, the Company evaluates whether a decline in value is other than temporary. Evidence may include continuing operating losses of the joint venture, a declining occupancy rate, a decrease in real estate value, and an oversupply of rental property in close vicinity to the investment property. Should available evidence indicate the recovery of the initial investment is less likely, the Company would compare the carrying value of the investment with its expected residual value and recognize an impairment loss in earnings.

Real Estate Investments.Investments. Real estate investments include real estate and the related assets purchased for investment purposes (see Note 4 -- “Investments”).

Prior to August 16, 2016, the Company was party to an Acquisition, Development and Construction loan agreement (“ADC Arrangement”) whereby the Company provided financing to a property developer for the construction of a retail shopping center. Because the Company expected to receive more than 50% of the residual profit from the ADC Arrangement which had characteristics similar to a real estate investment, the costs of the real estate project were capitalized and interest was recognized in net investment income.

Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is included in net investment income and allocated over the estimated useful life of the asset using the straight-line method of depreciation. Land is not depreciated. Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable.

54


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Deferred policy acquisition costs.Policy Acquisition Costs. Deferred policy acquisition costs (“DAC”) represent direct costs to acquire insurance contracts and consist of premium taxes, inspection fees and commissions paid to outside agents at the time of collection of the policy premium. DAC may also include expenses associated with the transition of policies from other insurers for replacement policies and the issuance of renewal policies under the Company’s own rates and terms. DAC is amortized over the life of the related policy in relation to the amount of gross premiums earned. Ceding commission and related costs paid associated with assumed business are also deferred and amortized over the life of the reinsurance agreement.

The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned.

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

Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization, which is included in other operating expenses. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: land improvements, five years; building, 39 years; building improvements, three to ten years; computer hardware and software, 3 years;three years; and furniture and office and furniture equipment, 3three to 7 years.seven years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Land is not depreciated. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. The Company capitalizes both internal and external costs for internally developed software during the application development stage. During the preliminary project and post-implementation stage,internal-use software development costs are expensed as incurred. Capitalized software costs are depreciated on a straight-line basis over the estimated useful life of 7 years.seven years.

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

Leases.The Company leases office equipment, storage units, and office space from non-affiliates under terms ranging from one month up to nine years. In assessing whether a contract is or contains a lease, the Company first determines whether there is an identified asset in the contract. The Company then determines whether the contract conveys the right to obtain substantially all of the economic benefits from use of the identified asset or the right to direct the use of the identified asset. The Company elects not to record any lease with a term of 12 months or less on the consolidated balance sheet. For such short-term leases, the Company recognizes the lease payments in expense on a straight-line basis over the lease term.

If the contract is or contains a lease and the Company has the right to control the use of the identified asset, the right-of-use (“ROU”) asset and the lease liability is measured from the lease component of the contract and recognized on the consolidated balance sheet. In measuring the lease liability, the Company uses its incremental borrowing rate for a loan secured by a similar asset that has a term similar to the lease term to discount the lease payments. The contract is further evaluated to determine the classification of the lease as to whether it is finance or operating. If the lease is a finance lease, the ROU asset is depreciated to depreciation expense over the shorter of the useful life of the asset or the lease term. Interest expense is recorded in connection with the lease liability using the effective interest method. If the lease is an operating lease, the ROU asset is amortized to lease expense on a straight-line basis over the lease term. For the presentation of finance leases on the Company’s consolidated balance sheets, ROU assets and corresponding lease liabilities are included with property and equipment, net, and long-term debt, respectively. For the presentation of operating leases on the Company’s consolidated balance sheets, ROU assets are presented as right-of-use assets - operating leases and corresponding lease liabilities are reflected as lease liabilities - operating leases.

55


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Company as a lessor leases its commercial and retail properties, boat slips, and docks to non-affiliates at various terms. If the contract gives the Company’s customer the right to control the use of the identified asset, revenue is recognized on a straight-line basis over the lease term. Initial direct costs incurred by the Company are deferred and amortized on a straight-line basis over the lease term. The Company also records an unbilled receivable, which is the amount by which straight-line revenue exceeds the amount billed in accordance with the lease.

Intangible Assets. Intangibles related to real estate investments consist of the value attributable to the acquiredin-place leases and the primary, or anchor, tenant relationships. The value attributable to the anchor tenant relationship represents the economic benefits of having a nationally recognized retailer as the lead tenant, which draws consumer traffic and other tenants to the retail center. These intangibles are amortized to expense over the related lease term. Amortization of the intangibles related to real estate investments is reflected in net investment income in the consolidated statementstatements of income. The Company reviews these intangible assets for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable. In the event the Company determines the carrying value is not recoverable, an impairment loss is recorded in the Company’s consolidated statement of income.

HCI GROUP, INC. AND SUBSIDIARIES

NotesAcquired intangible assets represent the fair value of consideration the Company paid and is estimated to Consolidated Financial Statements

(Amountspay in thousands, exceptexchange for the renewal rights and non-compete intangible assets acquired from the seller. In the renewal rights transactions, the Company purchased the right, but not the obligation, to offer homeowners insurance coverage to all policyholders of the seller in certain states on the agreed-upon policy replacement date. The renewal rights agreements also contain a non-compete clause whereby the seller agrees not to offer homeowners insurance policies in these states through a specified date. The Company records these intangible assets based on the fair value of the consideration it paid and is estimated to pay to the seller as provided in the renewal rights agreements with the seller. The Company engaged a third-party valuation specialist to assist with the allocation of the renewal rights and non-compete intangible assets acquired. Intangible assets are amortized over their estimated useful lives. Amortization of the renewal rights and non-compete intangible assets is reflected in other operating expenses in the consolidated statements of income. Intangible assets are evaluated to ensure that there is no impairment to carrying value and no change required in the amortization period. See Note 9 -- “Intangible Assets, Net” for additional information.

Funds Withheld for Assumed Business. Pursuant to the Company’s quota share reinsurance agreements with United, trust accounts were established for the benefit of United as beneficiary. The balance represents the net amount owed to the Company under the reinsurance agreements and perconsists of funds deposited to establish the trust accounts adjusted for subsequent premium changes net of related commissions and decreased for paid losses and loss adjustment expenses. The assets within the trust accounts consist primarily of cash and United has the exclusive and unconditional right to withdraw funds from the trust accounts on demand with written notice in compliance with the quota share amounts, unless otherwise stated)reinsurance agreements. Any balance remaining at the termination of the quota share agreement will be settled and distributed upon the termination of the trust account and trust agreement.

Lease Acquisition Costs. Lease acquisition costs represent capitalized costs of finding and acquiring tenants such as leasing commissions, legal, and marketing expenses. The costs are included in other assets on the consolidated balance sheets. The Company amortizes these costs in other operating expenses on a straight-line basis over the term of a lease.

Long-Term Debt. Long-term debt includes debt instruments and finance lease obligations. A debt instrument is generally classified as a liability and carried at amortized cost, net of any discountissuance costs. Debt issuance costs are capitalized and issuance costs.amortized to interest expense over the expected life of the debt instrument using the effective interest method. At issuance, a debt instrument with embedded features such as conversion and redemption options is evaluated to determine whether bifurcation and derivative accounting is applicable. If such instrument is not subject to derivative accounting, it is further evaluated to determine if the Company is required to separately account for the liability and equity components.

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

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

Prior to January 1, 2021, if the embedded feature of the debt instrument was not subject to derivative accounting, the debt instrument was further evaluated to determine if the Company was required to separately account for the liability and equity components. To determine the carrying values of the liability and equity components at issuance, the Company measured the fair value of a similar liability, including any embedded features other than the conversion option, and assigned such value to the liability component.

The liability component’s fair value was then subtracted from the initial proceeds to determine the carrying value of the debt instrument’s equity component, which was included in additional paid-in capital. Transaction costs related to issuing a debt instrument that embodies both liability and equity components arewere allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs are capitalized and presented as a deduction from the carrying value of the debt. Both debt discount and deferred debt issuance costs are

56


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

were amortized to interest expense over the expected life of the debt instrument using the effective interest method.instrument. Equity issuance costs arewere a reduction to the proceeds allocated to the equity component.

Redeemable Noncontrolling Interest. Redeemable noncontrolling interest represents an economic interest in TTIG and is presented in the temporary equity (mezzanine) section of the consolidated balance sheets. The interest contains rights in dividends, voting, conversion, participation, liquidation preference and redemption. The redemption feature is not solely within the control of TTIG.

The redeemable noncontrolling interest is initially recorded at fair value and is decreased by related issuance costs. The fair value is estimated using a residual fair value approach. The effect of increasing dividend rates is accreted to the redeemable noncontrolling interest with a corresponding debit to retained income. The effective interest method is used for accretion over the period of the increasing dividend rates. The carrying value of the interest is also subsequently adjusted for accrued dividends and dividend payments. The Company has an option to pay the dividends in cash or make a payment in kind. The dividends are accrued monthly assuming that they will be settled in cash.

When the redemption is probable, the Company elects to recognize changes in the redemption value immediately as it occurs and adjust the carrying value of the interest to the maximum redemption value which is the higher of the redemption price or fair market value at the reporting date. Such changes in the redemption value are treated as dividends when calculating income available to common stockholders.

Noncontrolling Interests. The Company has noncontrolling interests attributable to TTIG. A noncontrolling interest arises when the Company has less than 100% of the voting rights and economic interests in a subsidiary. The noncontrolling interest is periodically adjusted for the expensing of TTIG’s stock-based awards granted to its employees, the interest’s share of TTIG’s net income or loss to common stockholders and change in other comprehensive income or loss.

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

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

The estimates of unpaid losses and LAE are subject to trends in claim severity and frequency and are continually reviewed. As part of the process, the Company reviews historical data and considers various factors, including known and anticipated regulatory and legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and LAE. Adjustments are reflected in the results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. Losses and LAE ceded to or recovered from reinsurers are recorded as a reduction to losses and LAE on the consolidated statement of income.

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

57


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Premiums Receivable. Premiums receivable represent the amount of premiums due from policyholders for insurance coverage. Premiums are recorded as receivable in the Company’s general ledger on the effective date of the policy. Premiums are billed to the policyholder 45-60 days in advance of the effective date. The policyholder is given a 30-day grace period after the effective date to pay the premium before the insurance coverage is cancelled. If the policyholder does not pay the premium, the Company can cancel the policy and has no obligation to provide insurance coverage. Unpaid renewal policies are cancelled at midnight on the last day of the period for which the policyholder has paid. The unearned premium liability for the cancelled policy is reversed along with the premium receivable balance. Therefore, there is no unpaid earned premium and credit loss associated with the cancelled policy.

However, when the 30-day grace period falls between two reporting periods, the premium receivable balance at the end of the first reporting period may potentially be overstated for not considering the policy that is subsequently cancelled during the following reporting period. To mitigate the overstatement issue, the Company estimates the monetary impact from the subsequent policy cancellation by multiplying the historical cancellation rate to the premiums receivable balance at the reporting date. An allowance for uncollectible premiums, which offsets the balance of premiums receivable, is established by reducing the unearned premiums liability and earned revenues.

At December 31, 2022 and 2021, allowances for uncollectible premiums were $5,362 and $1,750, respectively. The increase in allowances for uncollectible premiums during 2022 resulted in a $3,432 decrease in unearned premiums during the year ended December 31, 2022. The decrease in allowances for uncollectible premiums during 2021 resulted in a $318 increase in unearned premiums during the year ended December 31, 2021.

Reinsurance Ceded. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the applicable reinsurance contract or contracts. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of gross premiums earned. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers.

CertainFrom time to time, the Company may elect to pay a reinstatement premium to a reinsurer in order to restore an amount of reinsurance coverage limit exhausted by a loss event. When that occurs, the unamortized portion of the existing prepaid reinsurance premium associated with the first coverage limit will be immediately expensed. The reinstatement premium will be recognized as prepaid reinsurance premium which will be amortized to premiums ceded over the remaining coverage period of a contract.

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

received upon the expiration of the contracts.contract. See Note 13 -- “Reinsurance” for additional information.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Company receives ceding commissions from ceding gross written premiums to a third-party reinsurer under one flood quota share reinsurance contract. The ceding commissions represent the reimbursement of the Company’s policy acquisition, underwriting and other operating expenses. Ceding commissions received cover a portion of premium taxes and agent commissions capitalized by the Company and a portion ofnon-capitalized acquisition costs and other underwriting expenses. Ceding commissions are recognized toas income on apro-rata basis over the terms of the policies reinsured, the amount of which is included in policy acquisition and other underwriting expenses in the 2017 consolidated statement of income. The unearned portion of ceding commissions that represents recovery of capitalized acquisition costs is classified as a reduction of deferred policy acquisition costsDAC whereas the remaining unearned balance is classified as deferred revenue in other liabilities.

Reinsurance Assumed. From time to time, the Company agrees to assume risk from another insurance company. Reinsurance premiums, commission, cost allowance, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums assumed from other insurance companies are included in gross premiums earned. Ceding commissions on assumed gross written premiums and related costs paid are reflected as DAC which is amortized as expense on a pro-rata basis over the life of the reinsurance agreement. This amortized expense is included in policy acquisition and other underwriting expenses in the consolidated statements of income.

58


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Reinsurance Recovered in Advance on Unpaid Losses.Reinsurance recovered in advance on unpaid losses represents cash received in advance from reinsurersa reinsurer under a reinsurance contractscontract to reimburse the Company’s losses and LAE.loss adjustment expenses. The Company is contractually permitted to apply these funds to offset the paid portion of reinsurance recoverable only.

Premium Revenue. Premium revenue includes premium from the direct issuance of policies to insureds or the renewal or replacement of insureds’ policies and assumed premium for providing coverage under reinsurance agreements. Premium revenue is earned on a dailypro-rata basis over the term of the policies and is included in gross premiums earned. Unearned premiums represent the portion of the premiums attributable to the unexpired policy term. The Company reviews its policy detail and establishes an allowance for any amount outstanding for more than 90 days. As of December 31, 2017 and 2016, there was no allowance required.

Policy Fees. Policy fees represent nonrefundable fees for insurance coverage, which are intended to reimburse a portion of the costs incurred to underwrite the policy. Policy fees are recognized ratably over the policy coverage period.

Revenue from Claims Processing Services. The Company provides a claims processing service to a third-party insurance company as a third-party administrator (“TPA”). The service includes investigation, evaluation, adjustment and settlement of a claim. These highly interrelated activities are combined to fulfill the Company’s obligation to provide the claims processing service under a contract. As such, they are considered a single performance obligation for revenue recognition purposes. Fees are established on a per-claim basis by type of claim. For each type of claim, the per-claim fee revenue is recognized over an average claim processing period.

Florida The Company may incur additional costs for outsourced services in connection with the investigation, coverage analysis, adjustment, negotiation, settlement, defense or general processing of a claim. These costs are reimbursable from the customer. The Company has control over how an outsourced service is performed on its behalf. Thus, these pass-through costs are recognized as revenue in the gross amount to which the Company expects to be entitled and when the outsourced service is completed and paid or accrued by the Company.

For a certain type of claim and in addition to the per-claim service fee, the Company is entitled to additional revenue which is determined based on a fixed percent of the paid indemnification of the loss per claim. The revenue is recognized when the indemnification is paid by the Company.

Revenue related to claims processing services is included in other revenue in the consolidated statements of income. For the years ended December 31, 2022 and 2021, revenues from claims processing services were $3,425 and $4,554, respectively. At December 31, 2022 and 2021, other assets included $2,543 and $314, respectively, of amounts receivable attributable to this service.

Insurance Guaranty Association Assessments. The Company’s Florida insurance subsidiaries may be assessed by state associations such as the state guaranty association.Florida Insurance Guaranty Association. The assessments are intended to be used for the payment of covered claims of insolvent insurance entities. The assessments are generally based on a percentage of premiums written during or following the year of insolvency. Liabilities are recognized when the assessments are probable to be imposed on the premiums on which they are expected to be based and the amounts can be reasonably estimated. TheAn insurer is generally permitted by Florida statutes to recover the entire amount of assessments fromin-force and future policyholders through policy surcharges. U.S. GAAP provides that the Company should record an asset based on the amount of written orobligated-to-write premiums and limited to the amounts recoverable over the life of thein-force policies.

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

Income Taxes.The Company files consolidated federal and state income tax returns and allocates taxes among its wholly owned subsidiaries in accordance with a writtentax-allocation agreement.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

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

59


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Deferred income tax expense and benefit results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than fifty percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets themore-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met themore-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of both positive and negative evidence available including recent operating results, available tax planning strategies, and projected future taxable income, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2017, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements.

Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 20172022 and 2016.2021. Fair values for securities or financial instruments are based on the framework for measuring fair value established by U.S. GAAP (see Note 7 —6 -- “Fair Value Measurements”).

Stock-Based Compensation.The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requiresrequire the measurement and recognition of compensation for all stock-based awards made to employees, non-employee directors (see Note 21 -- “Stock-Based Compensation”), and directors including stock options and restricted stock issuancesthird-party award recipients based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards granted to employees and non-employee directors is generally recognized as compensation expense over the requisite service period, which is defined as the period during which an employeea recipient is required to provide service in exchange for an award. Forfeitures of the Company’s stock-based awards are accounted for as they occur. The Company uses a straight-line attribution method for all grants that include only a serviceservice-based vesting condition. The Company’s restricted stock awards include service and market conditions. As a result, restrictedRestricted stock grants with marketmarket-based vesting conditions are expensed over the derived service period for each separatelyperiod. Expensing market-based awards may be expedited if the conditions are met sooner than anticipated. For awards granted to third-party recipients, the cost of the grant is recognized in the same period(s) and in the same manner as if the Company had paid cash. The Company’s outstanding stock-based awards include stock options, warrants, and restricted stock awards with service and market-based vesting tranche.conditions. Compensation expense related to all awards granted to employees and non-employee directors is included in general and administrative personnel expenses. The Company receives a windfall tax benefit for certain stock option exercises during the period of exercise and for restricted stock awards if these awards vest at a higher value than the value used to recognize compensation expense. In the event the restricted stock awards vest at a lower value than the value used to recognize compensation expense, the Company experiences a tax shortfall. The Company recognizes tax windfalls and shortfalls in the consolidated statement of income. Prior to January 1, 2017, the windfall tax benefit was recognized in additionalpaid-in-capital in the consolidated statements of stockholders’ equity whereas the shortfall was charged to additionalpaid-in-capital to the extent of the Company’s pool of windfall tax benefits with any remainder recognized in income tax expense. For 2016, all shortfall amounts were charged to additionalpaid-in-capital with no additional income tax expense recognized for these shortfalls.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Basic and diluted earnings (loss) per common share.Diluted Earnings Per Common Share. Basic earnings (loss)or loss per common share is computed by dividing net income (loss)or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP requires the inclusion of restricted stock as participating securities since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. In addition, the intrinsic value of restricted stock declines when the Company experiences operating losses. As a result, holders of the Company’s restricted stock are allocated a proportional share of net income and loss determined by dividing total weighted-average shares of restricted stock by the sum of total weighted-average common shares and shares of restricted stock (the“two-class “two-class method”). Diluted earnings (loss) per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as participating equities. During loss periods, common stock equivalents such as stock options and convertible debt are excluded from the calculation of diluted loss per share, as the inclusion would have an anti-dilutive effect. See Note 18 -- “Earnings Per Share” for potentially dilutive securities at December 31, 2017, 20162022, 2021 and 2015.2020.

Statutory Accounting Practices. The Company’s U.S. insurance subsidiaries comply with statutory accounting practices prescribed by the National Association of Insurance Commissioners.Commissioners and as adopted or permitted by the Florida Department of Financial Services, Office of Insurance Regulation (“FLOIR”). There are no state prescribed or permitted practices that have been adopted by the Company’s U.S. subsidiaries. In addition, the Company’s Bermuda insurance subsidiary prepares and files financial statements in accordance with the prescribed regulatory accounting practices of the Bermuda Monetary Authority.

Reclassifications. Certain reclassifications of prior year amounts have been made to conformReclassification. In response to the current year presentation. For example, certain payroll-related costs such as share-based compensation expense, payroll taxes and employee benefits, which were previously reportednew reporting segment described in other operating expenses totaling $7,163 and $8,136 forNote 15 -- “Segment Information,” the years ended December 31, 2016 and 2015, respectively, were2020 segment information has been reclassified to general and administrative personnel expenses to conform with the 2017current period presentation.

Note 3 — Recent Accounting Pronouncements

Accounting Standards Update No. 2017-09. In May 2017, TypTap and TypTap Management Company were removed from the FASB issued Accounting Standards UpdateNo. 2017-09 (“ASU2017-09”), Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,segment previously referred to as Insurance Operations to form the new TypTap Group segment. The information technology companies which provides guidance about which changeshad previously been presented in the Corporate and Other segment were also added to the terms or conditions of a share-based payment award require an application of modification accounting. ASU2017-09 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted. This guidance will impact the Company’s accounting for any future modification of its existing share-based awards.TypTap Group segment.

60


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Accounting Standards Update No. 2017-08. In March 2017,Note 3 -- Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the FASB issued Accounting Standards UpdateNo. 2017-08 (“ASU2017-08”), Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20): Premium Amortization on Purchased Callable Debt Securities, which amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, this update shortens the amortization period of certain purchased callable debt securitiesCompany’s consolidated balance sheets that sum to the earliest call date. ASU2017-08 is effective fortotal of the Company beginning with the first quarter of 2019. Early adoption is permitted. The Company does not anticipate significant impact from this guidance.

Accounting Standards Update No. 2017-05. In February 2017, the FASB issued Accounting Standards UpdateNo. 2017-05 (“ASU2017-05”), Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic610-20), which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. In addition, ASU2017-15 eliminates the exceptionsame such amounts shown in the financial asset guidance for transfersconsolidated statements of investments including equity method investments in real estate entities and supersedes the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest subsection (Topic 845). ASU2017-05 is effective for the Company beginning with the first quarter of 2018. The Company does not anticipate significant impact from this guidance.cash flows.

Accounting Standards Update No. 2017-03. In January 2017, the FASB issued Accounting Standards UpdateNo. 2017-03 (“ASU2017-03”), Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323), which adds and amends SEC paragraphs pursuant to SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force meetings. The announcement made at the September 22, 2016 meeting provides the SEC staff view on the disclosure

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash and cash equivalents

 

$

234,863

 

 

$

628,943

 

Restricted cash

 

 

2,900

 

 

 

2,400

 

Total

 

$

237,763

 

 

$

631,343

 

At December 31, 2022, $175,331 or 74.7% of the impact that recently issued accounting standards will have on a public entity’s financial statements when the standards are adopted in a future period. This announcement applies to ASU2014-09, Revenue from ContractsCompany’s cash and cash equivalents were deposited at four national banks and included $15,796 with Customers (Topic 606); ASU2016-02, Leases (Topic 842); ASU2016-13, Financial Instruments—Credit Losses (Topic 326) and any subsequent amendments to guidance in the ASUs that are issued prior to the adoptiontwo custodians. At December 31, 2021, $527,294 or 83.8% of the aforementioned ASUs.

Accounting Standards Update No. 2017-01. In January 2017,Company’s cash and cash equivalents were deposited at six national banks and included $181,390 with two custodians. At December 31, 2022 and 2021, the FASB issued Accounting Standards UpdateNo. 2017-01 (“ASU2017-01”), Business Combinations (Topic 805), which clarifiesCompany’s cash deposits at any one bank generally exceed the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. If the screen is not met, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. ASU2017-01 is effectiveFederal Deposit Insurance Corporation’s $250 coverage limit for the Company beginning with the first quarter of 2018. Early adoption is permitted under certain circumstances. When adopted, this guidance will impact how the Company determines whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. The Company elected to adopt this standard in the fourth quarter of 2017.insured deposit accounts.

61


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Accounting Standards to be Adopted in Fiscal Year 2018

In February 2018, the FASB issued Accounting Standards UpdateNo. 2018-02 (“ASU2018-02”), Income Statement – Reporting Comprehensive Income (Topic 220), primarily allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. Early adoption is permitted. The Company elected to early adopt this standard in the first quarter of 2018, which has no impact to the Company’s financial position.

In January 2016, the FASB issued Accounting Standards UpdateNo. 2016-01 (“ASU2016-01”), Financial Instruments – Overall (Subtopic825-10), primarily requiring all equity investments other than those accounted for under the equity method of accounting or those that result in consolidation of the investee to be measured at fair value with changes in the fair value recognized through net income. The application of ASU2016-01 could cause the Company to experience significant volatility in earnings. Under current accounting policy, the Company recognizes unrealized holding gains and losses onavailable-for-sale equity securities in stockholders’ equity as a component of accumulated other comprehensive income. In the year of adoption, the unrealized holding gains and losses ofavailable-for-sale equity securities reported in accumulated other comprehensive income at December 31, 2017 will be reclassified to beginning retained income. Any subsequent changes in fair value will be recognized in the consolidated statement of income. In addition, the classification of the Company’s equity securities with readily determinable fair values as“available-for-sale” in the consolidated balance sheet and related disclosures will be eliminated.

In May 2014, the FASB issued Accounting Standards UpdateNo. 2014-09 (“ASU2014-09”), Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. ASU2014-09 also amends the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer to be consistent with the guidance in this ASU. ASU2014-09 permits two methods of adoption: a full retrospective method or a modified retrospective method. The Company has identified and reviewed impacted revenue generating activities in accordance with the five-step revenue recognition model specified by this standard. The Company elects to use a modified retrospective method for transition to the new revenue recognition standard. Based on the Company’s assessment, the impact will be limited to the related disclosures of certain revenue generating activities as its primary source of revenue from insurance premiums is not within the scope of this new standard.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 4 -- Investments

a)Available-for-Sale Fixed-Maturity Securities

The Company holds investments in fixed-maturity securities and equity securities that are classified asavailable-for-sale. At December 31, 20172022 and 2016,2021, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’savailable-for-sale securities by security type were as follows:

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

Value
 

 

Cost or
Amortized

 

Allowance
 for

 

Gross
Unrealized

 

Gross
Unrealized

 

Estimated
Fair

 

As of December 31, 2017

        

Fixed-maturity securities

        

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

  $42,313   $1   $(287  $42,027 

Corporate bonds

   106,897    1,110    (904   107,103 

State, municipalities, and political subdivisions

   78,954    1,816    (75   80,695 

Exchange-traded debt

   7,666    197    (204   7,659 
  

 

   

 

   

 

   

 

 

 

Cost

 

 

Credit Loss

 

 

Gain

 

 

Loss

 

 

Value

 

Total

   235,830    3,124    (1,470   237,484 

Equity securities

   53,132    6,280    (501   58,911 
  

 

   

 

   

 

   

 

 

Totalavailable-for-sale securities

  $288,962   $9,404   $(1,971  $296,395 
  

 

   

 

   

 

   

 

 

As of December 31, 2016

        

Fixed-maturity securities

        

As of December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

  $1,975   $—     $(36  $1,939 

 

$

463,648

 

 

$

 

 

$

59

 

 

$

(9,105

)

 

$

454,602

 

Corporate bonds

   75,538    607    (1,641   74,504 

 

 

28,378

 

 

 

 

 

 

20

 

 

 

(1,205

)

 

 

27,193

 

State, municipalities, and political subdivisions

   78,018    776    (488   78,306 

 

 

1,389

 

 

 

 

 

 

 

 

 

(6

)

 

 

1,383

 

Exchange-traded debt

   11,463    36    (237   11,262 

 

 

683

 

 

 

 

 

 

2

 

 

 

(52

)

 

 

633

 

Redeemable preferred stock

   237    3    (3   237 

 

 

99

 

 

 

 

 

 

 

 

 

(9

)

 

 

90

 

  

 

   

 

   

 

   

 

 

Total

   167,231    1,422    (2,405   166,248 

 

$

494,197

 

 

$

 

 

$

81

 

 

$

(10,377

)

 

$

483,901

 

Equity securities

   47,750    5,769    (484   53,035 
  

 

   

 

   

 

   

 

 

Totalavailable-for-sale securities

  $214,981   $7,191   $(2,889  $219,283 
  

 

   

 

   

 

   

 

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

17,046

 

 

$

 

 

$

64

 

 

$

(86

)

 

$

17,024

 

Corporate bonds

 

 

21,913

 

 

 

 

 

 

632

 

 

 

(53

)

 

 

22,492

 

State, municipalities, and political subdivisions

 

 

1,759

 

 

 

 

 

 

49

 

 

 

 

 

 

1,808

 

Exchange-traded debt

 

 

767

 

 

 

 

 

 

44

 

 

 

 

 

 

811

 

Redeemable preferred stock

 

 

468

 

 

 

 

 

 

 

 

 

(20

)

 

 

448

 

Total

 

$

41,953

 

 

$

 

 

$

789

 

 

$

(159

)

 

$

42,583

 

At December 31, 2017, fixed-maturity securities included $249 of U.S. Treasury securities related to a statutory deposit held in trust for the South Carolina Director of Insurance.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Expected maturities willmay differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at December 31, 20172022 and 20162021 are as follows:

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

Cost or

 

 

Estimated

 

 

Cost or

 

 

Estimated

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

266,170

 

 

$

265,353

 

 

$

10,734

 

 

$

10,826

 

Due after one year through five years

 

 

223,153

 

 

 

214,307

 

 

 

19,222

 

 

 

19,820

 

Due after five years through ten years

 

 

4,380

 

 

 

3,797

 

 

 

11,503

 

 

 

11,403

 

Due after ten years

 

 

494

 

 

 

444

 

 

 

494

 

 

 

534

 

 

 

$

494,197

 

 

$

483,901

 

 

$

41,953

 

 

$

42,583

 

62

   December 31, 
   2017   2016 
   Amortized
Cost
   Estimated
Fair

Value
   Amortized
Cost
   Estimated
Fair

Value
 

Available-for-sale

        

Due in one year or less

  $35,386   $35,364   $2,656   $2,662 

Due after one year through five years

   116,575    115,766    49,915    50,023 

Due after five years through ten years

   57,415    58,984    90,360    89,332 

Due after ten years

   26,454    27,370    24,300    24,231 
  

 

 

   

 

 

   

 

 

   

 

 

 
   $235,830   $237,484   $167,231   $166,248 
  

 

 

   

 

 

   

 

 

   

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Sales ofAvailable-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales ofavailable-for-sale fixed-maturity securities, for the years ended December 31, 2017, 20162022, 2021 and 20152020 were as follows:

   Proceeds   Gross
Realized
Gains
   Gross
Realized
Losses
 

Year ended December 31, 2017

      

Fixed-maturity securities

  $31,759   $2,176   $(181
  

 

 

   

 

 

   

 

 

 

Equity securities

  $42,657   $3,882   $(1,565
  

 

 

   

 

 

   

 

 

 

Year ended December 31, 2016

      

Fixed-maturity securities

  $40,454   $604   $(79
  

 

 

   

 

 

   

 

 

 

Equity securities

  $23,127   $2,656   $(580
  

 

 

   

 

 

   

 

 

 

Year ended December 31, 2015

      

Fixed-maturity securities

  $53,711   $253   $(470
  

 

 

   

 

 

   

 

 

 

Equity securities

  $25,695   $1,327   $(1,718
  

 

 

   

 

 

   

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Realized

 

 

Realized

 

 

 

Proceeds

 

 

Gains

 

 

Losses

 

Year ended December 31, 2022

 

$

11,716

 

 

$

13

 

 

$

(442

)

Year ended December 31, 2021

 

$

23,055

 

 

$

722

 

 

$

(35

)

Year ended December 31, 2020

 

$

81,433

 

 

$

1,773

 

 

$

(610

)

Other-than-temporary Impairment

Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities

Securities with gross unrealized loss positions at December 31, 2022 and 2021, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

 

 

Less Than Twelve Months

 

 

Twelve Months or Longer

 

 

Total

 

As of December 31, 2022

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

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

 

$

(8,701

)

 

$

269,116

 

 

$

(404

)

 

$

4,644

 

 

$

(9,105

)

 

$

273,760

 

Corporate bonds

 

 

(909

)

 

 

23,028

 

 

 

(296

)

 

 

2,541

 

 

 

(1,205

)

 

 

25,569

 

States, municipalities, and political
   subdivisions

 

 

(6

)

 

 

1,383

 

 

 

 

 

 

 

 

 

(6

)

 

 

1,383

 

Exchange-traded debt

 

 

(52

)

 

 

463

 

 

 

 

 

 

 

 

 

(52

)

 

 

463

 

Redeemable preferred stock

 

 

(9

)

 

 

90

 

 

 

 

 

 

 

 

 

(9

)

 

 

90

 

Total available-for-sale securities

 

$

(9,677

)

 

$

294,080

 

 

$

(700

)

 

$

7,185

 

 

$

(10,377

)

 

$

301,265

 

 

 

Less Than Twelve Months

 

 

Twelve Months or Longer

 

 

Total

 

As of December 31, 2021

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

 

Gross
Unrealized
Loss

 

 

Estimated
Fair
Value

 

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

 

$

(73

)

 

$

9,809

 

 

$

(13

)

 

$

616

 

 

$

(86

)

 

$

10,425

 

Corporate bonds

 

 

(53

)

 

 

4,452

 

 

 

 

 

 

 

 

 

(53

)

 

 

4,452

 

Redeemable preferred stock

 

 

(20

)

 

 

442

 

 

 

 

 

 

 

 

 

(20

)

 

 

442

 

Total available-for-sale securities

 

$

(146

)

 

$

14,703

 

 

$

(13

)

 

$

616

 

 

$

(159

)

 

$

15,319

 

At December 31, 2022 and 2021, there were 84 and 23 securities, respectively, in an unrealized loss position.

Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities

The Company regularly reviews its individual investment securities for other-than-temporarycredit impairment. The Company considers various factors in determining whether a credit loss exists for each individual security, is other-than-temporarily impaired, including-

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

63


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

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

general market conditions and industry or sector specific factors and other qualitative factors;

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

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

The table below summarizes the activity in the allowance for credit losses of available-for-sale fixed-maturity securities for the years ended December 31, 2022 and 2021:

 

 

2022

 

 

2021

 

Balance at January 1

 

$

 

 

$

588

 

Reductions for securities sold

 

 

 

 

 

(9

)

Reductions for securities exchanged

 

 

 

 

 

(579

)

Balance at December 31

 

$

 

 

$

 

For the years ended December 31, 2022 and 2021, the Company recognized $0 credit loss expense related to fixed-maturity securities in the consolidated statements of income compared with $611 of credit loss expense on two fixed-maturity securities for the year ended December 31, 2020.

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At December 31, 2022 and 2021, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

 

 

 

 

 

Gross
Unrealized

 

 

Gross
Unrealized

 

 

Estimated
Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

December 31, 2022

 

$

36,272

 

 

$

2,078

 

 

$

(3,767

)

 

$

34,583

 

December 31, 2021

 

$

46,276

 

 

$

6,335

 

 

$

(871

)

 

$

51,740

 

The table below presents the portion of unrealized gains and losses in the Company’s consolidated statements of income related to equity securities still held.

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Net (losses) gains recognized

 

$

(8,149

)

 

$

5,486

 

 

$

435

 

Exclude: Net realized (losses) gains recognized for
   securities sold

 

 

(996

)

 

 

4,123

 

 

 

(244

)

Net unrealized (losses) gains recognized

 

$

(7,153

)

 

$

1,363

 

 

$

679

 

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the years ended December 31, 2022, 2021 and 2020 were as follows:

 

 

 

 

 

Gross
Realized

 

 

Gross
Realized

 

 

 

Proceeds

 

 

Gains

 

 

Losses

 

Year ended December 31, 2022

 

$

31,605

 

 

$

2,224

 

 

$

(3,220

)

Year ended December 31, 2021

 

$

112,310

 

 

$

6,280

 

 

$

(2,157

)

Year ended December 31, 2020

 

$

47,312

 

 

$

2,868

 

 

$

(3,112

)

64


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Fixed-maturity Securities

For the year ended December 31, 2017, the Company recognized impairment losses of $428 related to the sale of fourintent-to-sell fixed-maturity securities in the consolidated statement of income. For the year ended December 31, 2016, the Company recognized $1,565 of impairment losses on four fixed-maturity securities, representing $1,335 of additional losses recorded during the period and $230 of the net change recorded in other comprehensive income. For the year ended December 31, 2015, the Company recorded $705 of impairment losses on two fixed-maturity securities, of which $111 was considered other-than-temporarily impaired due to credit related losses, with the remaining amount of $594 related tonon-credit factors.

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in income for available for sale fixed-maturity securities:

   2017  2016  2015 

Balance at January 1

  $475  $111  $—   

Credit impairments on impaired securities

   —     475   111 

Additional credit impairments on previously impaired securities

   —     293   —   

Credit impaired security fully disposed of for which there was no prior intent or requirement to sell

   (475  (385  —   

Reduction due to increase in expected cash flows recognized over the remaining life of the previously impaired security

   —     (19  —   
  

 

 

  

 

 

  

 

 

 

Balance at December 31

  $—    $475  $111 
  

 

 

  

 

 

  

 

 

 

During 2017, the Company sold two fixed-maturity securities with cumulative credit losses totaling $475. The decision to sell these securities before their maturity was primarily driven by the impact of the Tax Cut and Jobs Act signed into law in 2017. Of two fixed-maturity securities with credit related losses existing at December 31, 2015, one matured with full payment of principal and interest and one was sold due to uncertainties surrounding the issuer’s restructuring plan during 2016.

Equity Securities

In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, the length of time each security has been in an unrealized loss position, the extent of the decline and the near term prospect for recovery. At December 31, 2017, the Company had one equity security that was other-than-temporarily impaired. This compared with nine and 17 equity securities that were other-than-temporarily impaired at December 31, 2016 and 2015, respectively. The Company recognized impairment losses of $1,039, $917 and $4,570 in the consolidated statement of income for the years ended December 31, 2017, 2016 and 2015, respectively.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Securities with gross unrealized loss positions at December 31, 2017 and 2016, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

   Less Than Twelve Months   Twelve Months or Longer   Total 
As of December 31, 2017  Gross
Unrealized
Loss
  Estimated
Fair

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

Value
 

Fixed-maturity securities

         

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

  $(246 $40,587   $(41 $1,938   $(287 $42,525 

Corporate bonds

   (174  40,627    (730  30,563    (904  71,190 

State, municipalities, and political subdivisions

   (30  9,775    (45  2,297    (75  12,072 

Exchange-traded debt

   (203  2,481    (1  36    (204  2,517 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total fixed-maturity securities

   (653  93,470    (817  34,834    (1,470  128,304 

Equity securities

   (449  12,812    (52  1,440    (501  14,252 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Totalavailable-for-sale securities

  $(1,102 $106,282   $(869 $36,274   $(1,971 $142,556 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

At December 31, 2017, there were 135 securities in an unrealized loss position. Of these securities, 22 securities had been in an unrealized loss position for 12 months or longer.

   Less Than Twelve
Months
   Twelve Months or
Longer
   Total 
As of December 31, 2016  Gross
Unrealized
Loss
  Estimated
Fair
Value
   Gross
Unrealized
Loss
  Estimated
Fair
Value
   Gross
Unrealized
Loss
  Estimated
Fair
Value
 

Fixed-maturity securities

         

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

  $(36 $1,939   $—    $—     $(36 $1,939 

Corporate bonds

   (1,546  43,859    (95  2,814    (1,641  46,673 

State, municipalities, and political subdivisions

   (441  26,029    (47  3,036    (488  29,065 

Exchange-traded debt

   (191  4,980    (46  1,954    (237  6,934 

Redeemable preferred stock

   (3  47    —     —      (3  47 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total fixed-maturity securities

   (2,217  76,854    (188  7,804    (2,405  84,658 

Equity securities

   (293  10,042    (191  3,209    (484  13,251 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Totalavailable-for-sale securities

  $(2,510 $86,896   $(379 $11,013   $(2,889 $97,909 
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

At December 31, 2016, there were 134 securities in an unrealized loss position. Of these securities, 20 securities had been in an unrealized loss position for 12 months or longer. The gross unrealized loss of corporate bonds in an unrealized loss position for twelve months or more included $76 of other-than-temporary impairment losses related tonon-credit factors.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

b) Trading Securities

At December 31, 2017, the cost, net unrealized gains, and estimated fair value of the Company’s trading equity securities were $953, $92, and $1,045, respectively. There were no investments in trading equity securities at December 31, 2016.

Sales of Trading Securities

Proceeds received, and the gross realized gains and losses from sales of trading equity securities, for the year ended December 31, 2017 were as follows:

   Proceeds   Gross
Realized
Gains
   Gross
Realized
Losses
 

Year ended December 31, 2017

      

Equity securities

  $2,625   $111   $(77
  

 

 

   

 

 

   

 

 

 

The Company did not hold any trading equity securities during 2016.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

c) Limited Partnership Investments

The Company has interests in limited partnerships that are not registered or readily tradeable on a securities exchange. These partnerships are private equity funds managed by general partners who make decisions with regard to financial policies and operations. As such, the Company is not the primary beneficiary and does not consolidate these partnerships. In August 2017, the Company entered into a subscription agreement with another limited partnership. The following table provides information related to the Company’s investments in limited partnerships:

 

 

December 31, 2022

 

 

December 31, 2021

 

 

 

Carrying

 

 

Unfunded

 

 

 

 

 

Carrying

 

 

Unfunded

 

 

 

 

Investment Strategy

 

Value

 

 

Balance

 

 

(%) (a)

 

 

Value

 

 

Balance

 

 

(%) (a)

 

Primarily in senior secured loans and, to
   a limited extent, in other debt and
   equity securities of private U.S. lower-
   middle-market companies. (b)(c)(e)

 

$

4,146

 

 

$

 

 

 

15.37

 

 

$

6,076

 

 

$

2,085

 

 

 

15.37

 

Value creation through active distressed
   debt investing primarily in bank loans,
   public and private corporate bonds,
   asset-backed securities, and equity
   securities received in connection with
   debt restructuring. (b)(d)(e)

 

 

2,528

 

 

 

 

 

 

1.66

 

 

 

3,423

 

 

 

 

 

 

1.69

 

High returns and long-term capital
   appreciation through investments in
   the power, utility and energy industries,
   and in the infrastructure sector. (b)(f)(g)

 

 

5,319

 

 

 

 

 

 

0.18

 

 

 

6,270

 

 

 

1,401

 

 

 

0.18

 

Value-oriented investments in less liquid
   and mispriced senior and junior debts
   of private equity-backed companies.
   (b)(h)(i)

 

 

3,470

 

 

 

 

 

 

0.56

 

 

 

4,437

 

 

 

 

 

 

0.57

 

Value-oriented investments in mature real
   estate private equity funds and portfolios
   globally. (b)(j)

 

 

7,457

 

 

 

3,125

 

 

 

1.32

 

 

 

5,977

 

 

 

4,537

 

 

 

1.36

 

Risk-adjusted returns on credit and equity
   investments, primarily in private
   equity-owned companies. (b)(k)

 

 

2,782

 

 

 

2,536

 

 

 

0.98

 

 

 

1,950

 

 

 

3,050

 

 

 

0.47

 

Total

 

$

25,702

 

 

$

5,661

 

 

 

 

 

$

28,133

 

 

$

11,073

 

 

 

 

(a)
Represents the Company’s percentage investment in the fund at each balance sheet date.
(b)
Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated.

65


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   December 31, 2017   December 31, 2016 
Investment Strategy  Carrying
Value
   Unfunded
Balance
   (%)(a)   Carrying
Value
   Unfunded
Balance
   (%)(a) 

Primarily in senior secured loans and, to a limited extent, in other debt and equity securities of private U.S. lower-middle-market companies. (b)(c)(e)

  $7,276   $5,505    15.37   $6,246   $6,428    16.50 

Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e)

   7,951    1,745    1.76    7,358    1,360    1.76 

Maximum long-term capital appreciation through long and short positions in equity and/or debt securities of publicly traded U.S. andnon-U.S. issuers, derivative instruments and certain other financial instruments. (f)

   —      —      —      11,333    —      66.58 

High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(g)(h)

   7,509    2,512    0.18    4,326    5,766    0.18 

Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(i)(j)

   448    4,566    0.47    —      —      —   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $23,184   $14,328     $29,263   $13,554   
  

 

 

   

 

 

     

 

 

   

 

 

   

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

(a)Represents the Company’s percentage investment in the fund at each balance sheet date.
(b)Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated.
(c)Expected to have a10-year term and the capital commitment is expected to expire on September 3, 2019.
(d)Expected to have a three-year term from the end of the capital commitment period, which is March 31, 2018.
(e)At the fund manager’s discretion, the term of the fund may be extended for up to two additionalone-year periods.
(f)The withdrawal was effective on February 15, 2017. As a result, the Company’s investment in this limited partnership was terminated.
(g)Expected to have a10-year term and the capital commitment is expected to expire on June 30, 2020.
(h)With the consent of a super majority of partners, the term of the fund may be extended for up to three additionalone-year periods.
(i)Expected to have asix-year term from the commencement date, which can be extended for up to two additionalone-year periods with the consent of either the advisory committee or a majority of limited partners.
(j)Unless extended or terminated for reasons specified in the agreement, the capital commitment is expected to expire on December 1, 2018.

(c)
The term is expected to be the later of ten years or two years following the maturity of the fund’s outstanding leverage. Although the capital commitment period has expired, follow-on investments and pending commitments may require additional fundings.
(d)
The term has been extended for a second additional one-year period to June 30, 2023. Although the capital commitment period has ended, the general partner could still request an additional funding under certain circumstances.
(e)
At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.
(f)
Expected to have a ten-year term. The capital commitment period has expired but the general partner may request additional funding for follow-on investment.
(g)
With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods.
(h)
Expected to have an eight-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.
(i)
The capital commitment period has ended but an additional funding may be requested.
(j)
The term is expected to end November 27, 2027. The term may be extended for up to four additional one-year periods at the general partner’s discretion, and up to two additional one-year periods with the consent of the advisory committee.
(k)
Expected to have an eight-year term after the final admission date. The term may be extended for an additional one-year period at the general partner’s discretion, and up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.

The following is the summary of aggregated summarized unaudited financial information of limited partnerships included in the investment strategy table above, which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. In applying the equity method of accounting, the Company uses the most recently available financial information provided by the general partner of each of these partnerships. The financial statements of these limited partnerships are audited annually.

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Operating results:

 

 

 

 

 

 

 

 

 

Total income

 

$

1,252,264

 

 

$

705,610

 

 

$

(1,432,907

)

Total expenses

 

 

(139,174

)

 

 

(131,463

)

 

 

(133,281

)

Net income (loss)

 

$

1,113,090

 

 

$

574,147

 

 

$

(1,566,188

)

HCI GROUP, INC. AND SUBSIDIARIES

 

 

December 31,

 

 

 

2022

 

 

2021

 

Balance sheet:

 

 

 

 

 

 

Total assets

 

$

5,119,695

 

 

$

5,855,616

 

Total liabilities

 

$

430,354

 

 

$

564,732

 

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

   Years Ended December 31, 
   2017   2016   2015 

Operating results:

      

Total income

  $409,169   $310,998   $4,350 

Total expenses

   105,281    185,126    77,508 
  

 

 

   

 

 

   

 

 

 

Net income (loss)

  $303,888   $125,872   $(73,158
  

 

 

   

 

 

   

 

 

 

   December 31, 
   2017   2016 

Balance Sheet:

    

Total assets

  $4,381,321   $2,956,327 

Total liabilities

  $382,310   $63,813 

For the years ended December 31, 20172022 and 2016,2021, the Company recognized net investment income of $2,334$3,963 and $1,207,$4,947, respectively, compared with net investment loss of $1,595for these investments. For the year ended December 31, 2015, the Company recognized net investment loss of $3,244.2020, for these investments. At December 31, 20172022 and 2016,2021, the Company’s net cumulative contributed capital to the partnerships existing at each respective balance sheet date totaled $21,172$24,978 and $31,946,$28,371, respectively, and the Company’s maximum exposure to loss aggregated $23,184$25,702 and $29,263,$28,133, respectively.

During the year ended December 31, 2017,2022, the Company received in cash returns on investment of $3,001 and returns of capital of $5,360 compared with returns on investment of $3,604 and returns of capital of $4,657 during the year ended December 31, 2021. During the year ended December 31, 2020, the Company received total cash distributions of $12,639,$3,301, representing $11,758$1,215 of returns on investment and $2,086 of returned capital and $881 of return on investment. Included in the return of capital was $11,626 from one limited partnership the Company withdrew from in February 2017. During the year ended December 31, 2016, the Company received in cash $544 of return on investment. There was a return on investment of $12 received by the Company during the year ended December 31, 2015.capital.

For the years ended December 31, 2017, 2016 and 2015, the Company recognized its share of earnings or losses based on the respective partnership’s statement of income. The carrying value of these investments approximates the amount the Company expected to recover at December 31, 2017 and 2016.

d) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has a 90%had an equity interestinvestment in FMKT Mel JV, LLC (“FMJV”), a Florida limited liability company treated as a joint venture under U.S. GAAP. FMJV is deemed aAt December 31, 2022 and 2021, the Company’s maximum exposure to loss relating to this variable interest entity due to its lack of sufficient equity to finance its operations without direct or indirect additional financial support from parties towas $18 and $363, respectively, representing the joint venture. Although Melbourne FMA holds a majority interest in FMJV, certain major economic decisions specified in the agreement are not under Melbourne FMA’s control. As a result, Melbourne FMA is not the primary beneficiary and is not required to consolidate FMJV.

In January 2016, FMJV sold a portion of its outparcel land for gross proceeds of $829, of which $515 was used to repay a portioncarrying value of the construction loan obtained forinvestment. At December 31, 2022, 2021 and 2020, there was no undistributed income from this equity method investment.

In June 2022, FMKT Mel JV sold its real estate development project. FMJVlast remaining outparcel and recognized a $404 gain on the outparcel sale of which $383 was allocated to$572 before distributing its earnings in July 2022 and being liquidated in December 2022. For the year ended December 31, 2022, the Company received a cash distribution of $840, representing a combined distribution of $489in accordance withearnings and $351 in capital. For the profit allocation specifiedyear ended December 31, 2021, the Company received a cash distribution of $737, representing a combined distribution of $114 in earnings and $623 in capital. For the operating agreement. Onyear ended December 15, 2016, FMJV distributed its entire equity interest in FMKT Mel Manager, LLC (“FMKT MGA”),31, 2020, the Company did not receive any cash distributions. See Note 28 -- “Subsequent Events” for

66


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

its wholly owned subsidiary, to Melbourne FMA and the other member, each of which received 90% and 10%, respectively. In addition to operating a retail shopping center business, FMKT MGA owned land which included two outparcels. Melbourne FMA accounted for this transaction as a business step acquisition using the fair value method and, as a result, recognized a $4,005 gain on remeasurement of previously held interest. The gain represented the difference between the fair value of the 90% equity interest and its carrying value under the equity method. The fair value of the equity interest was comprised of the fair value of FMKT MGA’s underlying assets primarily determined by an independent appraiser offset by the fair value of liabilities assumedinformation on the date offinal distribution. Inputs used by the appraiser included, but were not limited to, information about market and surrounding environments, demographics, and the sale or rent of similar types of property within the vicinity. Due to their short-term nature, the carrying value of current assets and assumed liabilities, including a variable interest rate revolving credit line, approximated fair value. SeePineda Landings -Melbourne, Florida in Note 6 — “Business Acquisitions” for additional information.

In March 2017, FMJV sold a portion of its outparcel land for gross proceeds of $825 and recognized a $331 gain on sale of which $199 was allocated to the Company in accordance with the profit allocation specified in the operating agreement. During 2017, FMKT MGA was merged with Melbourne FMA, LLC.

At December 31, 2017 and 2016, the Company’s maximum exposure to loss relating to the variable interest entity was $1,304 and $2,102, respectively, representing the carrying value of the investment. At December 31, 2017, there was $0 of undistributed income from this equity method investment as compared with an undistributed loss, after an equity distribution, of $25 at December 31, 2016, the amounts of which were included in the Company’s consolidated retained income.

For the year ended December 31, 2017, the Company received a cash distribution of $564, representing a combined distribution of $147 in earnings and $417 in capital. The limited liability company members received no cash distributions during 2016 and 2015. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Operating results:

 

 

 

 

 

 

 

 

 

Total revenues

 

$

572

 

 

$

540

 

 

$

 

Total expenses

 

 

(22

)

 

 

(77

)

 

 

(64

)

Net income (loss)

 

$

550

 

 

$

463

 

 

$

(64

)

The Company’s share of net income (loss)*

 

$

495

 

 

$

417

 

 

$

(57

)

*Included in net investment income in the Company’s consolidated statements of income.

   Years Ended December 31, 
   2017   2016   2015 

Operating results:

      

Total revenues

  $331   $—     $118 

Total expenses

   483    —      257 
  

 

 

   

 

 

   

 

 

 

Net loss

  $(152  $—     $(139
  

 

 

   

 

 

   

 

 

 

The Company’s share of net loss (a)

  $(234  $—     $(125

(a)Included in net investment income in the Company’s consolidated statements of income. Gain from the sale of the outparcel during 2017 was allocated in accordance with the method specified in the operating agreement.

 

 

December 31,

 

 

 

2022

 

 

2021

 

Balance sheet:

 

 

 

 

 

 

Property and equipment, net

 

$

 

 

$

357

 

Cash

 

 

 

 

 

29

 

Other

 

 

 

 

 

18

 

Total assets

 

$

 

 

$

404

 

 

 

 

 

 

 

 

Members’ capital

 

$

 

 

$

404

 

Total members’ capital

 

$

 

 

$

404

 

Investment in unconsolidated joint venture, at equity**

 

$

18

 

 

$

363

 

**Includes the 90% share of FMKT Mel JV’s operating results.

e) Real Estate Investments

Real estate investments include land, buildings with office and retail space for lease, outparcels, and marinas. Real estate investments consist of the following as of December 31, 2022 and 2021:

 

 

December 31,

 

 

 

2022

 

 

2021

 

Land

 

$

38,327

 

 

$

39,720

 

Land improvements

 

 

12,138

 

 

 

11,917

 

Buildings and building improvements

 

 

29,410

 

 

 

29,405

 

Tenant and leasehold improvements

 

 

1,742

 

 

 

1,511

 

Other

 

 

1,649

 

 

 

1,265

 

Total, at cost

 

 

83,266

 

 

 

83,818

 

Less: accumulated depreciation and amortization

 

 

(11,878

)

 

 

(9,922

)

Real estate investments

 

$

71,388

 

 

$

73,896

 

In May 2022, the Company sold one outparcel in Sorrento, Florida for net proceeds of $667. On July 1, 2022, the Company closed on its agreement to sell 1.5 acres of land in Tampa, Florida for net proceeds of $14,500 to the Florida Department of Transportation (“FDOT”) in connection with an eminent domain proceeding for a planned road improvement project. See additional information under f) Net Investment Income below. Depreciation and amortization expense related to real estate investments was $1,956, $1,922 and $1,864, respectively, for the years ended December 31, 2022, 2021 and 2020 and was included in net investment income on the consolidated statements of income.

67


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

   December 31, 
   2017   2016 

Balance Sheet:

    

Construction in progress—real estate

  $27   $334 

Property and equipment, net

   1,199    1,654 

Cash

   236    179 

Other

   5    180 
  

 

 

   

 

 

 

Total assets

  $1,467   $2,347 
  

 

 

   

 

 

 

Accounts payable

  $   $11 

Other liabilities

   18    —   

Members’ capital

   1,449    2,336 
  

 

 

   

 

 

 

Total liabilities and members’ capital

  $1,467   $2,347 
  

 

 

   

 

 

 

Investment in unconsolidated joint venture, at equity*

  $1,304   $2,102 

*Included the 90% share of FMKT Mel JV’s operating results.

FMJV’s assets at December 31, 2017 and 2016 included primarily three outparcels for sale or lease which have increased in value since the adjacent retail shopping center was completed. The Company determined that there was no impairment loss associated with these assets for the years ended December 31, 2017 and 2016. In the fourth quarter of 2017, FMJV decided to terminate its development plan for nearby land, thereby expensing $382 of deferred costs associated with the land feasibility study. The 2015 results reflected expenses incurred during the initial development stage. Because the Company expected to incur such expenses during development of the property and prior to its occupancy, the Company determined there was no impairment loss for the year ended December 31, 2015.

e) Real Estate Investments

Real estate investments include buildings with office and retail space for lease, outparcels, wet and dry boat storage, one restaurant, and two marinas. Real estate investments consist of the following as of December 31, 2017 and 2016:

   December 31, 
   2017   2016 

Land

  $26,315   $17,592 

Land improvements

   9,904    9,336 

Building

   21,284    16,154 

Tenant and leasehold improvements

   1,204    872 

Construction in progress*

   —      3,404 

Other

   3,050    2,683 
  

 

 

   

 

 

 

Total, at cost

   61,757    50,041 

Less: accumulated depreciation and amortization

   (3,399)��   (1,955
  

 

 

   

 

 

 

Real estate investments

  $58,358   $48,086 
  

 

 

   

 

 

 

*This project, which was developed by the Company’s consolidated variable interest entity, was completed in July 2017. The capitalized costs were reclassified to land, land improvement, and building.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

On October 17, 2017, the Company, through a wholly owned subsidiary, acquired commercial real estate in Tampa, Florida for a purchase price of $9,100. The acquired assets primarily consisted of land, building andin-place lease agreements. The Company incurred approximately $115 of acquisition-related costs and accounted for this transaction as an asset acquisition in accordance with ASU2017-01 which the Company early adopted in the fourth quarter of 2017. As a result, all transaction-related costs were allocated among the assets acquired. During 2016, the Company acquired properties through two business acquisitions. See Note 6 — “Business Acquisitions” for additional information. Depreciation and amortization expense related to real estate investments was $1,447, $531 and $370, respectively, for the years ended December 31, 2017, 2016 and 2015.

f) Consolidated Variable Interest Entity

The Company has a commercial property in Riverview, Florida. The development project of this property was completed in July 2017 through a limited liability company treated under U.S. GAAP as a joint venture in which the Company’s subsidiary had a controlling financial interest and, as a result, it was the primary beneficiary (See Note 27 — “Subsequent Events”). The real estate investments of this limited liability company primarily include a retail strip center with 8,400 square feet of net rentable space and an adjacent parcel of land which is currently leased in its entirety to a large gas station and convenience store chain. The following table summarizes the assets and liabilities related to this variable interest entity which are included in the accompanying consolidated balance sheets.

   December 31, 
   2017   2016 

Cash and cash equivalents

  $—     $65 

Construction in progress included in real estate investments

  $—     $3,404 

Real estate investments

  $4,680   $—   

Other assets

  $152   $—   

Accrued expenses

  $21   $68 

Other liabilities

  $160   $11 

g) Net Investment Income

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

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Available-for-sale securities:

      

Fixed-maturity securities

  $5,689   $4,589   $3,935 

Available-for-sale fixed-maturity securities

 

$

6,367

 

 

$

1,375

 

 

$

4,252

 

Equity securities

   3,318    3,452    3,710 

 

 

1,204

 

 

 

1,411

 

 

 

1,388

 

Investment expense

   (726   (651   (673

 

 

(491

)

 

 

(542

)

 

 

(497

)

Limited partnership investments

   2,334    1,207    (3,244

 

 

3,963

 

 

 

4,947

 

 

 

(1,595

)

Real estate investments

   (1,018   (592   (343

 

 

16,126

 

 

 

4,086

 

 

 

(620

)

Loss from unconsolidated joint venture

   (234   —      (125

Net income (loss) from unconsolidated joint venture

 

 

495

 

 

 

417

 

 

 

(57

)

Cash and cash equivalents

   2,069    1,036    661 

 

 

4,783

 

 

 

641

 

 

 

1,691

 

Other

   7    46    57 
  

 

   

 

   

 

 

Short-term investments

 

 

 

 

 

 

 

 

2

 

Net investment income

  $11,439   $9,087   $3,978 

 

$

32,447

 

 

$

12,335

 

 

$

4,564

 

  

 

   

 

   

 

 

HCI GROUP, INC. AND SUBSIDIARIES

NotesIn May 2022, income from real estate investments included a net gain of $376 resulting from the sale of the outparcel described in e) Real Estate Investments and $451 of income from selling the liquor license previously owned by the Company’s restaurant business which was discontinued in 2020. In July 2022, income from real estate investments included a net realized gain of $13,402 resulting from the sale of 1.5 acres of land in Tampa, Florida for net proceeds of $14,500 to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Atthe FDOT. During the year ended December 31, 2017, $87,092 or 34.1%2021, income from real estate investments included a net gain of $2,790 resulting from a legal settlement with The Kroger Co. in a lawsuit filed by a real estate subsidiary of the Company’s cashCompany to enforce a guaranty of a commercial lease.

g) Other Investments

From time to time, the Company may invest in financial assets other than stocks, mutual funds, and cash equivalents were deposited at three national banks and included $38,543 in three custodial accounts. Atbonds. For the years ended December 31, 2016, $203,139 or 72.6% of the Company’s cash2022, 2021 and cash equivalents2020, net realized gains related to other investments were deposited at three national banks$238, $1,662 and included $28,431 in three custodial accounts. At December 31, 2017 and 2016, the Company’s cash deposits at any one bank generally exceed the Federal Deposit Insurance Corporation’s $250 coverage limit for insured deposit accounts.$81, respectively.

Note 5 -- Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income or loss, which for the Company includes changes in unrealized gains or losses of investments carried at fair value and changes in the unrealized other-than-temporary impairmentto any credit losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows:

 

 

Year Ended December 31, 2022

 

 

 

Before Tax

 

 

Income Tax
Effect

 

 

Net of Tax

 

Net unrealized losses

 

$

(11,355

)

 

$

(263

)

 

$

(11,092

)

Reclassification adjustment for net realized losses

 

 

429

 

 

 

109

 

 

 

320

 

Total other comprehensive loss

 

$

(10,926

)

 

$

(154

)

 

$

(10,772

)

 

 

Year Ended December 31, 2021

 

 

 

 

 

 

Income Tax

 

 

 

 

 

 

Before Tax

 

 

Effect

 

 

Net of Tax

 

Net unrealized losses

 

$

(692

)

 

$

(170

)

 

$

(522

)

Call and repayment gains charged to investment income

 

 

(36

)

 

 

(9

)

 

 

(27

)

Reclassification adjustment for net realized gains

 

 

(687

)

 

 

(168

)

 

 

(519

)

Total other comprehensive loss

 

$

(1,415

)

 

$

(347

)

 

$

(1,068

)

68

   Year Ended December 31, 2017 
   Before
Tax
   Income Tax
Expense
(Benefit)
   Net of
Tax
 

Unrealized gain arising during the period

  $5,996   $2,313   $3,683 

Other-than-temporary impairment loss

   1,467    566    901 

Call and repayment losses charged to investment income

   14    5    9 

Reclassification adjustment for realized gains

   (4,346   (1,676   (2,670
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

  $3,131   $1,208   $1,923 
  

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 2016 
   Before
Tax
   Income Tax
Expense
(Benefit)
   Net of
Tax
 

Unrealized gain arising during the period

  $7,317   $2,823   $4,494 

Other-than-temporary impairment loss

   2,482    957    1,525 

Call and repayment losses charged to investment income

   20    8    12 

Reclassification adjustment for realized gains

   (2,601   (1,004   (1,597
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

  $7,218   $2,784   $4,434 
  

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 2015 
   Before
Tax
   Income Tax
Expense
(Benefit)
   Net of
Tax
 

Unrealized loss arising during the period

  $(9,366  $(3,613  $(5,753

Other-than-temporary impairment loss

   4,681    1,806    2,875 

Call and repayment losses charged to investment income

   77    29    48 

Reclassification adjustment for realized losses

   608    235    373 
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

  $(4,000  $(1,543  $(2,457
  

 

 

   

 

 

   

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

 

 

Year Ended December 31, 2020

 

 

 

 

 

 

Income Tax

 

 

 

 

 

 

Before Tax

 

 

Effect

 

 

Net of Tax

 

Net unrealized gains

 

$

86

 

 

$

21

 

 

$

65

 

Credit losses on investments

 

 

611

 

 

 

150

 

 

 

461

 

Call and repayment gains charged to investment income

 

 

(374

)

 

 

(92

)

 

 

(282

)

Reclassification adjustment for net realized gains

 

 

(1,163

)

 

 

(285

)

 

 

(878

)

Total other comprehensive loss

 

$

(840

)

 

$

(206

)

 

$

(634

)

Note 6 — Business Acquisitions

Sorrento Hills Village—Sorrento, Florida

On August 16, 2016, the Company’s wholly owned subsidiary, Greenleaf Capital, LLC, assigned the right to purchase the developed property in the ADC Arrangement to its subsidiary, Sorrento PBX, LLC. Sorrento PBX simultaneously exercised the purchase option and acquired the property from Sorrento Retail Investments, LLC. The acquired assets included a retail shopping center and appurtenant facilities in Sorrento, Florida as well as existing tenant lease agreements to use the property. The purchase price was $12,250, which was determined using a predetermined capitalization rate and the projected net operating income of the property. The Company recognized a $2,071 gain on bargain purchase, resulting primarily from a favorable fair value at the date of acquisition as compared with the Company’s purchase price. The Company relied on an independent appraisal report, which is based on the weighted results of two valuation approaches, in determining the estimated fair values of the significant assets acquired. This acquisition was financed in part by the proceeds from the issuance of a 3.75% promissory note. See Note 13 — “Long-Term Debt” for additional information.

The table below presents an allocation of the purchase price to the net assets acquired based on their fair values at the acquisition date:

Identifiable assets acquired and liabilities assumed:

  

Cash

  $194 

Land

   1,600 

Land improvements

   3,045 

Buildings

   7,120 

Intangibles

   2,580 

Tenant improvements

   76 

Building improvement

   29 

Other assets

   33 

Other liabilities

   (356
  

 

 

 

Total net assets acquired

   14,321 

Less: Gain on bargain purchase

   (2,071
  

 

 

 

Purchase price

  $12,250 
  

 

 

 

Pineda LandingsMelbourne, Florida

With regard to the 90% equity interest in FMKT MGA distributed by FMJV as described inInvestment in Unconsolidated Joint Venture in Note 4 — “Investments,” the transaction was accounted for as a business step acquisition resulting in the assets acquired and liabilities assumed being recorded at fair value. Immediately following FMJV’s distribution of the 90% equity interest, the Company elected to purchase the remaining 10% noncontrolling interest from the other member and pay $2,064 in cash in 2016, plus an additional $200 in January 2017 upon the execution of one lease agreement. The Company funded the consideration paid with $871 of its own cash and $1,193 of additional borrowing from FMKT MGA’s revolving credit facility.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The table below presents the fair values of the net assets acquired at the acquisition date:

Identifiable assets acquired and liabilities assumed:

  

Cash

  $502 

Land

   2,857 

Land improvements

   4,671 

Buildings

   5,480 

Intangibles

   2,619 

Tenant improvements

   403 

Building improvement

   403 

Other property and equipment

   17 

Other assets

   940 

Construction loan

   (8,214

Other liabilities

 �� (550
  

 

 

 

Total net assets acquired

   9,128 

Less: Carrying value of 90% equity method investment

   (2,859

  Gain on remeasurement of previously held interest

   (4,005

  Payable to the 10% joint venture partner

   (200
  

 

 

 

Cash paid to the 10% joint venture partner

  $2,064 
  

 

 

 

Subsequent to the acquisition date, the Company incurred an impairment loss of $388 in 2016 resulting from the write-down of lease intangibles and other assets associated with the unexpected closure of one tenant’s business at this property.

The acquired businesses, in aggregate, contributed $426 of rental income and $460 of net loss to the Company for the period from the acquisition date to December 31, 2016. Pro forma results of operations are not presented as the effects of the acquisition were not material to the Company’s consolidated results of operations.

Note 7 —-- Fair Value Measurements

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

Level 1 -Unadjusted quoted prices in active markets for identical assets.
Level 2 -Other inputs that are observable for the assets, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.
Level 3 -Inputs that are unobservable.

HCI GROUP, INC. AND SUBSIDIARIESLevel 1 – Unadjusted quoted prices in active markets for identical assets.

Notes to Consolidated Financial StatementsLevel 2 – Other inputs that are observable for the asset, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Level 3 – Inputs that are unobservable.

Valuation Methodology

Cash and cash equivalentsCash Equivalents

Cash and cash equivalents primarily consist of money-market funds and certificates of deposit.deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.

Available-for-saleRestricted Cash

Restricted cash represents cash held by state authorities and trading securitiesthe carrying value approximates fair value.

Fixed-Maturity and Equity Securities

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

The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies, and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values.

Limited Partnership InvestmentsRevolving Credit Facility

As described in Note 4 — “Investments” under Limited Partnership Investments,From time to time, the Company has interests in limited partnerships which are private equity funds. Pursuant to U.S. GAAP, these funds are required to use fair value accounting; therefore, the estimated fair value approximates the carrying value of these funds.

Revolving Credit Facility

an amount outstanding under a revolving credit facility. The interest rate on the Company’s revolving credit facility wasis variable and is periodically adjusted based on the London Interbank Offered RateSecured Overnight Financing Right (“SOFR”) plus a spread.ten basis points adjustment plus a margin based on the debt-to-capital ratio. As a result, its carrying value, at December 31, 2016 approximatedwhen outstanding, approximates fair value. In February 2017, this credit facility was converted into a 3.95% three-year promissory note. See Note 13 — “Long-Term Debt” under3.95% Promissory Note.

69


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Long-term debtLong-Term Debt

The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:

Maturity
Date

Valuation Methodology

8% Senior Notes

*

Date

Closing price listed on the New York Stock Exchange

Valuation Methodology

3.875%4.75% Convertible Senior Notes

2019

2042

Quoted price at January 3, 2018;

4.25% Convertible Senior Notes

2037

Quoted price

3.90% Promissory Note

2032

Discounted cash flow method/Level 3 inputs at December 31, 2016

4.25% Convertible Senior Notes3.75% Callable Promissory Note

2037Quoted price

3.95% Promissory Note

2036

2020

Discounted cash flow method/Level 3 inputs

4%4.55% Promissory Note

2031

2036

Discounted cash flow method/Level 3 inputs

3.75% Promissory Note

2036Discounted cash flow method/Level 3 inputs

*Redeemed on April 3, 2017.

70


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Assets Measured at Estimated Fair Value on a Recurring Basis:Basis

The following tables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicatestables indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of December 31, 20172022 and 2016:2021:

  Fair Value Measurements Using     

 

Fair Value Measurements Using

 

 

 

 

  (Level 1)   (Level 2)   (Level 3)   Total 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

As of December 31, 2017

        

As of December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

        

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

  $255,884   $—     $—     $255,884 

 

$

234,863

 

 

$

 

 

$

 

 

$

234,863

 

  

 

   

 

   

 

   

 

 

Restricted cash

 

$

2,900

 

 

$

 

 

$

 

 

$

2,900

 

Fixed-maturity securities:

        

 

 

 

 

 

 

 

 

 

 

 

 

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

   40,527    1,500    —      42,027 

 

$

446,233

 

 

$

8,369

 

 

$

 

 

$

454,602

 

Corporate bonds

   106,109    994    —      107,103 

 

 

27,193

 

 

 

 

 

 

 

 

 

27,193

 

State, municipalities, and political subdivisions

   —      80,695    —      80,695 

States, municipalities, and political subdivisions

 

 

 

 

 

1,383

 

 

 

 

 

 

1,383

 

Exchange-traded debt

   7,659    —      —      7,659 

 

 

633

 

 

 

 

 

 

 

 

 

633

 

  

 

   

 

   

 

   

 

 

Total fixed-maturity securities

   154,295    83,189    —  ��   237,484 

Redeemable preferred stock

 

 

90

 

 

 

 

 

 

 

 

 

90

 

Total available-for-sale securities

 

$

474,149

 

 

$

9,752

 

 

$

 

 

$

483,901

 

Equity securities

   58,911    —      —      58,911 

 

$

34,583

 

 

$

 

 

$

 

 

$

34,583

 

  

 

   

 

   

 

   

 

 

Totalavailable-for-sale securities

   213,206    83,189    —      296,395 
  

 

   

 

   

 

   

 

 

Trading equity securities

   1,045    —      —      1,045 
  

 

   

 

   

 

   

 

 

Total

  $470,135   $83,189   $—     $553,324 
  

 

   

 

   

 

   

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

628,943

 

 

$

 

 

$

 

 

$

628,943

 

Restricted cash

 

$

2,400

 

 

$

 

 

$

 

 

$

2,400

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

15,536

 

 

$

1,488

 

 

$

 

 

$

17,024

 

Corporate bonds

 

 

22,492

 

 

 

 

 

 

 

 

 

22,492

 

States, municipalities, and political subdivisions

 

 

 

 

 

1,808

 

 

 

 

 

 

1,808

 

Exchange-traded debt

 

 

811

 

 

 

 

 

 

 

 

 

811

 

Redeemable preferred stock

 

 

448

 

 

 

 

 

 

 

 

 

448

 

Total available-for-sale securities

 

$

39,287

 

 

$

3,296

 

 

$

 

 

$

42,583

 

Equity securities

 

$

51,740

 

 

$

 

 

$

 

 

$

51,740

 

71


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

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

As of December 31, 2016

        

Financial Assets:

        

Cash and cash equivalents

  $280,531   $—     $—     $280,531 
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-maturity securities:

        

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

   1,939    —      —      1,939 

Corporate bonds

   73,519    985    —      74,504 

State, municipalities, and political subdivisions

   —      78,306    —      78,306 

Exchange-traded debt

   11,262    —      —      11,262 

Redeemable preferred stock

   237    —      —      237 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity securities

   86,957    79,291    —      166,248 

Equity securities

   53,035    —      —      53,035 
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalavailable-for-sale securities

   139,992    79,291    —      219,283 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $420,523   $79,291   $—     $499,814 
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2017 and 2016.

Assets and Liabilities Carried at Other Than Fair Value

The following tables present fair value information for assets and liabilities that are carried on the consolidated balance sheetsheets at amounts other than fair value as of December 31, 20172022 and 2016:2021:

   Carrying   Fair Value Measurements Using   Estimated 
   Value   (Level 1)   (Level 2)   (Level 3)   Fair Value 

As of December 31, 2017

          

Financial Assets:

          

Limited partnership investments

  $23,184   $—     $—     $23,184   $23,184 

Financial Liabilities:

          

Long-term debt:

          

3.875% Convertible senior notes

  $85,436   $—     $90,827   $—     $90,827 

4.25% Convertible senior notes

   126,454    —      124,444    —      124,444 

3.95% Promissory note

   9,270    —      —      7,894    7,894 

4% Promissory note

   8,206    —      —      7,820    7,820 

3.75% Promissory note

   8,469    —      —      9,227    9,227 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt

  $237,835   $—     $215,271   $24,941   $240,212 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Carrying

 

 

Fair Value Measurements Using

 

 

Estimated

 

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

As of December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.75% Convertible Senior Notes

 

$

167,126

 

 

$

 

 

$

133,167

 

 

$

 

 

$

133,167

 

4.25% Convertible Senior Notes

 

 

23,916

 

 

 

 

 

 

19,473

 

 

 

 

 

 

19,473

 

3.90% Promissory Note

 

 

8,943

 

 

 

 

 

 

 

 

 

8,152

 

 

 

8,152

 

3.75% Callable Promissory Note

 

 

6,789

 

 

 

 

 

 

 

 

 

6,171

 

 

 

6,171

 

4.55% Promissory Note

 

 

4,900

 

 

 

 

 

 

 

 

 

4,642

 

 

 

4,642

 

Total long-term debt

 

$

211,674

 

 

$

 

 

$

152,640

 

 

$

18,965

 

 

$

171,605

 

 

 

Carrying

 

 

Fair Value Measurements Using

 

 

Estimated

 

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

15,000

 

 

$

 

 

$

15,000

 

 

$

 

 

$

15,000

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.25% Convertible Senior Notes

 

$

23,885

 

 

$

 

 

$

33,248

 

 

$

 

 

$

33,248

 

3.90% Promissory Note

 

 

9,287

 

 

 

 

 

 

 

 

 

10,488

 

 

 

10,488

 

3.75% Callable Promissory Note

 

 

7,153

 

 

 

 

 

 

 

 

 

7,852

 

 

 

7,852

 

4.55% Promissory Note

 

 

5,148

 

 

 

 

 

 

 

 

 

6,051

 

 

 

6,051

 

Total long-term debt

 

$

45,473

 

 

$

 

 

$

33,248

 

 

$

24,391

 

 

$

57,639

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

   Carrying   Fair Value Measurements Using   Estimated 
   Value   (Level 1)   (Level 2)   (Level 3)   Fair Value 

As of December 31, 2016

          

Financial Assets:

          

Limited partnership investments

  $29,263   $—     $—     $29,263   $29,263 

Financial Liabilities:

          

Revolving credit facility

  $9,463   $—     $—     $9,463   $9,463 

Long-term debt:

          

8% Senior notes

  $39,448   $—     $41,618   $—     $41,618 

3.875% Convertible senior notes

   81,988    —      —      84,696    84,696 

4% Promissory note

   8,660    —      —      8,664    8,664 

3.75% Promissory note

   8,767    —      —      8,506    8,506 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt

  $138,863   $—     $41,618   $101,866   $143,484 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 8 —7 -- Deferred Policy Acquisition Costs

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

  December 31, 

 

December 31,

 

  2017   2016 

 

2022

 

 

2021

 

Beginning balance

  $16,639   $18,602 

 

$

57,695

 

 

$

43,858

 

Policy acquisition costs deferred

   35,736    35,905 

 

 

88,496

 

 

 

100,800

 

Amortization

   (35,663   (37,868

 

 

(100,669

)

 

 

(86,963

)

  

 

   

 

 

Ending balance

  $16,712   $16,639 

 

$

45,522

 

 

$

57,695

 

  

 

   

 

 

The amount of policy acquisition costs amortized and included in policy acquisition and other underwriting expenses for the years ended December 31, 2017, 20162022, 2021 and 20152020 was $35,663, $37,868$100,669, $86,963 and $36,224,$49,125, respectively.

As described in Note 9 — Property1 -- “Nature of Operations” with regards to the quota share reinsurance agreements, the Company derecognized $1,349 of direct costs attributable to the assumption of insurance policies from United for the year ended December 31, 2022. The Company incurred $34,491 and Equipment, net

Property and equipment, net consists$15,557, respectively, of direct costs attributable to the following:

   December 31, 
   2017   2016 

Land

  $1,642   $1,642 

Building

   7,952    7,932 

Computer hardware and software

   3,964    2,294 

Office furniture and equipment

   2,014    1,940 

Tenant and leasehold improvements

   3,320    3,250 

Other

   1,387    940 
  

 

 

   

 

 

 

Total, at cost

   20,279    17,998 

Less:accumulated depreciation and amortization

   (7,814   (6,624
  

 

 

   

 

 

 

Property and equipment, net

  $12,465   $11,374 
  

 

 

   

 

 

 

Depreciation and amortization expense under property and equipment was $1,237, $1,272 and $1,338, respectively,assumption of insurance policies from United for the years ended December 31, 2017, 20162021 and 2015.2020.

72


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 8 -- Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

December 31,

 

 

 

2022

 

 

2021

 

Land

 

$

2,134

 

 

$

2,134

 

Land improvements

 

 

79

 

 

 

 

Buildings and building improvements

 

 

6,550

 

 

 

4,005

 

Computer hardware and software

 

 

16,741

 

 

 

13,295

 

Office furniture and equipment

 

 

2,955

 

 

 

2,561

 

Tenant and leasehold improvements

 

 

782

 

 

 

620

 

Other

 

 

1,767

 

 

 

2,136

 

Total, at cost

 

 

31,008

 

 

 

24,751

 

Less: accumulated depreciation and amortization

 

 

(13,098

)

 

 

(10,519

)

Property and equipment, net

 

$

17,910

 

 

$

14,232

 

Depreciation and amortization expense for property and equipment was $2,580, $1,941 and $1,854, respectively, for the years ended December 31, 2022, 2021 and 2020.

Note 10 —9 -- Intangible Assets, netNet

The Company’s intangible assets, net consist of the following:

  December 31, 

 

December 31,

 

  2017   2016 

 

2022

 

 

2021

 

Anchor tenants relationships

  $1,761   $1,761 

Anchor tenant relationships (a)

 

$

1,761

 

 

$

1,761

 

In-place leases

   3,806    3,214 

 

 

3,579

 

 

 

4,215

 

  

 

   

 

 

Policy renewal rights - United

 

 

10,100

 

 

 

7,634

 

Non-compete agreements - United (b)

 

 

314

 

 

 

195

 

Total, at cost

   5,567    4,975 

 

 

15,754

 

 

 

13,805

 

Less: accumulated amortization

   (572   (76

 

 

(5,176

)

 

 

(3,169

)

  

 

   

 

 

Intangible assets, net

  $4,995   $4,899 

 

$

10,578

 

 

$

10,636

 

  

 

   

 

 

Recognized with the 2017 acquisition of commercial real estate described inReal Estate Investments

(a)
An anchor tenant is a tenant that attracted more customers than other tenants.
(b)
$119 was fully amortized in Note 4 — “Investments”June 2022 and $195 was $636 ofin-place leases. In connection with the 2016 business acquisitions describedfully amortized in Note 6 — “Business Acquisitions,” the Company recognized $5,199 of intangible assets. For the years ended December 31, 2017 and 2016, amortization expense associated with intangible assets was $503 and $77, respectively. June 2021.

The remaining weighted-average amortization periodperiods for the intangible assets as of December 31, 2017 was 17.3 years and 11.4 years for anchor tenants relationships andin-place leases, respectively, or 13.3 years2022 are summarized in aggregate.the table below:

Amortization expense for intangible assets after December 31, 2017 is as follows:

Anchor tenant relationships

11.5 years

In-place leases

9.7 years

Policy renewal rights - United

3.3 years

73

Year

  Amount 

2018

  $604 

2019

   604 

2020

   597 

2021

   493 

2022

   419 

Thereafter

   2,278 
  

 

 

 

Total

  $4,995 
  

 

 

 

Note 11 — Other Assets

The following table summarizes the Company’s other assets:

   December 31, 
   2017   2016 

Benefits receivable related to retrospective reinsurance contracts

  $2,393   $5,810 

Prepaid expenses

   1,741    1,581 

Lease acquisition costs, net

   723    641 

Restricted cash

   809    600 

Other

   4,884    2,710 
  

 

 

   

 

 

 

Total other assets

  $10,550   $11,342 
  

 

 

   

 

 

 

During 2017, benefits receivable related to retrospective reinsurance contracts were adjusted due to the impact from Hurricane Irma. See Note 14 — “Reinsurance.”

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 12 — Revolving Credit Facility

In connection with FMJV’s December 15, 2016 distribution of its 90% ownership interest in FMKT MGAthe Northeast Region assumed business as described inInvestment in Unconsolidated Joint Venture in Note 4 — “Investments,1 -- “Nature of Operations,” the Company recorded renewal rights and non-compete intangible assets aggregating $7,829 during 2021 in exchange for 100,000 shares of HCI’s common stock and a contingent liability of $2,419.

In connection with the Southeast Region assumed a liability to repay $8,214 under a secured credit agreement. The agreement provided thatbusiness as described in Note 1 -- “Nature of Operations,” the Company could borrow uprecorded intangible assets of $4,869 during 2022 representing the renewal rights and non-compete agreement in exchange for consideration consisting of a 6% commission on any replacement premium which includes $3,800 of commission prepaid up-front and a contingent liability of $1,069.

During the fourth quarter of 2022, all available information pertaining to $9,550, whichthe Northeast and Southeast Regions’ policies in-force was guaranteed by Greenleaf Capitalreviewed. Furthermore, management engaged an independent valuation specialist to assess for possible impairment of the renewal rights intangible assets. Based on the review and collateralized primarily by the retail shopping center in Melbourne, Florida. The credit agreement bore interest at a rate equal to LIBOR plus 2.7% per annum and had an initial maturity date of February 27, 2017. The Company had an option to convert the outstanding balance at the initial maturity date into a three-year mortgage loan payable in 36 monthly installments at a fixed interest rate. On December 15, 2016,assessment, the Company drewrecognized an additional $1,193 from this credit line, which was used towardsimpairment loss of $2,284 related to the purchaserenewal rights intangible assets and, simultaneously, recorded a decrease in contingent liabilities resulting in a remeasurement gain of the 10% noncontrolling interest as described inPineda Landings—Melbourne, Florida in Note 6 — “Business Acquisitions.”$3,117. At December 31, 2016,2022 and 2021, contingent liabilities related to renewal rights intangible assets were $371 and $2,419, respectively, with the loan balance totaled $9,463, which wascontingent liabilities included in other liabilities inon the Company’s 2016 consolidated balance sheet. sheets.

The renewal rights and non-compete intangible assets acquired do not meet the definition of a business as substantially all of the fair value of the intangible assets acquired are concentrated in a group of similar assets. Therefore, the Company accounted for the purchases of the renewal rights and non-compete intangible assets as asset acquisitions.

For the yearyears ended December 31, 2016, interest2022, 2021 and 2020, amortization expense associated with intangible assets was $2,643, $761 and $624, respectively. Amortization expense for this revolving credit facility totaled $235, of which $11 related to the period fromintangible assets after December 15 to 31, 2016.2022 is as follows:

In February 2017, the Company exercised the conversion option under the credit agreement. See3.95% Promissory Note in

Year

 

Amount

 

2023

 

$

2,763

 

2024

 

 

2,759

 

2025

 

 

2,728

 

2026

 

 

1,024

 

2027

 

 

212

 

Thereafter

 

 

1,092

 

Total

 

$

10,578

 

Note 13 – “Long-Term Debt” for additional information.10 -- Other Assets

Note 13 — Long-Term Debt

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

   December 31, 
   2017   2016 

8% Senior Notes, redeemed in April 2017

  $—     $40,250 

3.875% Convertible Senior Notes, due March 15, 2019

   89,990    89,990 

4.25% Convertible Senior Notes, due March 1, 2037

   143,750    —   

3.95% Promissory note, due through February 17, 2020

   9,360    —   

4% Promissory note, due through February 1, 2031

   8,348    8,821 

3.75% Promissory note, due through September 1, 2036

   8,613    8,924 
  

 

 

   

 

 

 

Total principal amount

   260,061    147,985 

Less: unamortized discount and issuance costs

   (22,226   (9,122
  

 

 

   

 

 

 

Total long-term debt

  $237,835   $138,863 
  

 

 

   

 

 

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Benefits receivable related to retrospective reinsurance contracts

 

$

16,317

 

 

$

3,064

 

Reimbursement receivable under TPA service

 

 

5,445

 

 

 

3,525

 

Prepaid expenses

 

 

2,826

 

 

 

2,853

 

Deposits

 

 

491

 

 

 

406

 

Lease acquisition costs, net

 

 

832

 

 

 

505

 

Other

 

 

5,760

 

 

 

4,364

 

Total other assets

 

$

31,671

 

 

$

14,717

 

Management reviewed the collectability of the reimbursement receivable under TPA service and other amounts receivable attributable to this service as of December 31, 2022 and, considering the subsequent collection of reimbursement receivable as well as the balance of funds withheld for assumed business as of December 31, 2022, determined that an allowance for credit losses is not necessary for the reimbursement receivable under TPA service or the other amounts receivable attributable to this service.

74


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 11 -- Revolving Credit Facility

The Company has a secured revolving credit agreement (“Credit Agreement”) with Fifth Third Bank that expires on December 31, 2023. On November 7, 2022, the Company executed the Fourth Amendment to Credit Agreement. Under the terms of this amendment, the maximum debt-to-capital ratio as defined in the Credit Agreement is set at 67.5% and the borrowing capacity of the line of credit is set at $50,000.

On December 1, 2022, the Company executed the Fifth Amendment to Credit Agreement. Under the terms of this amendment, one of the Company’s properties was released from the collateral pool and borrowings bear interest at an annual rate equal to the one or three month Secured Overnight Financing Rate (“SOFR”) plus a ten basis points adjustment plus a margin based on the debt-to-capital ratio. The interest payment is due quarterly in arrears on January 1, April 1, July 1, and October 1. The Credit Agreement contains affirmative and negative covenants as well as customary events of default. Under the terms of the Credit Agreement, the Company must comply with certain financial and non-financial covenants and agree to pay a fee equal to the product of the unused line fee rate and the average of the daily unused available credit balances. The unused line fee rate is determined based on the debt-to-capital ratio as amended by the Fifth Amendment to Credit Agreement.

In May 2022, the Company repaid the entire credit facility balance of $15,000 and at December 31, 2022 had no borrowings outstanding under the credit facility. For the years ended December 31, 2022, 2021 and 2020, interest expense was $227, $189 and $501, respectively, including $125, $98 and $158 of amortization of issuance costs, respectively. At December 31, 2022, the Company was in compliance with all required covenants and had available borrowing capacity of $50,000.

Note 12 -- Long-Term Debt

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

 

 

December 31,

 

 

 

2022

 

 

2021

 

4.75% Convertible Senior Notes, due June 1, 2042

 

$

172,500

 

 

$

 

4.25% Convertible Senior Notes, due March 1, 2037

 

 

23,916

 

 

 

23,916

 

3.90% Promissory Note, due through April 1, 2032

 

 

9,072

 

 

 

9,431

 

3.75% Callable Promissory Note, due through September 1, 2036

 

 

6,871

 

 

 

7,246

 

4.55% Promissory Note, due through August 1, 2036

 

 

4,968

 

 

 

5,225

 

Finance lease liabilities, due through October 15, 2024

 

 

13

 

 

 

31

 

Total principal amount

 

 

217,340

 

 

 

45,849

 

Less: unamortized issuance costs

 

 

(5,653

)

 

 

(345

)

Total long-term debt

 

$

211,687

 

 

$

45,504

 

The following table summarizes future maturities of long-term debt as of December 31, 2017,2022, which takes into consideration the assumption that the 4.25%4.75% Convertible Senior Notes and 4.25% Convertible Senior Notes are repurchased at thetheir respective next earliest call date.dates:

Year

    

2018

  $1,049 

2019

   91,081 

2020

   9,761 

2021

   916 

2022

   144,702 

Thereafter

   12,552 
  

 

 

 

Total

  $260,061 
  

 

 

 

Due in 12 months following December 31,

 

 

 

2022

 

$

1,043

 

2023

 

 

1,075

 

2024

 

 

1,117

 

2025

 

 

1,163

 

2026

 

 

197,627

 

Thereafter

 

 

15,315

 

Total

 

$

217,340

 

75


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Information with respect to interest expense related to long-term debt is as follows:

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Interest Expense:

      

 

 

 

 

 

 

 

 

 

Contractual interest

  $10,424   $7,315   $7,211 

 

$

6,835

 

 

$

5,384

 

 

$

7,083

 

Non-cash expense (a)

   6,404    3,529    3,543 

 

 

706

 

 

 

827

 

 

 

4,247

 

Capitalized interest (b)

   (61   —      —   

 

 

 

 

 

 

 

 

(97

)

  

 

   

 

   

 

 

Total

  $16,767   $10,844   $10,754 

 

$

7,541

 

 

$

6,211

 

 

$

11,233

 

  

 

   

 

   

 

 

(a)Represents amortization of debt discount and issuance costs.
(b)Interest was capitalized for a construction project in Riverview, Florida which is intended for lease.
(a)
Includes amortization of debt discount and issuance costs. Amortization of debt discount discontinued effective January 1, 2021 upon the Company’s adoption of Accounting Standards Update No. 2020-06 (“ASU 2020-06”) “Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity.”
(b)
Interest was capitalized for construction projects.

Convertible Senior Notes

The Company’s Convertible Senior Notes consist of 3.875%4.25% Convertible Senior Notes due 2019 (“3.875%that mature March 1, 2037 and 4.75% Convertible Notes”) andSenior Notes that mature June 1, 2042. The 4.25% Convertible Senior Notes due 2037 (“4.25% Convertible Notes”). The 3.875% Convertible Notes were issued in late 2013March 2017 with cash interest payable semiannually in a private offering for an aggregate principal amountarrears on March 1 and September 1 of $103,000. During the first quarter of 2016, the Company repurchased an aggregate of $13,010 in principal, thereby decreasing the aggregate principal balance of its 3.875% Convertible Notes to $89,990. On March 3, 2017,each year. In May 2022, the Company issued 4.25%4.75% Convertible Senior Notes in a private offering for an aggregate principal amount of $143,750.$172,500. The net proceeds of the 4.25%4.75% Convertible Senior Notes were $138,775$166,486 after $4,975$6,014 in related issuance and transaction costs. The following table summarizescash interest for the principal and interest payment terms of these4.75% Convertible Senior Notes:Notes is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022. In conjunction with the issuance of the 4.75% Convertible Senior Notes, the Company entered into a share repurchase agreement providing for the repurchase of shares of the Company’s common stock. See Note 20 -- “Equity” under Share Repurchase Agreement for additional information.

Convertible Senior Notes

Interest Payment Terms

3.875% Convertible Notes, due March 15, 2019

Semiannually in arrears: March 15 and September 15

4.25% Convertible Notes, due March 1, 2037

Semiannually in arrears: March 1 and September 1

The Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. TheseThe Convertible Senior Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Convertible Senior Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in each respective

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

indenture. TheseThe Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. In conjunction with the issuances of the Convertible Senior Notes, the Company entered into prepaid share repurchase forward contracts and share repurchase agreements providing for the repurchase of shares of the Company’s common stock. See Note 19 — “Stockholders’ Equity” underShare Repurchase Agreements andPrepaid Share Repurchase Forward Contracts for additional information.

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

   December 31, 
   2017   2016 

Principal amount

  $233,740   $89,990 

Unamortized discount

   (17,354   (6,795
  

 

 

   

 

 

 

Liability component – net carrying value before issuance costs

  $216,386   $83,195 
  

 

 

   

 

 

 

Equity component – conversion, net of offering costs

  $31,051   $15,900 
  

 

 

   

 

 

 

Embedded Conversion Feature

The conversion feature of these Convertible Senior Notes is subject to conversion rate adjustments upon the occurrence of specified events (including payment of dividends above a specified amount) but will not be adjusted for any accrued and unpaid interest.

3.875%4.25% Convertible Notes. Since January 2015,Senior Notes. When the Company’s cash dividends on common stock have exceeded $0.275exceed $0.35 per share, resultingit will result in adjustments to the conversion rate of the 3.875%4.25% Convertible Senior Notes. Accordingly, as of December 31, 2017,2022, the conversion rate of the Company’s 3.875%4.25% Convertible Senior Notes was 16.217216.5320 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.66$60.49 per share.

4.25%4.75% Convertible Notes. Senior Notes. The conversion rate of the 4.25%4.75% Convertible Senior Notes is currently 16.263512.4166 shares of common stock for each $1 in principal amount, which is the equivalent of approximately $61.49$80.54 per share.

The holders of the Convertible Senior Notes may convert all or a portion of their Convertible Senior Notesconvertible senior notes during specified periods prior to each respective maturity date as follows: (1) during any calendar quarter commencing after the calendar quarter ending on the dates specified in each respective indenture, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130%130% of the conversion price on each applicable trading day; (2) during the fivebusiness-day period after any ten consecutivetrading-day period in which the trading price per $1 principal amount of the Convertible Senior Notes is less than 98%98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; or (4) if the respective Convertible Senior Notes are called for redemption,

76


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

at any time on or afterprior to the dates specified in each respective indenture; or (5) at any time on the dates or during the periods specified in each respective indenture.

The note holders who elect to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of December 31, 2017,2022, none of the conditions allowing the holders of either class of the Convertible Senior Notes to convert had been met.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Company determined that the Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument but rather is requiredand does not require bifurcation. At issuance of the 4.25% Convertible Senior Notes, which was prior to be separately accounted forthe adoption of ASU 2020-06 “Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance,Entity’s Own Equity,” the Company accounted for the equity component of the embedded conversion feature as a reduction in the carrying amount of the debt and an increase in additionalpaid-in capital.

Embedded Redemption Feature – Fundamental Change

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

Embedded Redemption Feature – Put Option of the Note Holder

4.25% Convertible Senior Notes. At the option of the holders of the 4.25% Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the 4.25% Convertible Senior Notes at par on March 1, 2022, March 1, 2027 or March 1, 2032. 2032. The Company amortized the issuance costs associated with the 4.25% Convertible Senior Notes over the period from March 3, 2017 to March 1, 2022. The debt issuance costs for the 4.25% Convertible Senior Notes had been fully amortized as of February 2022.

4.75% Convertible Senior Notes. At the option of the holders of the 4.75% Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the 4.75% Convertible Senior Notes at par on June 1, 2027, June 1, 2032 or June 1, 2037. The Company amortizes the issuance costs associated with the 4.75% Convertible Senior Notes over the period from May 23, 2022 to June 1, 2027. As of December 31, 2022, the remaining amortization period of the debt issuance costs was expected to be 4.4 years for the 4.75% Convertible Senior Notes.

The Company concluded that this embedded feature is not a derivative financial instrument. In addition, based on economic factors at the time when the 4.25% Convertible Notes were issued,instrument and does not require bifurcation. Due to this provision, the Company determined that it is probable thatappropriate to amortize the note holders will exercise this option. Thus, the Company amortizes the liability component and relateddebt issuance costs associated withfrom the 4.25%date each debt is issued to the earliest date at which the holders of the respective Convertible Senior Notes over the period from March 3, 2017 to March 1, 2022.can demand payment.

The effective interest ratesrate for the 3.875%4.75% Convertible Notes and the 4.25% ConvertibleSenior Notes, taking into account both cash andnon-cash components, approximate 8.3% and 7.6%, respectively.approximates 5.6%. Had a20-year term been used for the amortization of the liability component and issuance costs of the 4.25%4.75% Convertible Senior Notes, the annual effective interest rate charged to earnings would have been decreased to approximately 5.4%5.0%. As

Promissory Notes

3.90% Promissory Note

The agreement bears interest at a fixed rate of December 31, 2017,3.90% and is secured by the remaining amortization periodsCompany’s shopping center property in Melbourne, Florida and the assignment of the debt discounts were expected to be 1.2 years for the 3.875% Convertible Notesassociated lease agreements. Approximately $60 of principal and 4.2 years for the 4.25% Convertible Notes.

8% Senior Notes

On April 3, 2017, the Company redeemed its 8% publicly traded, unsecured senior notes which had unamortized debt issuance costsinterest is payable in 143monthly installments beginning May 1, 2020 plus a final balloon payment of $743 at par for $40,805,$5,007 including accruedprincipal and unpaid interest of $555. For the year ended December 31, 2017,payable on April 1, 2032. The promissory note may be repaid in full at any time as long as the Company recognizedprovides at least 60 days’ written notice and pays a loss of $743 associated with the early extinguishment of this debt. The redemption was funded by the net proceeds from the issuance of the 4.25% Convertible Senior Notes.prepayment premium and processing fee.

77


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

3.95%3.75% Callable Promissory Note

On February 27, 2017, the Company converted its outstanding revolving credit facilityThe loan bears interest at a fixed annual rate of $9,441 into a three-year mortgage loan primarily3.75% and is collateralized by a retail shopping center in Melbourne, Florida. Shortly afterSorrento, Florida and the loan conversion, the Company withdrew an additional amount of $109, thereby increasing the loan amount to $9,550. The loan bears a fixed annual interest rate of 3.95%.lease agreements associated with this property. Approximately $50$53 of principal and interest is payable in 35 240monthly installments beginning March 17, 2017 plus a final balloon payment of $8,891 including principal and unpaid interest payable on February 17, 2020. The promissory note may be repaid in part or in full at any time without penalty.

3.75% Promissory Note

In connection with the business acquisition described in Note 6 — Business Acquisitions, Sorrento PBX, LLC entered into a20-year secured loan agreement for gross proceeds of $9,000. The loan proceeds were used to finance the acquisition. The loan bears a fixed annual interest rate of 3.75% and is collateralized by the acquired property and the assignment of associated lease agreements. Approximately $53 of principal and interest is payable in 240 monthly installments. The promissory note may be repaid in full after September 1, 2017 as long as the Company provides at least 60 days’ written notice and pays a prepayment premium as specified in the loan agreement. In addition, the lender may require full payment of the outstanding principal and unpaid interest on September 1, 2031 provided a written notice of its intention to call the note is given at least six months in advance.advance.

4%4.55% Promissory Note

On January 14, 2016, HCPCI Holdings, LLC, a subsidiary of the Company, entered into a15-year securedThe loan agreement for proceeds of $9,200. The loan is collateralizedsecured by the Company’scommercial real estate in Tampa, Florida real estate, which is owned by HCPCI Holdings, and thean associated lease agreements associated with this property.agreement. The loan bears interest at a fixed annual interest rate of 4%4.55%. Approximately $68$41 of principal and interest is payable in 180 216monthly installments. The promissory note may be repaid in full or in part after FebruarySeptember 1, 20172020 as long as the Company provides at least 6030 days’ written notice and pays a prepayment premiumconsideration as specified in the loan agreement. The proceeds were used for real estate development projects oragreement.

Note 13 -- Reinsurance

Reinsurance obtained from other general business purposes.insurance companies

Note 14 — Reinsurance

The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance treatiescontracts and a portion of its flood insurance exposure under one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, effective January 1, 2017, the Company wasis entitled to a 30%30% ceding commission on ceded premiums written. During the third quarterwritten and a profit commission equal to 10% of 2017, the Company entered into a three-year flood catastrophe excess of loss reinsurance contract effective July 1, 2017. The reinsurance premiums under this three-year contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter. Effective September 1, 2017, the quota share reinsurance agreement was terminated and replaced with a new quota share agreement with revised terms and conditions. Under the new agreement, the Company is also entitled to a 30% ceding commission on ceded premiums written.net profit.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.

The impact of the reinsurance treatiescontracts on premiums written and earned is as follows:

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Premiums Written:

      

 

 

 

 

 

 

 

 

 

Direct

  $346,188   $352,803   $393,009 

 

$

713,103

 

 

$

545,441

 

 

$

459,615

 

Assumed

   1,158    14,388    3,329 

 

 

12,916

 

 

 

128,948

 

 

 

44,539

 

  

 

   

 

   

 

 

Gross written

   347,346    367,191    396,338 

 

 

726,019

 

 

 

674,389

 

 

 

504,154

 

Ceded

   (133,635   (135,051   (140,614

 

 

(261,144

)

 

 

(199,741

)

 

 

(153,458

)

  

 

   

 

   

 

 

Net premiums written

  $213,711   $232,140   $255,724 

 

$

464,875

 

 

$

474,648

 

 

$

350,696

 

  

 

   

 

   

 

 

Premiums Earned:

      

 

 

 

 

 

 

 

 

 

Direct

  $347,235   $372,699   $360,878 

 

$

651,455

 

 

$

478,546

 

 

$

412,999

 

Assumed

   11,018    5,979    62,242 

 

 

73,261

 

 

 

98,498

 

 

 

2,919

 

  

 

   

 

   

 

 

Gross earned

   358,253    378,678    423,120 

 

 

724,716

 

 

 

577,044

 

 

 

415,918

 

Ceded

   (133,635   (135,051   (140,614

 

 

(261,144

)

 

 

(199,741

)

 

 

(153,458

)

  

 

   

 

   

 

 

Net premiums earned

  $224,618   $243,627   $282,506 

 

$

463,572

 

 

$

377,303

 

 

$

262,460

 

  

 

   

 

   

 

 

During the year ended December 31, 2017, ceded losses of $214,082 were recognized as a reduction in losses and LAE, $7,400 of which related to Oxbridge Reinsurance Limited, a related party. The reduction in 2017 was primarily related to Hurricane Irma which made landfall in the Florida peninsula and caused significant property damages across the region.

During the years ended December 31, 20162022, 2021, and 2015, there were no recoveries pertaining to reinsurance contracts that were deducted from2020, ceded losses incurred. At December 31, 2017 and 2016, there were 37 and 35 reinsurers, respectively, participating in the Company’s reinsurance program. Amounts receivable with respect to reinsurers at December 31, 2017 and 2016 were $103,104 and $0, respectively. Approximately 29.7% of the reinsurance recoverable balance at December 31, 2017 was concentrated in two reinsurers. Based on the insurance ratings, the payment history and the financial strength of the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of December 31, 2017. The ratio of assumed premiums earned to net premiums earned for the years ended December 31, 2017, 2016 and 2015 was 4.9%$812,623, 2.5%$40,432, and 22.0%$9,413, respectively.

Certain of the reinsurance contracts include retrospective provisions that adjust premiums, increase the amount of future coverage, or resultrespectively, were recognized as reductions in a profit commission in the event losses are minimal or zero. Dueand loss adjustment expenses. Ceded losses related to the losses incurred byHurricane Ian, Hurricane Irma, the balances of previously accrued benefitsTropical Storm Eta, and deferred reinsurance premiumsother catastrophe and non-catastrophe claims were adjusted with the changes recognized in the consolidated statement of income as additional$782,071, $20,000, $10,483, and $69, respectively, for 2022. For 2021, ceded premiums.losses related to Hurricane Irma, Hurricane Sally, and other non-catastrophe claims were $32,144, $4,434, and $3,854,

78


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

For the year endedrespectively. Ceded losses related to Hurricane Irma, Hurricane Michael, Hurricane Sally, and other non-catastrophe claims were $362, $4,000, $88, and $4,963, respectively, for 2020. At December 31, 2017,2022 and 2021, there were 45 and 55 reinsurers, respectively, participating in the Company’s reinsurance program. Total net amounts recoverable and receivable from reinsurers at December 31, 2022 and 2021 were $688,359 and $76,650, respectively. Approximately 65.6% of the reinsurance recoverable balance at December 31, 2022 was receivable from three reinsurers, one of which was the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on all available information considered in the rating-based method described in Note 2 -- “Summary of Significant Accounting Policies,” the Company recognized net premiums cededan increase in credit loss expense of $5,740, related to these adjustments. Included in these amounts attributable to the Company’s contract with Oxbridge$364 for the year ended December 31, 20172022. Allowances for credit losses related to the reinsurance recoverable balance were $933. In contrast, these adjustments$454 and $90 at December 31, 2022 and 2021, respectively.

Due to Hurricane Ian, the Company’s first event reinsurance coverage for flood losses was exhausted, and accordingly, the Company can no longer cede additional flood losses from Hurricane Ian to reinsurers. As a result, the Company elected to pay reinstatement premiums of $6,684 to the reinsurers to restore the full amount of coverage. The unamortized first event reinsurance premiums of $3,306 were reflected as a net reduction inwritten off and charged to premiums ceded during the fourth quarter of $12,6772022. See Note 14 -- “Losses and $18,322Loss Adjustment Expenses” for more information about the flood losses attributable to Hurricane Ian.

One of the existing reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. Prior to June 1, 2022, there were two reinsurance contracts with retrospective provisions. As a result of Hurricane Ian, the balance of previously accrued benefits under the multi-year reinsurance contract with retrospective provisions was decreased by $12,600 in September 2022. For the years ended December 31, 20162022, 2021 and 2015, respectively, of which $1,929 and $2,797 related to the Company’s contract with Oxbridge. In June 2016,2020, the Company received a totalrecognized reductions in premiums ceded of $37,800 in cash benefits related$18,710, $10,864 and $15,120, respectively. See Note 23 -- “Commitments and Contingencies” for additional information.

Amounts receivable pursuant to two retrospective reinsurance contracts that terminated May 31, 2016 of which $7,560 was received from Oxbridge. In September 2016, the Company received the final cash payment of $5,716 under the terms of the remaining retrospective reinsurance contract which terminated May 31, 2016.

In addition, these adjustmentsprovisions are reflected in other assets and prepaid reinsurance premiums.assets. At December 31, 20172022 and 2016,2021, other assets included $2,393$16,317 and $5,810, respectively,$3,064, respectively. In October 2022, the Company received $5,457 of premium refund under the Company’s previous two multi-year reinsurance contracts which $479 and $1,043 related to the contract with Oxbridge and prepaid reinsurance premiums included $0 and $2,152, respectively, of which $0 and $338 related to the contract with Oxbridge.were commuted effective May 31, 2022. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer with a good credit rating and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.

Note 15 — LossesReinsurance provided to other insurance companies

For the year ended December 31, 2022, $27,488 of assumed premiums written related to the Northeast Region’s insurance policies were derecognized, which primarily resulted from the return of the unearned portion of assumed written premiums subsequent to the Company’s renewal and/or replacement of insurance policies in Massachusetts and Loss Adjustment Expenses

The liabilityNew Jersey, whereas for the year ended December 31, 2021, assumed premiums written related to the Northeast Region’s insurance policies were $93,607. At December 31, 2022, the Company had a net balance of $1,581 due to United related to the Northeast Region, consisting of payable on paid losses and LAE is determinedloss adjustment expenses of $1,000 and ceding commission payable of $581. At December 31, 2021, the Company had a net balance of $4,486 due to United related to the Northeast Region, consisting of payable on an individual case basis for all claims reported. The liability also includes amounts for unallocatedpaid losses and loss adjustment expenses anticipated future claim developmentof $4,017 and losses incurred, but not reported. SeeLoss and Loss Adjustment Expenses in Note 2 — “Summaryceding commission payable of Significant Accounting Policies.”

The Company currently writes insurance$535, offset by premiums receivable of $66. Effective December 30, 2022, the Company’s quota share reinsurance agreement to provide 100% reinsurance on United’s policies in the stateNortheast Region was commuted.

Effective December 31, 2021, the Company entered into a separate agreement to provide 85% quota share reinsurance on United’s personal lines insurance policies in the states of Florida, which could be exposedGeorgia, South Carolina and North Carolina through May 31, 2022. Effective June 1, 2022, the Company entered into a new agreement to hurricanes or other natural catastrophes. The occurrenceprovide 100% quota share reinsurance on United’s personal lines insurance policies in the Southeast Region. For the years ended December 31, 2022 and 2021, assumed premiums written related to the Southeast Region’s insurance policies were $40,404 and $35,341, respectively. At December 31, 2022, the Company had a net balance of $7,521 due to United related to the Southeast Region, consisting of payable on paid losses and loss adjustment expenses of $7,606 and ceding commission payable of $16, offset by premiums receivable of $101. At December 31, 2021, there was an amount receivable from United of $23,325 related to the Southeast Region, net of a majorceding commission of $8,835 and a catastrophe could have a significant effect oncost allowance of $3,181.

At December 31, 2022 and 2021, the balance of funds withheld for assumed business related to the Company’s quarterly resultsquota share reinsurance agreements with United was $48,772 and cause a temporary disruption$73,716, respectively.

The ratio of assumed premiums earned to net premiums earned for the normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.years ended December 31, 2022, 2021 and 2020 was 15.80%, 26.11%, and 1.11%, respectively.

79


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 14 -- Losses and Loss Adjustment Expenses

The Company establishes reserves for the estimated total unpaid costs of losses including LAE. Loss and LAE reserves reflect 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 the Company (“IBNR”). Reserves established by management represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of the Company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, the Company gives careful consideration to all available data and actuarial analyses.

When a claim is reported to the Company, the claims personnel establish a “case reserve” for the estimated amount of the ultimate amount payable to settle the claim. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the claims adjuster. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, location, and the policy provisions relating to the type of loss. Case reserves are adjusted as more information becomes available. It is the Company’s policy to settle each claim as expeditiously as possible.

Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior years. As the Company continues to expand historical data regarding paid and incurred losses, the data is used to develop expected ultimate loss and LAE ratios, then these expected loss and LAE ratios are applied to earned premium to derive a reserve level for each line of business. In connection with the determination of these reserves, other specific factors such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability will also be considered. Therefore, the loss ratio method, among other methods, is used to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses.

The Company maintains IBNR reserves to provide for claims that have been incurred but have not been reported and subsequent development on reported claims. The IBNR reserve is determined by estimating the Company’s ultimate net liability for both reported and unreported claims and then subtracting the case reserves and payments made to date for reported claims.

Loss and LAE Reserve Estimation Methods. The Company applies the following general methods in projecting reserves for losses and LAE:

Reported loss development;
Paid loss development;
Paid Bornhuetter-Ferguson method;
Reported Experience-Modified Bornhuetter-Ferguson method;
Paid Experience-Modified Bornhuetter-Ferguson method;
Loss ratio method;
Several variations of the Frequency-Severity method, depending on exposure; and
A factor load to loss and allocated LAE reserves for the unallocated LAE.

80


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Selected reserves are based on a review of the indications from these methods as well as other considerations such as emergence since the most recent evaluation and number of open claims for a given accident period.

Currently, the estimated ultimate liability is calculated using the principles and procedures described above, which are applied to the lines of business written. However, because the establishment of loss and LAE reserves is an inherently uncertain process, ultimate losses and LAE may exceed the established loss and LAE reserves and have a material, adverse effect on our results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

The Company’s reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine the net loss reserves. However, it is believed that a reasonably likely increase or decrease in the severity of claims could impact our net loss reserves.

Activity in the liability for losses and LAE is summarized as follows:

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Gross balance, beginning of year

  $70,492   $51,690   $48,908 
  

 

   

 

   

 

 

Net balance, beginning of year*

 

$

172,410

 

 

$

141,065

 

 

$

98,174

 

Incurred, net of reinsurance, related to:

      

 

 

 

 

 

 

 

 

 

Current year

   146,922    104,128    78,325 

 

 

330,836

 

 

 

199,888

 

 

 

158,236

 

Prior years

   18,707    20,539    8,899 

 

 

40,627

 

 

 

27,637

 

 

 

1,800

 

  

 

   

 

   

 

 

Total incurred, net of reinsurance

   165,629    124,667    87,224 

 

 

371,463

 

 

 

227,525

 

 

 

160,036

 

  

 

   

 

   

 

 

Paid, net of reinsurance, related to:

      

 

 

 

 

 

 

 

 

 

Current year

   (87,770   (64,812   (51,095

 

 

(169,641

)

 

 

(95,809

)

 

 

(71,772

)

Prior years

   (50,533   (41,053   (33,347

 

 

(127,686

)

 

 

(100,371

)

 

 

(45,373

)

  

 

   

 

   

 

 

Total paid, net of reinsurance

   (138,303   (105,865   (84,442

 

 

(297,327

)

 

 

(196,180

)

 

 

(117,145

)

  

 

   

 

   

 

 

Net balance, end of year

   97,818    70,492    51,690 

 

 

246,546

 

 

 

172,410

 

 

 

141,065

 

Add: reinsurance recoverable

   100,760    —      —   
  

 

   

 

   

 

 

Add: reinsurance recoverable before allowance for credit losses

 

 

617,219

 

 

 

64,755

 

 

 

71,104

 

Gross balance, end of year

  $198,578   $70,492   $51,690 

 

$

863,765

 

 

$

237,165

 

 

$

212,169

 

  

 

   

 

   

 

 

* Net balance represents beginning-of-year liability for unpaid losses and LAE less beginning-of-year reinsurance recoverable for unpaid losses and LAE.

The establishment of loss and LAE reserves is an inherently uncertain process and changes in loss and LAE reserve estimates are expected as these estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are adjusted. During the year ended December 31, 2017,2022, the Company incurred $267,000 of estimated gross losses or approximately $54,000 of estimated netrecognized losses related to Hurricane Irma and experienced unfavorable developmentprior years of $18,715, of which $17,869 pertains$40,627 primarily to claims in the 2015 and 2016 loss years. The 2017 prior year development was driven by approximately $16,200 of continued reserve strengtheningincrease reserves in response to trends involving assignment of insurance benefitsincreased litigation.

On September 28, 2022, Hurricane Ian made landfall in southwestern Florida as a dangerous, high-end Category 4 storm. After crossing the Florida peninsula, it made a second landfall on September 30, 2022 in coastal South Carolina. Gross losses and litigation and a $2,500 increase in 2016 loss reservesLAE related to Hurricane Matthew.Ian were estimated at $847,500 for all insurance lines of business, including $452,050 for HCPCI Insurance Operations and $395,450 for TypTap. After reinsurance recoveries, losses and LAE retained by the Company were approximately $65,300 for the year ended December 31, 2022. Of the total losses and LAE retained by the Company, $7,000 was attributable to flood losses exceeding the maximum amount of coverage

81


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

provided by reinsurers. As a result, the Company will be responsible for covering additional losses if the flood ultimate losses are later revised upward. Losses and LAE for the 2022 loss year included net estimated losses of approximately $81,651 related to United policies assumed, renewed and/or replaced and $6,500 related to Hurricane Nicole.

The following is information about incurred and paid claims development as of December 31, 2017,2022, net of reinsurance, as well as cumulative claim frequency and the total ofincurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2015 to 20122013 is presented as supplementary information and is unaudited.

Homeowners Multi-peril and Dwelling Fire Insurance (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

 

 

 

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

 

Total of
IBNR Plus
Expected
Development
Reported

 

 

Cumulative
Number of
Reported
Claims
(Not in Dollar

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Claims

 

 

Amounts) (b)

 

2013

 

$

67,579

 

 

$

69,932

 

 

$

69,906

 

 

$

72,015

 

 

$

71,604

 

 

$

73,763

 

 

$

74,043

 

 

$

74,543

 

 

$

74,543

 

 

$

74,454

 

 

$

14

 

 

 

7,009

 

2014

 

 

 

 

 

75,810

 

 

 

81,773

 

 

 

84,917

 

 

 

88,053

 

 

 

90,084

 

 

 

92,454

 

 

 

92,945

 

 

 

93,181

 

 

 

93,358

 

 

 

372

 

 

 

7,661

 

2015

 

 

 

 

 

 

 

 

78,017

 

 

 

90,902

 

 

 

96,173

 

 

 

101,272

 

 

 

102,149

 

 

 

102,587

 

 

 

103,135

 

 

 

103,671

 

 

 

266

 

 

 

7,665

 

2016

 

 

 

 

 

 

 

 

 

 

 

81,446

 

 

 

90,879

 

 

 

92,684

 

 

 

92,986

 

 

 

92,752

 

 

 

92,333

 

 

 

92,738

 

 

 

371

 

 

 

6,936

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91,443

 

 

 

88,937

 

 

 

89,652

 

 

 

90,958

 

 

 

90,877

 

 

 

90,652

 

 

 

1,265

 

 

 

5,776

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79,436

 

 

 

83,976

 

 

 

83,123

 

 

 

83,234

 

 

 

82,816

 

 

 

3,569

 

 

 

4,771

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,467

 

 

 

94,018

 

 

 

96,821

 

 

 

99,754

 

 

 

7,916

 

 

 

5,401

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126,086

 

 

 

133,349

 

 

 

159,758

 

 

 

15,460

 

 

 

8,253

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

187,164

 

 

 

186,606

 

 

 

44,550

 

 

 

11,754

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

263,626

 

 

 

127,833

 

 

 

12,563

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,247,433

 

 

 

 

 

 

 

82


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Homeowners Multi-peril

 

 

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

2013

 

$

40,240

 

 

$

57,374

 

 

$

64,257

 

 

$

68,106

 

 

$

70,224

 

 

$

72,492

 

 

$

73,420

 

 

$

73,986

 

 

$

74,260

 

 

$

74,440

 

2014

 

 

 

 

 

47,650

 

 

 

68,897

 

 

 

77,712

 

 

 

82,463

 

 

 

87,125

 

 

 

90,707

 

 

 

92,264

 

 

 

92,924

 

 

 

92,986

 

2015

 

 

 

 

 

 

 

 

50,939

 

 

 

76,042

 

 

 

87,784

 

 

 

95,179

 

 

 

99,200

 

 

 

101,424

 

 

 

102,486

 

 

 

103,405

 

2016

 

 

 

 

 

 

 

 

 

 

 

51,663

 

 

 

73,037

 

 

 

83,311

 

 

 

89,144

 

 

 

90,989

 

 

 

92,001

 

 

 

92,367

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,039

 

 

 

66,996

 

 

 

78,808

 

 

 

83,383

 

 

 

86,364

 

 

 

89,387

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,014

 

 

 

63,958

 

 

 

71,809

 

 

 

76,311

 

 

 

79,247

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,471

 

 

 

70,182

 

 

 

81,941

 

 

 

91,839

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,173

 

 

 

108,388

 

 

 

144,298

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85,895

 

 

 

142,054

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135,793

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,045,816

 

All outstanding liabilities before 2013, net of reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

Liabilities for loss and LAE, net of reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

201,627

 

(a)
Excludes losses from Wind-only insurance (2013 through 2022) and Dwelling Fire Insurance(a)any hurricane and storm events prior to 2022.
(b)
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

                           As of December 31, 2017 
                           Total of IBNR
Plus Expected
Development

on Reported
Claims
   Cumulative
Number of
Reported
Claims

(Not in Dollar
Amounts)(b)
 
   Incurred Claims and Allocated Claim Adjustment Expenses, Net of
Reinsurance
     

Accident

Year

  For the Years Ended December 31,     
  2012   2013   2014   2015   2016   2017     

2012

  $66,425   $62,742   $64,083   $66,505   $67,058   $66,465   $155    6,617 

2013

   —      67,579    69,932    69,906    72,020    71,604    540    7,003 

2014

   —      —      75,810    81,773    84,917    88,054    2,350    7,649 

2015

   —      —      —      78,017    90,902    96,173    4,398    7,627 

2016

   —      —      —      —      81,446    90,878    12,840    6,863 

2017

   —      —      —      —      —      91,443    37,388    5,325 
            

 

 

     
         Total     $504,617     
            

 

 

     
   

Cumulative Paid Claims and Allocated Claim Adjustment Expenses,

Net of Reinsurance

         

Accident

Year

  For the Years Ended December 31,         
  2012   2013   2014   2015   2016   2017         

2012

  $36,914   $53,225   $59,041   $62,836   $64,667   $65,903     

2013

   —      40,240    57,374    64,257    68,106    70,224     

2014

   —      —      47,650    68,897    77,712    82,463     

2015

   —      —      —      50,939    76,042    87,784     

2016

   —      —      —      —      51,663    73,037     

2017

   —      —      —      —      —      43,039     
            

 

 

     
         Total     $422,450     
            

 

 

     
   
All outstanding liabilities before 2012, net of
reinsurance
 
 
   538     
    

 

 

     
   
Liabilities for losses and loss adjustment, net of
reinsurance
 
 
  $82,705     
    

 

 

     

83

(a)Excludes losses from Wind-only insurance (2012 through 2017), any hurricane event prior to 2017 and Hurricane Irma (2017).
(b)The cumulative number of reported claims is measured as the number ofper-policyholder,per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Homeowners Wind-only Insurance(a)*

                          As of December 31, 2017 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

 

                          Total of IBNR
Plus Expected
Development

on Reported
Claims
   Cumulative
Number of
Reported
Claims

(Not in Dollar
Amounts)(b)
 

 

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

 

Total of
IBNR Plus
Expected
Development
Reported

 

 

Cumulative
Number of
Reported
Claims
(Not in Dollar

 

  Incurred Claims and Allocated Claim Adjustment
Expenses, Net of Reinsurance
   

Accident

Year

  For the Years Ended December 31,   
2012   2013   2014   2015   2016   2017    

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Claims

 

 

Amounts) (b)

 

2015

  $—     $—     $—     $308   $401   $569   $2  100 

 

$

 

 

$

 

 

$

308

 

 

$

401

 

 

$

569

 

 

$

692

 

 

$

605

 

 

$

582

 

 

$

582

 

 

$

582

 

 

$

 

 

 

100

 

2016

   —      —      —      —      1,005    1,314    41  228 

 

 

 

 

 

 

 

 

 

 

 

1,005

 

 

 

1,314

 

 

 

1,814

 

 

 

1,853

 

 

 

1,837

 

 

 

2,255

 

 

 

1,948

 

 

 

4

 

 

 

228

 

2017

   —      —      —      —      —      1,528    866    144 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,529

 

 

 

1,119

 

 

 

815

 

 

 

792

 

 

 

923

 

 

 

991

 

 

 

199

 

 

 

157

 

            

 

     
         Total     $3,411     
            

 

     
  Cumulative Paid Claims and Allocated Claim Adjustment Expenses,
Net of Reinsurance
         

Accident

Year

  For the Years Ended December 31,         
2012   2013   2014   2015   2016   2017         

2015

  $—     $—     $—     $156   $332   $464     

2016

   —      —      —      —      689    1,155     

2017

   —      —      —      —      —      484     
            

 

     
         Total     $2,103     
            

 

     
   
All outstanding liabilities before 2012,
net of reinsurance
 
 
   —       
    

 

     
   
Liabilities for losses and loss
adjustment, net of reinsurance
 
 
  $1,308     
    

 

     

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

798

 

 

 

708

 

 

 

1,061

 

 

 

1,109

 

 

 

1,226

 

 

 

302

 

 

 

137

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,132

 

 

 

1,501

 

 

 

1,833

 

 

 

2,359

 

 

 

589

 

 

 

154

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,621

 

 

 

1,970

 

 

 

3,386

 

 

 

951

 

 

 

193

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

682

 

 

 

1,257

 

 

 

458

 

 

 

114

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,284

 

 

 

580

 

 

 

122

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,033

 

 

 

 

 

 

 

*The Company began writing Homeowners Wind-only insurance in 2015.
(a)Excludes losses from multi-peril and dwelling fire insurance (2012 through 2017), any hurricane event prior to 2017 and Hurricane Irma (2017).
(b)The cumulative number of reported claims is measured as the number ofper-policyholder,per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

 

 

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

2015

 

$

 

 

$

 

 

$

156

 

 

$

332

 

 

$

465

 

 

$

582

 

 

$

582

 

 

$

582

 

 

$

582

 

 

$

582

 

2016

 

 

 

 

 

 

 

 

 

 

 

689

 

 

 

1,155

 

 

 

1,405

 

 

 

1,772

 

 

 

1,821

 

 

 

1,843

 

 

 

1,944

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

484

 

 

 

786

 

 

 

789

 

 

 

792

 

 

 

792

 

 

 

792

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

216

 

 

 

607

 

 

 

745

 

 

 

899

 

 

 

925

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

828

 

 

 

1,290

 

 

 

1,451

 

 

 

1,770

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

567

 

 

 

1,461

 

 

 

2,435

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

415

 

 

 

799

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

704

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,951

 

Liabilities for loss and LAE, net of reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,082

 

* The Company began writing Homeowners Wind-only insurance in 2015.

(a)
Excludes losses from multi-peril and dwelling fire insurance (2013 through 2022) and any hurricane and storm events prior to 2022.
(b)
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

84


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Losses Specific to Any Hurricane Eventand Storm Events prior to 20172022

                          As of December 31, 2017 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

 

                          Total of IBNR
Plus Expected
Development

on Reported
Claims
   Cumulative
Number of
Reported
Claims

(Not in Dollar
Amounts)(b)
 

 

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

 

Total of
IBNR Plus
Expected
Development
Reported

 

 

Cumulative
Number of
Reported
Claims
(Not in Dollar

 

  Incurred Claims and Allocated Claim Adjustment Expenses,
Net of Reinsurance
   

Accident

Year

  For the Years Ended December 31,   
2012   2013   2014   2015   2016   2017    

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Claims

 

 

Amounts) (b)

 

2016

  $—     $—     $—     $—     $21,414   $24,126   $3,435  2,410 

 

$

 

 

$

 

 

$

 

 

$

21,414

 

 

$

24,126

 

 

$

26,211

 

 

$

28,133

 

 

$

27,634

 

 

$

27,634

 

 

$

27,634

 

 

$

488

 

 

 

2,420

 

2017

   —      —      —      —      —      171    —    113 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,602

 

 

 

54,080

 

 

 

53,557

 

 

 

53,624

 

 

 

53,628

 

 

 

53,636

 

 

 

2

 

 

 

21,776

 

            

 

     
         Total     $24,297     
            

 

     
  Cumulative Paid Claims and Allocated Claim Adjustment Expenses,
Net of Reinsurance
         

Accident

Year

  For the Years Ended December 31,         
2012   2013   2014   2015   2016   2017         

2016

  $—     $—     $—     $—     $12,227   $20,025     

2017

   —      —      —      —      —      163     
            

 

     
         Total     $20,188     
            

 

     
   
All outstanding liabilities before 2012,
net of reinsurance
 
 
   —       
    

 

     
   
Liabilities for losses and loss
adjustment, net of reinsurance
 
 
  $4,109     
    

 

     

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,543

 

 

 

16,532

 

 

 

16,532

 

 

 

16,532

 

 

 

16,476

 

 

 

 

 

 

1,719

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

144

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,264

 

 

 

46,284

 

 

 

55,235

 

 

 

8,179

 

 

 

3,291

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,689

 

 

 

13,000

 

 

 

384

 

 

 

2,597

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

165,981

 

 

 

 

 

 

(b)The cumulative number of reported claims is measured as the number ofper-policyholder,per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

 

 

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

2016

 

$

 

 

$

 

 

$

 

 

$

12,227

 

 

$

20,025

 

 

$

23,316

 

 

$

25,849

 

 

$

26,098

 

 

$

26,807

 

 

$

27,146

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,905

 

 

 

47,514

 

 

 

47,524

 

 

 

49,425

 

 

 

53,216

 

 

 

53,634

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,391

 

 

 

15,992

 

 

 

16,436

 

 

 

16,477

 

 

 

16,476

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,964

 

 

 

34,771

 

 

 

47,056

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,323

 

 

 

12,616

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

156,928

 

Liabilities for loss and LAE, net of reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,053

 

(b)
The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

85


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Losses Specific to Hurricane Irma (2017)Ian (2022)

                           As of December 31, 2017 
                           Total of IBNR
Plus Expected
Development

on Reported
Claims
   Cumulative
Number of
Reported
Claims

(Not in Dollar
Amounts)(b)
 
   Incurred Claims and Allocated Claim Adjustment Expenses,
Net of Reinsurance
     

Accident

    Year    

  For the Years Ended December 31,     
  2012   2013   2014   2015   2016   2017     

2017

  $—     $—     $—     $—     $—     $53,430   $9,614    17,862 
            

 

 

     
         Total     $53,430     
            

 

 

     
   

Cumulative Paid Claims and Allocated Claim Adjustment Expenses,

Net of Reinsurance

         

Accident

    Year    

  For the Years Ended December 31,         
  2012   2013   2014   2015   2016   2017         

2017

  $—     $—     $—     $—     $—     $43,742     
            

 

 

     
         Total     $43,742     
            

 

 

     
   
All outstanding liabilities before 2012,
net of reinsurance
 
 
   —       
    

 

 

     
   
Liabilities for losses and loss adjustment,
net of reinsurance
 
 
  $9,688     
    

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

 

 

 

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

 

Total of
IBNR Plus
Expected
Development
Reported

 

 

Cumulative
Number of
Reported
Claims
(Not in Dollar

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Claims

 

 

Amounts) (b)

 

2022

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

65,325

 

 

$

32,327

 

 

 

12,861

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

65,325

 

 

 

 

 

 

 

(b)The cumulative number of reported claims is measured as the number ofper-policyholder,per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

 

 

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,

 

Year

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

2022

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

32,998

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,998

 

Liabilities for loss and LAE, net of reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,327

 

(b)
 The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company.

86


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The reconciliation of the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses is as follows:

 

December 31,

 

  December 31,
2017
 

 

2022

 

 

2021

 

Net outstanding liabilities

  

 

 

 

 

 

 

Homeowners multi-peril and dwelling fire insurance

  $82,705 

 

$

201,627

 

 

$

155,147

 

Homeowners Wind-only insurance

   1,308 

 

 

3,082

 

 

 

1,911

 

Losses specific to any hurricane prior to 2017

   4,109 

Losses specific to Hurricane Irma (2017)

   9,688 

Losses specific to any hurricane and storm events prior to 2022

 

 

9,053

 

 

 

15,172

 

Losses specific to Hurricane Ian (2022)

 

 

32,327

 

 

 

 

Other short-duration insurance lines

   8 

 

 

457

 

 

 

180

 

  

 

 

Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance

   97,818 

 

 

246,546

 

 

 

172,410

 

  

 

 

Reinsurance recoverables

   100,760 

 

 

617,219

 

 

 

64,755

 

  

 

 

Total gross liability for unpaid losses and loss adjustment expenses

  $198,578 

 

$

863,765

 

 

$

237,165

 

  

 

 

The following is supplementary and unaudited information about average historical claims duration as of December 31, 2017:2022:

Average Annual Percentage Payout of Incurred Losses by Age,

Net of Reinsurance

 

Years

  1  2  3  4  5  6 

Homeowners multi-peril and dwelling fire insurance

   53.8  24.4  10.1  5.5  2.9  1.9

Homeowners Wind-only insurance

   37.2  33.2  8.7  *   *   * 

Losses specific to any hurricane prior to 2017

   51.0  32.3  —     —     —     —   

Losses specific to Hurricane Irma (2017)

   81.9  —     —     —     —     —   

Average Annual Percentage Payout of Incurred Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   by Age, Net of Reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years

 

1

 

 

2

 

 

3

 

 

4

 

 

5

 

 

6

 

 

7

 

 

8

 

 

9

 

 

10

 

Homeowners multi-peril and dwelling fire
   insurance

 

 

48.1

%

 

 

22.4

%

 

 

8.9

%

 

 

3.6

%

 

 

0.2

%

 

 

1.1

%

 

 

0.4

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Homeowners Wind-only insurance

 

 

31.2

%

 

 

23.6

%

 

 

12.7

%

 

 

7.4

%

 

 

0.1

%

 

 

0.2

%

 

 

0.8

%

 

 

0.0

%

 

*

 

 

*

 

Other short-duration insurance lines

 

 

55.7

%

 

 

24.7

%

 

 

2.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

 

 

 

 

 

 

 

Losses specific to any hurricane and storm
   events prior to 2022

 

 

56.5

%

 

 

22.0

%

 

 

9.9

%

 

 

2.7

%

 

 

2.5

%

 

 

0.7

%

 

 

0.2

%

 

 

 

 

 

 

 

 

 

Losses specific to Hurricane Ian (2022)

 

 

50.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*The Company began writing Homeowners Wind-only insurance in 2015.

* The Company began writing Homeowners Wind-only insurance in 2015.

87


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 16 —15 -- Segment Information

The Company’s businesses consistCompany identifies its operating divisions based on managerial emphasis, organizational structure and revenue source. In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TTIG with a separate workforce, board of directors and financial reporting structure. Companies under TTIG include TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company, Inc., the parent company of an India company, Exzeo Software Private Limited. TTIG and its subsidiaries are considered a new reporting segment known as TypTap Group. The Company has four operating divisions: reportable segments: HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance investmentoperations, excluding the insurance operations under TypTap Group, are grouped together into one reportable segment under HCPCI insurance operations. The TypTap Group segment includes its property and casualty insurance operations, information technology operations and its management company’s activities. The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and information technology.other segment represents the activities of the holding companies and any other companies that do not meet the quantitative and qualitative thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performancesperformance based on revenue and operating income. The Company aggregates its operating divisions into segments based on organizational structure and revenue source.

Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance division are grouped together into one reportable segment under insurance operations. For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, revenues from the Company’sHCPCI insurance operations segment before intracompany elimination represented 96.2%66.1%, 95.5%74.6% and 97.5%73.4%, respectively, and revenues from the TypTap Group segment represented 29.9%, 22.7%, and 15.5%, respectively, of total revenues of all operating segments. At December 31, 2017, 20162022 and 2015,2021, HCPCI insurance operations’ total assets represented 87.1%53.4% and 58.7%, 87.9%respectively, and 91.8%TypTap Group’s total assets represented 37.9% and 29.3%, respectively, of the combined assets of all operating segments. See Note 1 -- “Nature of Operations” for a description of the Company’s insurance operations. The following tables present

88


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.

For the Year Ended December 31, 2022

 

HCPCI
Insurance
Operations

 

 

TypTap
Group

 

 

Real
Estate (a)

 

 

Corporate/
Other (b)

 

 

Reclassification/
Elimination

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums earned (c)

 

$

439,499

 

 

$

298,215

 

 

$

 

 

$

 

 

$

(12,998

)

 

$

724,716

 

Premiums ceded

 

 

(162,112

)

 

 

(110,299

)

 

 

 

 

 

 

 

 

11,267

 

 

 

(261,144

)

Net premiums earned

 

 

277,387

 

 

 

187,916

 

 

 

 

 

 

 

 

 

(1,731

)

 

 

463,572

 

Net income from investment portfolio

 

 

1,641

 

 

 

3,991

 

 

 

 

 

 

2,736

 

 

 

15,739

 

 

 

24,107

 

Policy fee income

 

 

2,482

 

 

 

1,797

 

 

 

 

 

 

 

 

 

 

 

 

4,279

 

Gain on involuntary conversion

 

 

 

 

 

 

 

 

13,402

 

 

 

 

 

 

(13,402

)

 

 

 

Gain from remeasurement of contingent liabilities

 

 

585

 

 

 

2,532

 

 

 

 

 

 

 

 

 

 

 

 

3,117

 

Other

 

 

25,155

 

 

 

2,302

 

 

 

10,365

 

 

 

3,752

 

 

 

(37,086

)

 

 

4,488

 

Total revenue

 

 

307,250

 

 

 

198,538

 

 

 

23,767

 

 

 

6,488

 

 

 

(36,480

)

 

 

499,563

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

204,549

 

 

 

173,828

 

 

 

 

 

 

 

 

 

(6,914

)

 

 

371,463

 

Amortization of deferred policy acquisition costs

 

 

56,841

 

 

 

43,828

 

 

 

 

 

 

 

 

 

 

 

 

100,669

 

Other policy acquisition expenses

 

 

2,557

 

 

 

1,905

 

 

 

 

 

 

 

 

 

(154

)

 

 

4,308

 

Stock-based compensation expense

 

 

3,879

 

 

 

3,512

 

 

 

 

 

 

7,716

 

 

 

 

 

 

15,107

 

Interest expense

 

 

 

 

 

883

 

 

 

892

 

 

 

6,875

 

 

 

(882

)

 

 

7,768

 

Depreciation and amortization

 

 

626

 

 

 

3,185

 

 

 

2,501

 

 

 

868

 

 

 

(2,401

)

 

 

4,779

 

Impairment loss

 

 

652

 

 

 

1,632

 

 

 

 

 

 

 

 

 

 

 

 

2,284

 

Personnel and other operating expenses

 

 

44,752

 

 

 

31,548

 

 

 

4,884

 

 

 

6,548

 

 

 

(26,129

)

 

 

61,603

 

Total expenses

 

 

313,856

 

 

 

260,321

 

 

 

8,277

 

 

 

22,007

 

 

 

(36,480

)

 

 

567,981

 

(Loss) income before income taxes

 

$

(6,606

)

 

$

(61,783

)

 

$

15,490

 

 

$

(15,519

)

 

$

 

 

$

(68,418

)

Total revenue from non-affiliates (d)

 

$

273,222

 

 

$

207,728

 

 

$

22,413

 

 

$

3,937

 

 

 

 

 

 

 

Gross premiums written

 

$

377,860

 

 

$

348,159

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)Other revenue under real estate primarily consisted of rental income from investment properties.

(b)Other revenue under corporate and other primarily consisted of revenue from marina business.

(c)Gross premiums earned under HCPCI Insurance Operations consist of $426,501 from HCPCI and $12,998 from a reinsurance company.

(d)Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

89


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

For the Year Ended December 31, 2017  Insurance
Operations
  Real
Estate(a)
  Corporate/
Other(b)
  Reclassification/
Elimination
  Consolidated 

Revenue:

      

Net premiums earned

  $224,618  $—    $—    $—    $224,618 

Net investment income

   9,898   6   2,974   (1,439  11,439 

Net realized investment gains

   3,978   —     368   —     4,346 

Net unrealized investment gains

   —     —     92   —     92 

Net other-than-temporary impairment losses

   (1,258  —     (209  —     (1,467

Policy fee income

   3,622   —     —     —     3,622 

Other

   693   7,046   4,417   (10,400  1,756 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

   241,551   7,052   7,642   (11,839  244,406 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

      

Losses and loss adjustment expenses

   165,629   —     —     —     165,629 

Amortization of deferred policy acquisition costs

   35,663   —     —     —     35,663 

Interest expense

   —     1,250   15,704   (187  16,767 

Loss on repurchases of senior notes

   —     —     743   —     743 

Depreciation and amortization

   128   2,121   939   (1,950  1,238 

Other

   27,547   4,022   18,123   (9,702  39,990 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   228,967   7,393   35,509   (11,839  260,030 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  $12,584  $(341 $(27,867 $—    $(15,624
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue fromnon-affiliates(c)

  $241,551  $5,525  $6,958   

(a)Other revenue under real estate primarily consisted of rental income from investment properties.
(b)Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
(c)Represents amounts before reclassification to conform with an insurance company’s presentation.

For the Year Ended December 31, 2021

 

HCPCI
Insurance
Operations

 

 

TypTap
Group

 

 

Real
Estate (a)

 

 

Corporate/
Other (b)

 

 

Reclassification/
Elimination

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums earned (c)

 

$

404,362

 

 

$

175,907

 

 

$

 

 

$

 

 

$

(3,225

)

 

$

577,044

 

Premiums ceded

 

 

(140,902

)

 

 

(61,534

)

 

 

 

 

 

 

 

 

2,695

 

 

 

(199,741

)

Net premiums earned

 

 

263,460

 

 

 

114,373

 

 

 

 

 

 

 

 

 

(530

)

 

 

377,303

 

Net income from investment portfolio

 

 

8,130

 

 

 

1,306

 

 

 

 

 

 

6,613

 

 

 

4,121

 

 

 

20,170

 

Policy fee income

 

 

2,794

 

 

 

1,201

 

 

 

 

 

 

 

 

 

 

 

 

3,995

 

Other

 

 

6,356

 

 

 

1,606

 

 

 

12,226

 

 

 

1,794

 

 

 

(15,535

)

 

 

6,447

 

Total revenue

 

 

280,740

 

 

 

118,486

 

 

 

12,226

 

 

 

8,407

 

 

 

(11,944

)

 

 

407,915

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

147,198

 

 

 

80,863

 

 

 

 

 

 

 

 

 

(536

)

 

 

227,525

 

Amortization of deferred policy acquisition costs

 

 

56,470

 

 

 

30,493

 

 

 

 

 

 

 

 

 

 

 

 

86,963

 

Other policy acquisition expenses

 

 

2,851

 

 

 

4,100

 

 

 

 

 

 

 

 

 

 

 

 

6,951

 

Stock-based compensation expense

 

 

3,553

 

 

 

3,380

 

 

 

 

 

 

6,821

 

 

 

 

 

 

13,754

 

Interest expense

 

 

 

 

 

113

 

 

 

1,202

 

 

 

5,467

 

 

 

(382

)

 

 

6,400

 

Depreciation and amortization

 

 

86

 

 

 

1,336

 

 

 

2,319

 

 

 

884

 

 

 

(2,441

)

 

 

2,184

 

Debt conversion expense

 

 

 

 

 

 

 

 

 

 

 

1,754

 

 

 

 

 

 

1,754

 

Personnel and other operating expenses

 

 

20,647

 

 

 

28,357

 

 

 

4,424

 

 

 

6,308

 

 

 

(8,585

)

 

 

51,151

 

Total expenses

 

 

230,805

 

 

 

148,642

 

 

 

7,945

 

 

 

21,234

 

 

 

(11,944

)

 

 

396,682

 

Income (loss) before income taxes

 

$

49,935

 

 

$

(30,156

)

 

$

4,281

 

 

$

(12,827

)

 

$

 

 

$

11,233

 

Total revenue from non-affiliates (d)

 

$

277,333

 

 

$

119,703

 

 

$

10,872

 

 

$

7,406

 

 

 

 

 

 

 

Gross premiums written

 

$

426,910

 

 

$

247,479

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)Other revenue under real estate primarily consisted of rental income from investment properties.

(b)Other revenue under corporate and other primarily consisted of revenue from marina business.

(c)Gross premiums earned under HCPCI Insurance Operations consist of $401,137 from HCPCI and $3,225 from a reinsurance company.

(d)Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

90


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

For the Year Ended December 31, 2016  Insurance
Operations
  Real
Estate(a)
   Corporate/
Other(b)
  Reclassification/
Elimination
  Consolidated 

Revenue:

       

Net premiums earned

  $243,627  $—     $—    $—    $243,627 

Net investment income (loss)

   8,440   18    1,162   (533  9,087 

Net realized investment gains

   2,450   —      151   —     2,601 

Net other-than-temporary impairment losses

   (2,467  —      (15  —     (2,482

Policy fee income

   3,914   —      —     —     3,914 

Gain on repurchases of convertible senior notes

   —     —      153   —     153 

Gain on bargain purchase

   —     2,071    —     —     2,071 

Gain on remeasurement of previously held interest

   —     4,005    —     —     4,005 

Other

   684   4,505    4,104   (7,823  1,470 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenue

   256,648   10,599    5,555   (8,356  264,446 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Expenses:

       

Losses and loss adjustment expenses

   124,667   —      —     —     124,667 

Amortization of deferred policy acquisition costs

   37,868   —      —     —     37,868 

Interest expense

   —     561    10,518   —     11,079 

Depreciation and amortization

   158   814    908   (608  1,272 

Other operating expenses

   31,351   2,921    16,180   (7,748  42,704 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total expenses

   194,044   4,296    27,606   (8,356  217,590 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  $62,604  $6,303   $(22,051 $—    $46,856 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenue fromnon-affiliates(c)

  $256,648  $9,072   $5,470   

(a)Other revenue under real estate primarily consisted of rental income from investment properties.
(b)Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
(c)Represents amounts before reclassification to conform with an insurance company’s presentation.

For the Year Ended December 31, 2020

 

HCPCI
Insurance
Operations

 

 

TypTap
Group

 

 

Real
Estate (a)

 

 

Corporate/
Other (b)

 

 

Reclassification/
Elimination

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums earned (c)

 

$

342,764

 

 

$

78,836

 

 

$

 

 

$

 

 

$

(5,682

)

 

$

415,918

 

Premiums ceded

 

 

(130,318

)

 

 

(28,822

)

 

 

 

 

 

 

 

 

5,682

 

 

 

(153,458

)

Net premiums earned

 

 

212,446

 

 

 

50,014

 

 

 

 

 

 

 

 

 

 

 

 

262,460

 

Net income from investment portfolio

 

 

6,423

 

 

 

793

 

 

 

3

 

 

 

15

 

 

 

(1,602

)

 

 

5,632

 

Policy fee income

 

 

2,702

 

 

 

820

 

 

 

 

 

 

 

 

 

 

 

 

3,522

 

Gain on involuntary conversion

 

 

 

 

 

 

 

 

36,969

 

 

 

 

 

 

 

 

 

36,969

 

Other

 

 

1,768

 

 

 

100

 

 

 

9,502

 

 

 

1,948

 

 

 

(11,464

)

 

 

1,854

 

Total revenue

 

 

223,339

 

 

 

51,727

 

 

 

46,474

 

 

 

1,963

 

 

 

(13,066

)

 

 

310,437

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

125,977

 

 

 

34,059

 

 

 

 

 

 

 

 

 

 

 

 

160,036

 

Amortization of deferred policy acquisition costs

 

 

35,410

 

 

 

13,715

 

 

 

 

 

 

 

 

 

 

 

 

49,125

 

Other policy acquisition expenses

 

 

3,496

 

 

 

1,865

 

 

 

 

 

 

 

 

 

 

 

 

5,361

 

Stock-based compensation expense

 

 

1,645

 

 

 

1,808

 

 

 

 

 

 

4,680

 

 

 

 

 

 

8,133

 

Interest expense

 

 

 

 

 

2

 

 

 

1,947

 

 

 

10,709

 

 

 

(924

)

 

 

11,734

 

Depreciation and amortization

 

 

85

 

 

 

1,102

 

 

 

2,526

 

 

 

634

 

 

 

(2,494

)

 

 

1,853

 

Loss on repurchases of convertible senior notes

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

 

 

 

150

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

98

 

 

 

 

 

 

 

 

 

98

 

Personnel and other operating expenses

 

 

17,778

 

 

 

15,637

 

 

 

5,388

 

 

 

7,864

 

 

 

(9,648

)

 

 

37,019

 

Total expenses

 

 

184,391

 

 

 

68,188

 

 

 

9,959

 

 

 

24,037

 

 

 

(13,066

)

 

 

273,509

 

Income (loss) before income taxes

 

$

38,948

 

 

$

(16,461

)

 

$

36,515

 

 

$

(22,074

)

 

$

 

 

$

36,928

 

Total revenue from non-affiliates (d)

 

$

221,633

 

 

$

52,807

 

 

$

44,709

 

 

$

640

 

 

 

 

 

 

 

Gross premiums written

 

$

399,299

 

 

$

104,855

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)Other revenue under real estate primarily consisted of rental income from investment properties.

(b)Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.

(c)Gross premiums earned under HCPCI Insurance Operations consist of $337,082 from HCPCI and $5,682 from a reinsurance company.

(d)Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

91


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

For the Year Ended December 31, 2015  Insurance
Operations
  Real
Estate(a)
   Corporate/
Other(a)
  Reclassification/
Elimination
  Consolidated 

Revenue:

       

Net premiums earned

  $282,506  $—     $—    $—    $282,506 

Net investment income (loss)

   6,841   5    (1,971  (897  3,978 

Net realized investment (losses) gains

   (716  —      108   —     (608

Net other-than-temporary impairment losses

   (4,606  —      (75  —     (4,681

Policy fee income

   3,496   —      —     —     3,496 

Other

   564   4,095    3,209   (6,607  1,261 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenue

   288,085   4,100    1,271   (7,504  285,952 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Expenses:

       

Losses and loss adjustment expenses

   87,224   —      —     —     87,224 

Amortization of deferred policy acquisition costs

   36,224   —      —     —     36,224 

Interest expense

   —     15    10,739   —     10,754 

Depreciation and amortization

   185   603    920   (370  1,338 

Other operating expenses

   30,665   2,822    17,867   (7,134  44,220 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total expenses

   154,298   3,440    29,526   (7,504  179,760 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  $133,787  $660   $(28,255 $—    $106,192 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Total revenue fromnon-affiliates(c)

  $288,085  $2,612   $1,104   

The following table presents segment assets reconciled to the Company’s total assets on the consolidated balance sheets:

(a)Other revenue under real estate primarily consisted of rental income from investment properties.
(b)Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.
(c)Represents amounts before reclassification to conform with an insurance company’s presentation.

 

 

December 31,

 

 

 

2022

 

 

2021

 

Segments:

 

 

 

 

 

 

HCPCI Insurance Operations

 

$

912,233

 

 

$

676,509

 

TypTap Group

 

 

704,429

 

 

 

369,600

 

Real Estate Operations

 

 

126,001

 

 

 

127,651

 

Corporate and Other

 

 

159,378

 

 

 

65,349

 

Consolidation and Elimination

 

 

(98,713

)

 

 

(62,252

)

Total assets

 

$

1,803,328

 

 

$

1,176,857

 

92


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 16 -- Leases

The table below summarizes the Company’s ROU assets and corresponding liabilities for operating and finance leases:

 

 

December 31,

 

 

 

2022

 

 

2021

 

Operating leases:

 

 

 

 

 

 

ROU assets

 

$

777

 

 

$

2,204

 

Liabilities

 

$

721

 

 

$

2,203

 

Finance leases:

 

 

 

 

 

 

ROU assets

 

$

80

 

 

$

86

 

Liabilities

 

$

13

 

 

$

31

 

The Company’s lease of office space in India for its information technology operations expired in January 2022 and a new lease agreement was entered into effective February 2022 with an initial term of nine years.

In December 2022, the Company notified the FDOT of the election to terminate one of the operating leases for office space effective January 31, 2023, resulting in a derecognition of the ROU assets and its corresponding liabilities by $553.

The following table presents segment assets reconciledsummarizes the Company’s operating and finance leases in which the Company is a lessee:

Renewal

Other Terms and

Class of Assets

Initial Term

Option

Conditions

Operating lease:

Office equipment

1 to 51 months

Yes

(a), (b)

Office space

3 to 9 years

Yes

(b), (c)

Finance lease:

Office equipment

3 to 5 years

Not applicable

(d)

(a) At the end of the lease term, the Company can purchase the equipment at fair market value.

(b) There are no variable lease payments.

(c) Rent escalation provisions exist.

(d) There is a bargain purchase option.

As of December 31, 2022, maturities of lease liabilities were as follows:

 

 

Leases

 

 

 

Operating

 

 

Finance

 

Due in Year

 

 

 

 

 

 

2023

 

$

110

 

 

$

11

 

2024

 

 

91

 

 

 

2

 

2025

 

 

96

 

 

 

 

2026

 

 

101

 

 

 

 

2027

 

 

106

 

 

 

 

Thereafter

 

 

361

 

 

 

 

Total lease payments

 

 

865

 

 

 

13

 

Less: interest

 

 

144

 

 

 

 

Total lease obligations

 

$

721

 

 

$

13

 

93


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The following table provides quantitative information with regards to the Company’s total assetsoperating and finance leases:

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

Lease costs:

 

 

 

 

 

 

Finance lease costs:

 

 

 

 

 

 

Amortization – ROU assets*

 

$

16

 

 

$

19

 

Interest expense

 

 

1

 

 

 

1

 

Operating lease costs*

 

 

1,219

 

 

 

1,622

 

Short-term lease costs*

 

 

408

 

 

 

348

 

Total lease costs

 

$

1,644

 

 

$

1,990

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows – finance leases

 

$

1

 

 

$

1

 

Operating cash flows – operating leases

 

$

1,194

 

 

$

1,626

 

Financing cash flows – finance leases

 

$

18

 

 

$

19

 

 

 

December 31, 2022

 

 

 

 

Weighted-average remaining lease term:

 

 

 

 

 

 

Finance leases (in years)

 

 

1.1

 

 

 

 

Operating leases (in years)

 

 

7.9

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

Finance leases (%)

 

 

3.4

%

 

 

 

Operating leases (%)

 

 

4.5

%

 

 

 

* Included in other operating expenses on the consolidated balance sheets.statements of income.

The following table summarizes the Company’s operating leases in which the Company is a lessor:

   December 31, 
   2017   2016 

Segment:

    

Insurance Operations

  $652,754   $651,927 

Real Estate Operations

   80,152    71,226 

Corporate and Other

   127,822    45,623 

Consolidation and Elimination

   (18,464   (98,712
  

 

 

   

 

 

 

Total assets

  $842,264   $670,064 
  

 

 

   

 

 

 

Renewal

Other Terms

Class of Assets

Initial Term

Option

and Conditions

Operating lease:

Office space

1 to 3 years

Yes

(e)

Retail space

3 to 20 years

Yes

(e)

Boat docks/wet slips

1 to 12 months

Yes

(e)

(e) There are no purchase options.

Note 17 -- Income Taxes

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

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Current:

      

 

 

 

 

 

 

 

 

 

Federal

  $(3,933  $14,918   $34,768 

 

$

(3,853

)

 

$

2,332

 

 

$

1,089

 

State

   34    2,666    5,856 

 

 

(275

)

 

 

415

 

 

 

30

 

Foreign

   81    96    68 

 

 

194

 

 

 

102

 

 

 

106

 

  

 

   

 

   

 

 

Total current taxes

   (3,818   17,680    40,692 

 

 

(3,934

)

 

 

2,849

 

 

 

1,225

 

  

 

   

 

   

 

 

Deferred:

      

 

 

 

 

 

 

 

 

 

Federal

   (4,144   182    (275

 

 

(7,828

)

 

 

489

 

 

 

6,694

 

State

   (757   (9   (46

 

 

(2,023

)

 

 

653

 

 

 

1,436

 

Foreign

   (12   (18   (40

 

 

(30

)

 

 

 

 

 

(7

)

  

 

   

 

   

 

 

Total deferred taxes

   (4,913   155    (361

 

 

(9,881

)

 

 

1,142

 

 

 

8,123

 

  

 

   

 

   

 

 

Income tax (benefit) expense

  $(8,731  $17,835   $40,331 

 

$

(13,815

)

 

$

3,991

 

 

$

9,348

 

  

 

   

 

   

 

 

94


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

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

  Years Ended December 31, 

 

Years Ended December 31,

 

  2017   2016 2015 

 

2022

 

 

2021

 

 

2020

 

  Amount %   Amount % Amount % 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Income taxes at statutory rate

  $(5,468 35.0   $16,395  35.0  $37,167  35.0 

 

$

(14,368

)

 

 

21.0

 

 

$

2,359

 

 

 

21.0

 

 

$

7,755

 

 

 

21.0

 

Increase (decrease) in income taxes resulting from:

        

(Decrease) increase in income taxes
resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State income taxes, net of federal tax benefits

   (657 4.2    1,710  3.6  3,783  3.6 

 

 

(2,812

)

 

 

4.1

 

 

 

402

 

 

 

3.6

 

 

 

1,364

 

 

 

3.7

 

Effects of tax rate changes

   (1,400 9.0    —     —     —     —   

 

 

 

 

 

 

 

 

437

 

 

 

3.9

 

 

 

 

 

 

 

Share-based compensation

   (705 4.5    —     —     —     —   

Stock-based compensation

 

 

(431

)

 

 

0.6

 

 

 

(298

)

 

 

(2.7

)

 

 

(296

)

 

 

(0.8

)

Non-deductible executive compensation

 

 

1,252

 

 

 

(1.8

)

 

 

1,008

 

 

 

9.0

 

 

 

757

 

 

 

2.0

 

Change in valuation allowance

 

 

2,549

 

 

 

(3.7

)

 

 

 

 

 

 

 

 

 

 

 

 

Other

   (501 3.2    (270 (0.5 (619 (0.6

 

 

(5

)

 

 

 

 

 

83

 

 

 

0.7

 

 

 

(232

)

 

 

(0.6

)

  

 

  

 

   

 

  

 

  

 

  

 

 

Income tax (benefit) expense

  $(8,731 55.9   $17,835  38.1  $40,331  38.0 

 

$

(13,815

)

 

 

20.2

 

 

$

3,991

 

 

 

35.5

 

 

$

9,348

 

 

 

25.3

 

  

 

  

 

   

 

  

 

  

 

  

 

 

The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.rates for the years ended December 31, 2022, 2021, and 2020. The tax returns filed for the years ending December 31, 2016, 2015,2021, 2020, and 20142019 remain subject to examination by the Company’s major taxing jurisdictions.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Company elected to classify if any, interest and penalties, if any, arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There have been no material amounts of interest or penalties for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.

In July 2017, the Company received notice from the Internal Revenue Service stating the Company’s 2015 federal income tax return would be examined. The examination is currently in the process of gathering information.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Key components of the 2017 Tax Act are: a permanent reduction to the federal corporate income tax rate from a bracket system with a top tax rate of 35% to a flat rate of 21% beginning on January 1, 2018; implementation of a territorial tax system; an amendment to Internal Revenue Code Section 965 that requires U.S. shareholders (10% or greater) of controlled foreign corporations and other specified foreign corporations to include in income, for the last taxable year of such foreign corporation beginning before January 1, 2018, such U.S. shareholder’s pro rata share of a deemed repatriation amount; and changes to carryback and carryforward rules for net operating losses arising after December 31, 2017. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is enacted. On the same day of the passing and enactment of the 2017 Tax Act, the Securities Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company used estimates with regard to several gross temporary book and tax differences, including depreciable assets, deductions for loss reserves and income from limited partnership interests in measuring provisional tax effects. The ultimate outcome may materially differ from these provisional amounts due to, among other things, changes in interpretations and assumptions, and additional regulatory guidance. The Company expects to finalize the accounting for the tax effects when the 2017 U.S. corporate income tax return is filed in October 2018. For the year ended December 31, 2017,2022, the Company recognized a provisional $1,400recorded $13,815 of income tax benefit resulting in an effective tax rate of 20.2%. For the years ended December 31, 2021 and 2020, the Company recorded income tax expense of $3,991 and $9,348, respectively, resulting in effective tax rates of 35.5% and 25.3%, respectively. The decrease in the effective tax rate in 2022 as compared with 2021 was primarily attributable to a valuation allowance established as of December 31, 2022 and an increase in non-deductible compensation expense related to net deferred tax liabilities duerestricted stock and stock options granted to the lower future corporate income tax rates enacted by the 2017 Tax Act in the Company’s consolidated statement of income.certain executives.

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

95


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Significant components of the Company’s net deferred income tax assetsliabilities are as follows:

  December 31, 

 

December 31,

 

  2017   2016 

 

2022

 

 

2021

 

Deferred tax assets:

    

 

 

 

 

 

 

Net operating loss carryforwards

 

$

13,883

 

 

$

 

Unearned premiums

  $5,753   $9,331 

 

 

12,588

 

 

 

14,174

 

Other-than-temporary impairment losses

   386    1,246 

Losses and loss adjustment expenses

   3,154    986 

 

 

3,013

 

 

 

2,591

 

Stock-based compensation

 

 

1,570

 

 

 

1,660

 

Prepaid expenses

 

 

 

 

 

658

 

Unearned revenue

 

 

426

 

 

 

237

 

Net unrealized investment losses

 

 

428

 

 

 

 

Basis difference related to convertible senior notes

 

 

300

 

 

 

169

 

Accrued expenses

 

 

163

 

 

 

110

 

Credit losses

 

 

244

 

 

 

151

 

Organizational costs

   90    61 

 

 

128

 

 

 

102

 

Stock-based compensation

   2,455    3,388 

Accrued expenses

   —      35 

Unearned revenue

   339    489 

State net operating losses

   333    —   

State capital loss carryforwards

   175    65 

Bad debt reserve

   2    3 

 

 

44

 

 

 

56

 

  

 

   

 

 

Other

 

 

85

 

 

 

 

Total deferred tax assets

   12,687    15,604 

 

 

32,872

 

 

 

19,908

 

  

 

   

 

 

Valuation allowance

 

 

(2,549

)

 

 

 

Total deferred tax assets, net of valuation allowance

 

 

30,323

 

 

 

19,908

 

Deferred tax liabilities:

    

 

 

 

 

 

 

Gain on involuntary conversion

 

 

(12,500

)

 

 

(9,202

)

Deferred policy acquisition costs

 

 

(12,156

)

 

 

(15,089

)

Intangible assets

 

 

(1,878

)

 

 

(2,450

)

Basis difference related to partnership investments

 

 

(2,942

)

 

 

(1,313

)

Prepaid expenses

 

 

(703

)

 

 

 

Net unrealized investment gains

 

 

 

 

 

(1,539

)

Property and equipment

   (1,517   (1,857

 

 

(1,515

)

 

 

(1,511

)

Intangible assets

   (1,541   (1,890

Deferred policy acquisition costs

   (4,365   (6,601

Unrealized net gain onavailable-for-sale securities

   (1,907   (1,659

Basis difference related to partnership investments

   (599   (5

Basis difference related to convertible senior notes

   (4,099   (2,519

Prepaid expenses

   (312   (412

Accrued expenses

   (37   —   

Other

   (200   (411

 

 

(333

)

 

 

(543

)

  

 

   

 

 

Total deferred tax liabilities

   (14,577   (15,354

 

 

(32,027

)

 

 

(31,647

)

  

 

   

 

 

Net deferred tax (liabilities) assets

  $(1,890  $250 
  

 

   

 

 

Net deferred tax liabilities

 

$

(1,704

)

 

$

(11,739

)

The Company has a federal net operating loss carryforward of $52,494 for the 2022 tax year which will expire on December 31, 2042. The Company has a state net operating loss carryforward of $7,665$65,766 for the 20172022 tax year which can be carried forward indefinitely and will expire on December 31, 2037. In addition, the Company has state capital loss carryforwards of $1,926 and $1,826 for the 2016 and 2015 tax years, respectively. The 2015 capital loss carryforward is available for tax years up to and including the 2020 tax year. The 2016 capital loss carryforward is available for tax years up to and including the 2021 tax year.never expire.

A valuation allowance must be established for deferred tax assets when it is established if, based upon the relevant facts and circumstances, management believes any portion ofmore likely than not that the deferred tax assets will not be realized. Although realization ofrealized based on available evidence both positive and negative, including recent operating results, available tax planning strategies, and projected future taxable income. Management concluded that the negative evidence outweighed the positive evidence and therefore a valuation allowance on the Company’s deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. Thus, theestablished as of December 31, 2022. The Company did not have a valuation allowance established as of December 31, 2017 or 2016.2021.

The 2017 Tax Act implemented a mandatoryone-time tax of eight percent on illiquid assets and 15.5% percent on cash and cash equivalents attributable to the accumulated earnings of controlled foreign companies and other specified foreign corporations on U.S. shareholders owning ten percent or greater of the foreign company. The Company has included thisone-time federal income tax and the corresponding state taxes attributable to this deemed repatriation amount in the net income tax benefit for the year ended December 31, 2017. In addition to this mandatoryone-time deemed repatriation, the 2017 Tax Act also implemented a territorial system which exempts U.S. corporations from U.S. taxes on most future foreign profits. Since all accumulated earnings of the Company’s

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

foreign subsidiary at December 31, 2017 will be subjected to federal and state income taxes as a result of theone-time mandatory deemed repatriation and all earnings of its foreign subsidiaries after December 31, 2017 will not be subject to U.S. income taxes, the Company will no longer be required to consider the establishment of a deferred tax liability related to the undistributed earnings of its foreign subsidiary.    

Note 18 -- Earnings Per Share

U.S. GAAP requires the Company to use thetwo-class method in computing basic earnings (loss) per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings (loss) earnings per share during periods of net income or loss. For a majority-owned subsidiary, its basic and diluted earnings (loss). per share are first computed separately. Then, the Company’s proportionate share in that majority-owned subsidiary’s earnings is added to the computation of both basic and diluted earnings (loss) per share at a consolidated level.

96


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

A summary of the numerator and denominator of the basic and fully diluted (loss) earnings per common share is presented below:

   (Loss)
Income
(Numerator)
   Shares (a)
(Denominator)
   Per Share
Amount
 
Year Ended December 31, 2017            

Net loss

  $(6,893    

Less: Loss attributable to participating securities

   481     
  

 

 

     

Basic and Diluted Loss Per Share:

      

Loss available to common stockholders*

  $(6,412   8,558   $(0.75
  

 

 

   

 

 

   

 

 

 

*  Stock options and convertible senior notes were excluded due to antidilutive effect.

   

Year Ended December 31, 2016            

Net income

  $29,021     

Less: Income attributable to participating securities

   (1,545    
  

 

 

     

Basic Earnings Per Share:

      

Income allocated to common stockholders

   27,476    9,326   $2.95 
      

 

 

 

Effect of Dilutive Securities:

      

Stock options

   —      54   

Convertible senior notes

   4,244    1,493   
  

 

 

   

 

 

   

Diluted Earnings Per Share:

      

Income available to common stockholders and assumed conversions

  $31,720    10,873   $2.92 
  

 

 

   

 

 

   

 

 

 
Year Ended December 31, 2015            

Net income

  $65,861     

Less: Income attributable to participating securities

   (3,398    
  

 

 

     

Basic Earnings Per Share:

      

Income allocated to common stockholders

   62,463    9,602   $6.51 
      

 

 

 

Effect of Dilutive Securities:

      

Stock options

   —      102   

Convertible senior notes

   4,505    1,651   
  

 

 

   

 

 

   

Diluted Earnings Per Share:

      

Income available to common stockholders and assumed conversions

  $66,968    11,355   $5.90 
  

 

 

   

 

 

   

 

 

 

(a)   Shares in thousands.

      

 

 

Loss
(Numerator)

 

 

Shares (a)
(Denominator)

 

 

Per Share
Amount

 

Year Ended December 31, 2022

 

 

 

 

 

 

 

 

 

Net loss

 

$

(54,603

)

 

 

 

 

 

 

Less: Net income attributable to redeemable
   noncontrolling interest

 

 

(9,106

)

 

 

 

 

 

 

Less: TypTap Group’s net loss attributable to
   non-HCI common stockholders and TypTap
   Group’s participating securities

 

 

5,198

 

 

 

 

 

 

 

Net loss attributable to HCI

 

 

(58,511

)

 

 

 

 

 

 

Less: Loss attributable to participating securities

 

 

3,463

 

 

 

 

 

 

 

Basic Loss Per Share:

 

 

 

 

 

 

 

 

 

Loss allocated to common stockholders

 

 

(55,048

)

 

 

8,817

 

 

$

(6.24

)

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities: *

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

 

 

 

Convertible senior notes

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

Diluted Loss Per Share:

 

 

 

 

 

 

 

 

 

Loss available to common stockholders and
   assumed conversions

 

$

(55,048

)

 

 

8,817

 

 

$

(6.24

)

(a)
Shares in thousands.

* Convertible senior notes, stock options, and warrants were excluded due to antidilutive effect.

 

 

Income
(Numerator)

 

 

Shares (a)
(Denominator)

 

 

Per Share
Amount

 

Year Ended December 31, 2021

 

 

 

 

 

 

 

 

 

Net income

 

$

7,242

 

 

 

 

 

 

 

Less: Net income attributable to redeemable
   noncontrolling interest

 

 

(7,399

)

 

 

 

 

 

 

Less: TypTap Group’s net loss attributable to
   non-HCI common stockholders and TypTap
   Group’s participating securities

 

 

2,013

 

 

 

 

 

 

 

Net income attributable to HCI

 

 

1,856

 

 

 

 

 

 

 

Less: Income attributable to participating securities

 

 

(24

)

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

Income allocated to common stockholders

 

 

1,832

 

 

 

8,092

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities: *

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

207

 

 

 

 

Warrants

 

 

 

 

 

281

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

Income available to common stockholders and
   assumed conversions

 

$

1,832

 

 

 

8,580

 

 

$

0.21

 

(a)
Shares in thousands.

* Convertible senior notes were excluded due to antidilutive effect.

97


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

 

 

Income
(Numerator)

 

 

Shares (a)
(Denominator)

 

 

Per Share
Amount

 

Year Ended December 31, 2020

 

 

 

 

 

 

 

 

 

Net income

 

$

27,580

 

 

 

 

 

 

 

Less: Income attributable to participating securities

 

 

(1,462

)

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

Income allocated to common stockholders

 

 

26,118

 

 

 

7,351

 

 

$

3.55

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

23

 

 

 

 

Convertible senior notes

 

 

7,705

 

 

 

2,320

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

Income available to common stockholders and
   assumed conversions

 

$

33,823

 

 

 

9,694

 

 

$

3.49

 

(a)
Shares in thousands.

Note 19 -- Redeemable Noncontrolling Interest

On February 26, 2021, TTIG completed a capital investment transaction with a fund associated with Centerbridge Partners, L.P. (collectively, the “Lead Investor”), a private investment management fund. Under the investment agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $0.001 par value, at a price of $10 per share for total proceeds of $100,000. The Company incurred $6,262 of related issuance costs in 2021. In connection with the transaction, the Lead Investor was granted by HCI warrants to purchase 750,000 shares of HCI’s common stock with an exercise price of $54.40 per share. The warrants valued at $9,217 or $12.29 per warrant were immediately exercisable and will expire on the fourth anniversary of the date of issuance.

Dividends

Dividends accrue and accumulate from the date of issuance. Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option. Cash dividend rates are $0.50 per share in Year 1, $0.60 per share in Year 2, $0.75 per share in Year 3, and $0.95 per share in Year 4 and thereafter. The rates for paid-in-kind dividends are $0.60 per share in Year 1 and $0.70 per share in Year 2. In addition, the Series A Preferred Stock will be paid dividends on an as-converted basis when and if TTIG declares common stock dividends.

Conversion Rights

The holders of TTIG’s Series A Preferred Stock have the right to convert the stock at any time into shares of TTIG’s common stock with an initial conversion rate of 1 to 1. The conversion rate will be adjusted under certain conditions. Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon (1) a qualified public offering of TTIG’s common stock with gross proceeds of not less than $250,000 with a price per share at least equal to 150% of the original purchase price of the Series A Preferred Stock, or (2) at the election of requisite holders of a majority of TTIG’s Series A Preferred Stock, whichever comes first.

Redemption Rights

On or after the fourth anniversary of the issuance date, TTIG’s Series A Preferred Stock is redeemable at the option of the holders at a price equal to the greater of (1) $10 per share plus any accrued but unpaid dividends and (2) a fair market value per share

98


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

determined by an independent valuation firm selected by TTIG’s board of directors. Management determined that the redemption was not probable at December 31, 2022.

Guaranty by HCI

All payment obligations to the holders of TTIG’s Series A Preferred Stock are fully guaranteed by HCI as long as TTIG’s Series A Preferred Stock is outstanding. As the guarantor, HCI is subject to certain financial covenants.

Liquidation Preference

In the event of any liquidation, the Series A Preferred Stock ranks senior to TTIG’s common stock with respect to distribution rights.

Anti-Dilutive Protection

The holders of TTIG’s Series A Preferred Stock receive protection in the form of a down-round feature which will be triggered in the event that TTIG issues additional common equivalent shares at an effective price per share less than $10 per share.

The following table summarizes the activity of redeemable noncontrolling interest during the years ended December 31, 2022 and 2021:

 

 

2022

 

 

2021

 

Balance at January 1

 

$

89,955

 

 

$

 

Initial proceeds from Centerbridge

 

 

 

 

 

100,000

 

Increase (decrease):

 

 

 

 

 

 

Proceeds allocated to warrants*

 

 

 

 

 

(9,217

)

Issuance costs

 

 

 

 

 

(6,262

)

Issuance costs allocated to warrants*

 

 

 

 

 

577

 

Accrued cash dividends

 

 

5,842

 

 

 

4,208

 

Accretion - increasing dividend rates

 

 

3,264

 

 

 

3,191

 

Dividends paid

 

 

(5,508

)

 

 

(2,542

)

Balance at December 31

 

$

93,553

 

 

$

89,955

 

* Net decrease related to warrants of $8,640.

For the years ended December 31, 2022 and 2021, net income attributable to redeemable noncontrolling interest was $9,106 and $7,399, respectively, consisting of accrued cash dividends of $5,842 and $4,208, respectively, and accretion related to increasing dividend rates of $3,264 and $3,191, respectively.

Note 20 -- Equity

Stockholders’ Equity

Common Stock

In December 2017,March 2022, the Company’s Board of Directors authorized a plan to repurchase up to $20,000$20,000 of the Company’s common shares before commissions and fees. The repurchase plan allows the Company to repurchase shares from time to timefees through December 31, 2018.2022. There was no stock repurchase plan approved by the Board of Directors during 2021. In December 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020, and in March 2020, the Board approved a stock repurchase plan to repurchase up to$20,000 of the Company’s common shares before commissions and fees during 2020. The shares may be purchased for cash in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. TheThere is no share repurchase plan may be modified, suspended, terminated or extendedapproved by the Company any time without prior notice.Board for 2023.

For each of the last two years, the Company’s Board of Directors authorized aone-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the years ended December 31, 2017 and 2016, the Company repurchased and retired 433,175 and 643,703 shares, respectively, at weighted average prices per share of $34.94 and $31.07, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended December 31, 2017 and 2016 were $15,155 and $20,026, respectively, or $34.98 and $31.11 per share, respectively.99


Series B Junior Participating Preferred Share Purchase Right

In October 2013, the Company’s Board of Directors declared a dividend of one preferred share purchase right (“Right”) for each outstanding share of the Company’s common stock to shareholders of record at the close of business on November 15, 2013. Each Right entitled the common shareholder to purchase from the Company oneone-hundredth of a share of Series B Junior Participating Preferred Stock, no par value, at a price of $125.00 per oneone-hundredth of such preferred share, subject to adjustment for certain events. The Right was intended to prevent any unsolicited takeover attempt that is unfair and unfavorable to the Company’s shareholders.

The Right would not be exercisable until ten days following a public announcement that a person or group had acquired beneficial ownership of 10% or more of the Company’s common stock or until ten business days after a person or group began a tender or exchange offer that would result in beneficial ownership of 10% or more of the Company’s common stock. The Right could be redeemed or exchanged by the Company for $0.001 per Right at any time until the Right’s expiration date on October 18, 2018. On April 18, 2017, the Company’s Board of Directors terminated the Company’s shareholder rights plan by amending the Right’s expiration date to April 18, 2017.

Share Repurchase Agreements

In conjunction with the issuance of the 4.25% Convertible Notes as described in Note 13 — “Long-Term Debt” underConvertible Senior Notes, the Company used $20,345 of the net proceeds to repurchase and retire an aggregate of 413,600 shares of its common stock at a price of $49.19 per share from institutional investors.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Prepaid During the years ended December 31, 2022 and 2020, the Company repurchased and retired 391,151 and 129,142 shares, respectively, at weighted average prices per share of $43.61 and $39.93, respectively, under these authorized repurchase plans. The total costs of shares repurchased under these plans, inclusive of fees and commissions, during the years ended December 31, 2022 and 2020 were $17,070 and $5,161, respectively, or $43.64 and $39.96 per share, respectively.

On October 13, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on December 16, 2022 to stockholders of record on November 18, 2022.

Warrants

At December 31, 2022, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock at an exercise price of $54.40. The warrants expire on February 26, 2025.

Share Repurchase Forward ContractsAgreement

The Company has two outstanding prepaid share repurchase forward contracts, one of which was entered into with Deutsche Bank AG, London Branch inIn conjunction with the issuance of the 3.875%4.75% Convertible Notes. The other was entered into with Societe Generale in conjunction with the issuance of the 4.25% ConvertibleSenior Notes as described in Note 13 —12 -- “Long-Term Debt” underConvertible Senior Notes. Both Deutsche Bank AG, London Branch and Societe Generale are considered forward counterparties. Under these forward contracts,, the Company made initial upfront payments in exchange for the future deliveries of the Company’s common stock from the forward counterparties. Pursuant to the forward contract entered into in December 2013 with Deutsche Bank AG, London Branch, the Company prepaid $29,923 to repurchase 622,751 shares of the Company’s common stock, which shares will be delivered over a settlement period in 2019. Pursuant to the forward contract entered into in March 2017 with Societe Generale, the Company prepaid $9,400used $66,853 of the net proceeds to repurchase and retire an aggregate of 1,037,600 shares of its common stock at a price of $64.43 per share from institutional investors.

Prepaid Share Repurchase Forward Contract

In March 2022, the Company’s prepaid share repurchase forward contract with Societe Generale, entered into in conjunction with the 2017 issuance of the offering to repurchase 4.25% Convertible Senior Notes, was physically settled with the delivery from Societe Generale of 191,100 shares of the Company’sHCI’s common stock which shares will be delivered over a settlement period in 2022.

Each forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of each forward counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company pays any cash dividends on its common shares, each forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contracts will be treated as retired for financial statement purposes as of the effective date of each forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders votes.

The Company determined that each forward contract does not meet the characteristics of a derivative instrument and, as such, the transaction resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted (loss) earnings per share.Noncontrolling Interests

Preferred Stock

Series A Cumulative Convertible Preferred Stock

As ofAt December 31, 2017 and 2016,2022, there were no Series A Cumulative Convertible Preferred Stock issued or outstanding.81,111,913 shares of TTIG’s common stock outstanding, of which 6,111,913 shares were not owned by HCI.

Series B Junior Participating Preferred Stock (“Series B Preferred”)

In connectionDuring the years ended December 31, 2022 and 2021, TTIG repurchased and retired a total of 69,876 and 48,901 shares, respectively, of its common stock surrendered by its employees to satisfy payroll tax liabilities associated with the declarationvesting of restricted shares. The total cost of purchasing noncontrolling interests during the Right dividends in 2013, the Company’s Board of Directors established and fixed the rights and preferences of the Series B Preferred. Of the authorized shares, the Company designated 400,000 shares as Series B Preferred. Each Series B Preferred will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per common share of the Company. In the event of liquidation, the holders of the Series B Preferred will be entitled to a minimum preferential

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per common share. Each Series B Preferred will have 100 votes per share, voting together as one class on all matters submitted to a vote of shareholders of the Company. Finally, in the event of any merger, consolidation or other transaction in which common shares are exchanged, each Series B Preferred will be entitled to receive 100 times the amount received per common share. The aforementioned rights of Series B Preferred are protected by customary anti-dilution provisions. As ofyears ended December 31, 20172022 and 2016, there were no Series B Preferred issued or outstanding.

Undesignated Preferred Stock

The Company is authorized to issue up to an additional 18,100,000 shares of preferred stock, no par value. The authorized but unissued2021 was $406 and undesignated preferred stock may be issued in one or more series and the shares of each series shall have such rights as determined by the Company’s Board of Directors subject to the rights of the holders of the Series A Cumulative Convertible Preferred Stock and Series B Preferred.$55, respectively.

Note 20 —21 -- Stock-Based Compensation

2012 Omnibus Incentive Plan

The Company currently has outstanding stock-based awards granted under the 2007 Stock Option and Incentive Plan and the 2012 Omnibus Incentive Plan. Only the 2012 Planwhich is currently active and available for future grants. With respect to the 2012 Plan, the Company may grant stock-based awards to employees, directors, consultants, and advisors of the Company. On March 17, 2017, the Company’s board of directors amended the 2012 Omnibus Incentive Plan and reduced the number of shares reserved under the plan from 5,000,000 shares to 3,000,000 shares. At December 31, 2017,2022, there were 1,995,6551,116,205 shares available for grant.

Stock Options

Stock options granted and outstanding under the incentive plansplan vest over periods ranging from immediately vested to fivea period of four years and are exercisable over the contractual term of ten years.years.

100


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

A summary of the stock option activity for the years ended December 31, 2017, 20162022, 2021 and 20152020 is as follows (option amounts not in thousands):

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

Outstanding at January 1, 2015

   230,000   $3.00    3.0 years   $9,256 
  

 

 

       

Exercised

   (120,000  $2.82     
  

 

 

       

Outstanding at December 31, 2015

   110,000   $3.19    2.3 years   $3,482 
  

 

 

       

Exercised

   (60,000  $2.50     
  

 

 

       

Outstanding at December 31, 2016

   50,000   $4.02    2.3 years   $1,773 
  

 

 

       

Granted

   110,000   $40.00     

Exercised

   (30,000  $2.50     
  

 

 

       

Outstanding at December 31, 2017

   130,000   $34.82    8.2 years   $472 
  

 

 

       

Exercisable at December 31, 2017

   20,000   $6.30    3.7 years   $472 
  

 

 

       

 

 

Number of
Options

 

 

Weighted
Average
Exercise
Price

 

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2020

 

 

340,000

 

 

$

43.21

 

 

7.9 years

 

$

1,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

110,000

 

 

$

48.00

 

 

 

 

 

 

Exercised

 

 

(10,000

)

 

$

6.30

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

440,000

 

 

$

45.25

 

 

7.6 years

 

$

3,113

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2021

 

 

440,000

 

 

$

45.25

 

 

6.6 years

 

$

18,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2022

 

 

440,000

 

 

$

45.25

 

 

5.6 years

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2022

 

 

357,500

 

 

$

44.23

 

 

5.3 years

 

$

 

The following table summarizes information about options exercised for the years ended December 31, 2017, 20162022, 2021 and 20152020 (option amounts not in thousands):

  2017   2016   2015 

 

2022

 

 

2021

 

 

2020

 

Options exercised

   30,000    60,000    120,000 

 

 

 

 

 

 

 

 

10,000

 

Total intrinsic value of exercised options

  $1,319   $1,376   $4,551 

 

$

 

 

$

 

 

$

288

 

Tax benefits realized

  $509   $501   $1,697 

 

$

 

 

$

 

 

$

71

 

During the year ended December 31, 2015, a total of 120,000 options were exercised, of which 30,000 options were net settled by surrender of 2,013 shares.

For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company recognized $306, $0$669, $884 and $0,$1,180, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $78, $0$0, $2 and $0$76 for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively. At December 31, 20172022 and 2016,2021, there was $941$336 and $0,$1,005, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 3.0 years.1.0 year.

The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the year ended December 31, 2017:2020:

2020

Expected dividend yield

3.53

3.48

%

Expected volatility

42.86

38.68

%

Risk-free interest rate

1.92

1.63

%

Expected life (in years)

5

101


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Restricted Stock Awards

From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, performance, and market-based conditions. The determination of fair value with respect to the awards containing only service-based conditions is based on the market value of the Company’s stock on the grant date. For awards with market-based conditions, the fair value is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect to the awards with only performance or service-based conditions is based on the market value of the Company’s stock on the grant date.

Information with respect to the activity of unvested restricted stock awards during the years ended December 31, 2017, 20162022, 2021 and 20152020 is as follows:

  Number of
Restricted
Stock
Awards
   Weighted
Average
Grant Date
Fair Value
 

 

Number of
Restricted
Stock
Awards

 

 

Weighted
Average
Grant Date
Fair Value

 

Nonvested at January 1, 2015

   639,705   $28.33 

Nonvested at January 1, 2020

 

 

396,760

 

 

$

41.71

 

Granted

   83,260   $44.46 

 

 

192,680

 

 

$

45.57

 

Vested

   (59,695  $30.13 

 

 

(146,801

)

 

$

40.54

 

Forfeited

   (42,757  $28.15 

 

 

(18,852

)

 

$

43.60

 

  

 

   

Nonvested at December 31, 2015

   620,513   $30.33 

Nonvested at December 31, 2020

 

 

423,787

 

 

$

43.79

 

  

 

   

 

 

 

 

 

 

Granted

   142,440   $32.35 

 

 

564,426

 

 

$

38.79

 

Vested

   (47,152  $42.27 

 

 

(109,791

)

 

$

43.19

 

Cancelled

   (160,000  $26.27 

 

 

(142,760

)

 

$

43.77

 

Forfeited

   (13,298  $39.06 

 

 

(55,665

)

 

$

44.01

 

  

 

   

Nonvested at December 31, 2016

   542,503   $30.81 

Nonvested at December 31, 2021

 

 

679,997

 

 

$

39.72

 

  

 

   

 

 

 

 

 

 

Granted

   154,936   $42.92 

 

 

7,000

 

 

$

69.17

 

Vested

   (75,983  $37.95 

 

 

(333,308

)

 

$

40.01

 

Forfeited

   (23,766  $36.32 

 

 

(11,230

)

 

$

45.00

 

  

 

   

Nonvested at December 31, 2017

   597,690   $32.82 
  

 

   

Nonvested at December 31, 2022

 

 

342,459

 

 

$

39.86

 

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $4,217, $4,198$10,926, $9,642 and $5,212$6,953 for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively. At December 31, 20172022 and 2016,2021, there was approximately $9,101$8,048 and $7,531,$18,995, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 32 months. 2.1 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.

 

 

2022

 

 

2021

 

 

2020

 

Deferred tax benefits recognized

 

$

1,780

 

 

$

1,397

 

 

$

1,296

 

Tax benefits realized for restricted stock and paid dividends

 

$

2,582

 

 

$

1,519

 

 

$

1,448

 

Fair value of vested restricted stock

 

$

13,337

 

 

$

4,742

 

 

$

5,952

 

On October 5, 2022, 231,516 shares of restricted stock issued to employees vested one year subsequent to satisfaction of a market-based vesting condition on October 5, 2021. The Company repurchased and retired a total of 80,339 shares surrendered to satisfy payroll tax liabilities associated with the vesting of these restricted shares. The restricted shares were granted in February 2021 with a grant date fair value of $36.57 per share.

   2017   2016   2015 

Deferred tax benefits recognized

  $970   $1,619   $1,453 

Tax benefits realized for restricted stock and paid dividends

  $1,396   $140   $598 

Fair value of vested restricted stock

  $2,884   $1,993   $1,798 

In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to TypTap Group. In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.

During the years ended December 31, 2022 and 2020, no awards were issued with other than service-based vesting conditions.

102


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

During

Subsidiary Equity Plan

For the years ended December 31, 2017, 20162022 and 2015, no2021, TypTap Group recognized compensation expense related to its stock-based awards were issued with other than time-based vesting conditions.of $3,512 and $3,228, respectively. At December 31, 2022 and 2021, there was $7,876 and $11,230, respectively, of unrecognized compensation expense related to nonvested restricted stock and stock options.

Note 21 —22 -- Employee Benefit PlanPlans

The Company has a 401(k) Safe Harbor Profit Sharing Plan (“401(k) Plan”) that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees are eligible for company matching and discretionary profit sharing contributions. Plan participants may elect to defer up to one hundred percent of theirpre-tax gross wages, subject to annual limitations. The CompanyCompany’s matching contribution is limited to a maximum of four percent of the employee’s annual salary or wage and is fully vested when contributed. Eligibility and vesting of the Company’s discretionary profit sharing contribution is subject to the plan participant’s years of service. During the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company contributed approximately $560, $415$1,037, $794 and $371,$731, respectively, in matching contributions, which are included in general and administrative personnel expenses. There has been no discretionary profit sharing contribution since the plan’s inception.

The Company also maintains benefit plans for its employees in India including a statutory post-employment benefit plan, or gratuity plan, providing defined,lump-sum benefits. The Company’s liability for the gratuity plan reflects the undiscounted benefit obligation payable as of the balance sheet date, which was based upon the employees’ salary and years of service. As ofAt December 31, 20172022 and 2016,2021, the amounts accrued under the gratuity plan were $58$204 and $42,$158, respectively. In addition, the Company provides matching contributions with respect to two defined contribution plans;plans: the Provident Fund and the EmployeesEmployees’ State Insurance Fund, both of which are available to qualifying employees in India. Expense recognized by the Company for all benefit plans in India was $17, $14$46, $28 and $9,$41, respectively, for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.

Note 22 —23 -- Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contracts

As of December 31, 2017,2022, the Company has a contractual obligationsobligation related to threeone multi-year reinsurance contracts. Two of these contracts havecontract. The contract was entered into effective dates of June 1, 20162022 and the other has anCompany’s previous two multi-year reinsurance contracts were commuted effective date of July 1, 2017. These contractsMay 31, 2022. The contract may be cancelled only with the other party’s consent. consent or when its experience account is positive at the end of each contract year. The table below presents the future minimum aggregate premiums amountpremium amounts payable to the reinsurers.reinsurer.

Year

 

Amount

 

2023

 

$

91,350

 

2024

 

 

91,350

 

Total

 

$

182,700

 

Rental Income

The Company leases available space at the Company’s various investment properties to non-affiliates at various terms. In addition, the Company leases boat slips and docks on a long-term basis. Expected annual rental income due under non-cancellable operating leases for all properties owned at December 31, 2022 is as follows:

Year

    

2018*

  $21,792 

2019*

   2,392 

2020*

   1,196 
  

 

 

 

Total

  $25,380 
  

 

 

 

*Premiums payable after December 31, 2017 under one contract are estimated. See Note 14 — “Reinsurance” for additional information.

Year

 

Amount

 

2023

 

$

4,066

 

2024

 

 

4,058

 

2025

 

 

3,900

 

2026

 

 

3,176

 

2027

 

 

2,506

 

Thereafter

 

 

11,853

 

Total

 

$

29,559

 

103


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

LeaseCapital Commitments

The Company leases 15,000 square feet of office spaceAs described in Noida, India. The lease has an initial term of nine years. The monthly rental payment, exclusive of applicable service tax, has increased by five percent every year since the end of the first year of the lease term. In addition,Note 4 -- “Investments” under Limited Partnership Investments, the Company had a leaseis contractually committed to capital contributions for office space in Miami, Florida which expired February 28, 2018.

Provided the leases are not early terminated, minimum future rental payments under operating leases afterlimited partnership interests. At December 31, 2017 are as follows:2022, there was an aggregate unfunded balance of $5,661.

FIGA Assessments

Year

  Amount 

2018

  $147 

2019

   142 

2020

   150 

2021

   157 
  

 

 

 

Total minimum future payments

  $596 
  

 

 

 

Rental expense underIn October 2021, the Florida Office of Insurance Regulation approved a 2022 assessment for the Florida Insurance Guaranty Association (“FIGA”) which is necessary to secure funds for the payment of covered claims of insolvent insurance companies. The 2022 FIGA assessment was levied at 0.70% on collected premiums of all facility leasescovered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, was $336, $333assessed on new and $304, respectively, during the years endedrenewal policies with effective dates beginning January 1, 2022 through December 31, 2017, 20162022.

In March 2022, the Florida Office of Insurance Regulation approved an assessment for FIGA which is necessary to secure funds for the payment of covered claims relating to the liquidation of one insurance company. The FIGA assessment is levied at 1.3% on collected premiums of all covered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, is assessed on new and 2015.renewal policies with effective dates beginning July 1, 2022 through June 30, 2023.

Service AgreementIn August 2022, the Florida Office of Insurance Regulation approved a 2023 assessment for FIGA which is necessary to secure funds for the payment of covered claims relating to the liquidation of two insurance companies. The 2023 FIGA assessment will be levied at 0.70% on collected premiums of all covered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, will be assessed on new and renewal policies with effective dates beginning January 1, 2023 through December 31, 2023.

In connection withThe Company’s insurance subsidiaries, as member insurers, are required to collect and remit the lease for office space in India as described inpass-through assessments to FIGA on a quarterly basis. As of December 31, 2022, the Lease Commitments” above,FIGA assessments payable by the Company signed a long-term contract withwere $2,832.

Note 24 -- Quarterly Results of Operations (Unaudited)

The tables below summarize unaudited quarterly results of operations for 2022, 2021 and 2020.

 

 

Three Months Ended

 

 

 

03/31/22

 

 

06/30/22

 

 

09/30/22

 

 

12/31/22

 

Net premiums earned

 

$

125,763

 

 

$

124,919

 

 

$

106,972

 

 

$

105,918

 

Total revenue

 

 

127,040

 

 

 

125,926

 

 

 

126,654

 

 

 

119,943

 

Losses and loss adjustment expenses

 

 

72,704

 

 

 

86,830

 

 

 

139,794

 

 

 

72,135

 

Policy acquisition and other underwriting expenses

 

 

29,408

 

 

 

26,863

 

 

 

24,678

 

 

 

24,028

 

Interest expense

 

 

601

 

 

 

1,515

 

 

 

2,813

 

 

 

2,839

 

Total expenses

 

 

123,039

 

 

 

137,486

 

 

 

190,256

 

 

 

117,200

 

Income (loss) before income taxes

 

 

4,001

 

 

 

(11,560

)

 

 

(63,602

)

 

 

2,743

 

Net income (loss)

 

 

2,791

 

 

 

(8,542

)

 

 

(51,503

)

 

 

2,651

 

Comprehensive income (loss)

 

 

7

 

 

 

(10,171

)

 

 

(58,804

)

 

 

3,593

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

$

(1.04

)

 

$

(5.66

)

 

$

0.18

 

Diluted*

 

$

0.09

 

 

$

(1.04

)

 

$

(5.66

)

 

$

0.18

 

��

*During the landlord to receive maintenancequarter ended March 31, 2022, the convertible senior notes were antidilutive. During the quarters ended June 30, 2022, September 30, 2022 and facility services. The agreement has the same initial term of nine years. The monthly payment, exclusive of applicable service tax, has also increased by five percent every year since the end of the first year of the lease term.

Provided the agreement is not early terminated, minimum future payments under the service agreement after December 31, 2017 are as follows:2022, the convertible senior notes, stock options and warrants were antidilutive.

104

Year

  Amount 

2018

  $24 

2019

   26 

2020

   27 

2021

   28 
  

 

 

 

Total minimum future payments

  $105 
  

 

 

 

Rental Income

The Company leases available space at the Company’s headquarters and at its various investment properties tonon-affiliates at various terms. Expected annual rental income due undernon-cancellable operating leases for all properties and other investments owned at December 31, 2017 is as follows:

Year

  Amount 

2018

  $4,227 

2019

   4,073 

2020

   3,651 

2021

   3,048 

2022

   2,558 

Thereafter

   13,786 
  

 

 

 

Total

  $31,343 
  

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Capital Commitment

 

 

Three Months Ended

 

 

 

03/31/21

 

 

06/30/21

 

 

09/30/21

 

 

12/31/21

 

Net premiums earned

 

$

87,843

 

 

$

93,004

 

 

$

94,232

 

 

$

102,224

 

Total revenue

 

 

94,874

 

 

 

101,504

 

 

 

99,217

 

 

 

112,320

 

Losses and loss adjustment expenses

 

 

45,751

 

 

 

55,917

 

 

 

62,664

 

 

 

63,193

 

Policy acquisition and other underwriting expenses

 

 

23,065

 

 

 

23,169

 

 

 

23,340

 

 

 

24,158

 

Interest expense

 

 

2,079

 

 

 

2,000

 

 

 

1,664

 

 

 

657

 

Total expenses

 

 

84,772

 

 

 

96,407

 

 

 

105,721

 

 

 

109,782

 

Income (loss) before income taxes

 

 

10,102

 

 

 

5,097

 

 

 

(6,504

)

 

 

2,538

 

Net income (loss)

 

 

6,845

 

 

 

3,830

 

 

 

(4,868

)

 

 

1,435

 

Comprehensive income (loss)

 

 

6,705

 

 

 

3,470

 

 

 

(5,129

)

 

 

1,128

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.82

 

 

$

0.25

 

 

$

(0.72

)

 

$

0.01

 

Diluted**

 

$

0.75

 

 

$

0.24

 

 

$

(0.72

)

 

$

0.01

 

As described in Note 4 — “Investments” underLimited Partnership Investments,**During the Company is contractually committed to capital contributions for four limited partnership interests. Atquarters ended June 30, 2021 and December 31, 2017, there was an aggregate unfunded balance of $14,328.2021, the convertible senior notes were antidilutive. During the quarter ended September 30, 2021, the convertible senior notes, stock options and warrants were antidilutive.

 

 

Three Months Ended

 

 

 

03/31/20

 

 

06/30/20

 

 

09/30/20

 

 

12/31/20

 

Net premiums earned

 

$

61,646

 

 

$

73,449

 

 

$

62,463

 

 

$

64,902

 

Total revenue

 

 

55,380

 

 

 

80,717

 

 

 

104,027

 

 

 

70,313

 

Losses and loss adjustment expenses

 

 

28,078

 

 

 

39,843

 

 

 

51,743

 

 

 

40,372

 

Policy acquisition and other underwriting expenses

 

 

11,826

 

 

 

12,991

 

 

 

14,210

 

 

 

14,832

 

Interest expense

 

 

2,970

 

 

 

3,020

 

 

 

2,856

 

 

 

2,888

 

Total expenses

 

 

54,723

 

 

 

68,894

 

 

 

82,491

 

 

 

67,401

 

Income before income taxes

 

 

657

 

 

 

11,823

 

 

 

21,536

 

 

 

2,912

 

Net income

 

 

547

 

 

 

8,936

 

 

 

15,390

 

 

 

2,707

 

Comprehensive (loss) income

 

 

(1,585

)

 

 

10,286

 

 

 

15,634

 

 

 

2,611

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

1.16

 

 

$

1.97

 

 

$

0.35

 

Diluted***

 

$

0.07

 

 

$

1.08

 

 

$

1.68

 

 

$

0.35

 

***During the quarters ended March 31, 2020 and December 31, 2020, the convertible senior notes were antidilutive.

Note 23 — Quarterly Results of Operations (Unaudited)

The tables below summarize unaudited quarterly results of operations for 2017, 2016 and 2015.

   Three Months Ended 
   03/31/17   06/30/17   09/30/17   12/31/17 

Net premiums earned

  $63,036   $61,847   $43,964   $55,771 

Total revenue

   67,713    67,580    47,490    61,623 

Losses and loss adjustment expenses

   25,529    27,665    89,231    23,204 

Policy acquisition and other underwriting expenses

   9,649    10,070    9,926    10,018 

Interest expense

   3,542    4,378    4,408    4,439 

Total expenses

   48,571    53,275    113,508    44,676 

Income (loss) before income taxes

   19,142    14,305    (66,018   16,947 

Net income (loss)

   12,020    9,542    (40,546   12,091 

Comprehensive income (loss)

   12,949    8,959    (38,792   11,914 

Earnings per share:

        

Basic

  $1.27   $1.05   $(4.44  $1.37 

Diluted*

  $1.15   $0.93   $(4.44  $1.14 

*During the quarter ended September 30, 2017, the convertible senior notes and stock options were antidilutive.

   Three Months Ended 
   03/31/16   06/30/16   09/30/16   12/31/16 

Net premiums earned

  $58,447   $58,528   $63,300   $63,352 

Total revenue

   60,747    61,520    69,808    72,371 

Losses and loss adjustment expenses

   27,080    26,272    25,909    45,406 

Policy acquisition and other underwriting expenses

   11,110    10,879    10,536    10,117 

Interest expense

   2,829    2,611    2,672    2,967 

Total expenses

   51,050    50,291    49,779    66,470 

Income before income taxes

   9,697    11,229    20,029    5,901 

Net income

   6,056    7,024    11,333    4,608 

Comprehensive income

   7,846    10,742    12,487    2,380 

Earnings per share:

        

Basic

  $0.60   $0.71   $1.17   $0.47 

Diluted*

  $0.60   $0.71   $1.10   $0.47 

*During the quarters ended March 31, 2016, June 30, 2016 and December 31, 2016, the convertible senior notes were antidilutive.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

   Three Months Ended 
   03/31/15   06/30/15   09/30/15   12/31/15 

Net premiums earned

  $81,728   $76,387   $62,765   $61,626 

Total revenue

   82,210    79,068    61,262    63,412 

Losses and loss adjustment expenses

   19,039    20,565    26,200    21,420 

Policy acquisition and other underwriting expenses

   9,799    10,443    10,675    11,067 

Interest expense

   2,661    2,679    2,698    2,716 

Total expenses

   41,164    43,485    49,324    45,787 

Income before income taxes

   41,046    35,583    11,938    17,625 

Net income

   25,378    22,022    7,371    11,090 

Comprehensive income

   27,009    19,856    5,023    11,516 

Earnings per share:

        

Basic

  $2.50   $2.17   $0.72   $1.12 

Diluted

  $2.21   $1.93   $0.71   $1.05 

Note 24 —25 -- Regulatory Requirements and Restrictions

The Company has no restrictions on the payment of dividends to its shareholders except those restrictions imposed by the Florida Business Corporation Act and those restrictions imposed by insurance statutes and regulations applicable to the Company’s insurance subsidiaries. As of December 2017,31, 2022, without prior regulatory approval, $95,310$147,732 of the Company’s consolidated retained earnings was free from restriction under the insurance statutes and regulations and available for the payment of dividends in 2018.2023. The following briefly describes certain related and other requirements and restrictions imposed by the states or jurisdiction in which the Company’s insurance subsidiaries are incorporated.

Florida

HCPCI and TypTap, which are domiciled in Florida, prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the Florida Department of Financial Services, Office of Insurance Regulation,FLOIR, which Florida utilizes for determining solvency under the Florida Insurance Code (the “Code”). The commissioner of the FLOIR has the right to permit other practices that may deviate from prescribed practices. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in

state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in Florida. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from entity to entity within a state, and may change in the future.

105


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

The Code requires HCPCI and TypTap to maintain capital and surplus equal to the greater of 10%10% of their respective liabilities or a statutory minimum as defined in the Code. TypTap, the Company’s insurance subsidiary organized in 2015, is subject to a consent order that requires TypTap to maintain minimum capital and surplus of $20,000 during each of the three years ending December 31, 2018. At December 31, 2017,2022, HCPCI wasand TypTap were required to maintain minimum capital and surplus of $25,900.$28,845 and $30,479, respectively. At December 31, 2016,2021, HCPCI wasand TypTap were required to maintain minimum capital and surplus of $22,550. TypTap was approved by the FLOIR in January 2016.$36,173 and $19,334, respectively. HCPCI and TypTap were in compliance with these requirements at December 31, 20172022 and 2016.2021.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

U.S. GAAP differs in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory-basis). These entities’ statutory-basis financial statements are presented on the basis of accounting practices prescribed or permitted by the FLOIR. The FLOIR has adopted the National Association of Insurance Commissioner’sCommissioners (“NAIC”)Accounting Practices and Procedures Manual as the basis of its statutory accounting practices. At December 31, 2017, 20162022 and 2015,2021, HCPCI’s statutory-basis capital and surplus was approximately $153,000, $183,000$103,838 and $195,000,$120,480, respectively. For the year ended December 31, 2017,2022, HCPCI had a statutory-basis net loss of approximately $10,500 as compared with$4,345. For the year ended December 31, 2021, HCPCI had a statutory-basis net income of approximately $5,900 and $57,400$45 as opposed to a statutory-basis net loss of approximately $28,780 for the yearsyear ended December 31, 2016 and 2015, respectively.2020. At December 31, 20172022 and 2016,2021, TypTap’s statutory-basis capital and surplus was approximately $24,000$76,736 and $25,000,$93,360, respectively. TypTap had statutory-basis net losses of approximately $797 and $364 forFor the years ended December 31, 20172022, 2021 and 2016.2020, TypTap’s statutory-basis net losses were approximately $31,739, $29,396 and $10,900, respectively. Statutory-basis surplus differs from stockholders’ equity reported in accordance with U.S. GAAP primarily because policy acquisition costs are expensed when incurred. In addition, the recognition of deferred tax assets is based on different recoverability assumptions.

Since inception to September 2020, HCPCI and TypTap have each has maintained a cash deposit with the Insurance Commissioner of the stateState of Florida in the amount of $300,$300 to meet regulatory requirements. TypTap later increased its cash deposit to $2,000 and placed a U.S. Government security in the amount of $310 with the State during the fourth quarter of 2020 in connection with its continued expansion.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated capital and surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the FLOIR if the dividend or distribution would exceed the larger of (1) the lesser of (a) 10.0%10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward, (2) 10.0%10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25%25% of unrealized capital gains or (3) the lesser of (a) 10.0%10.0% of capital surplus or (b) net investment income plus a three year carry forward with dividends payable constrained to unassigned funds minus 25%25% of unrealized capital gains.

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the FLOIR if (1) the dividend is equal to or less than the greater of (a) 10.0%10.0% of

the insurer’s capital surplus as regards to policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (2) the insurer will have policy holder capital surplus equal to or exceeding 115.0%115.0% of the minimum required statutory capital surplus after the dividend or distribution, (3) the insurer files a notice of the dividend or distribution with the FLOIR at least ten business days prior to the dividend payment or distribution and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115%115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (1) subject to prior approval by the FLOIR or (2) 30 days after the FLOIR has received notice of such dividend or distribution and has not disapproved it within such time.

As a result, only HCPCI was qualified to make dividend payments at December 31, 2022, 2021 and 2020. Without prior written approval from the FLOIR, TypTap was not permitted to make any dividend payments.

106


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

As a result, HCPCI was qualified to make dividend payments at December 31, 2017, 2016 and 2015.

In addition, Florida property and casualty insurance companies are required to adhere to prescribedpremium-to-capital surplus ratios. Florida state law requires that the ratio of 90%90% of written premiums divided by surplus as to policyholders does not exceed 10 to 1 for gross written premiums or 4 to 1 for net written premiums. The required ratioratios of gross and net written premiumpremiums to surplus, which the Company’s insurance companies had exceeded, issubsidiaries have met the requirements for, are summarized below:

 

Years Ended December 31,

 

 

2022

 

2021

 

2020

HCPCI:

 

 

 

 

 

 

Gross

 

3.30 to 1

 

3.21 to 1

 

3.02 to 1

Net

 

1.66 to 1

 

2.01 to 1

 

1.84 to 1

TypTap:

 

 

 

 

 

 

Gross

 

4.11 to 1

 

2.40 to 1

 

2.47 to 1

Net

 

2.34 to 1

 

1.61 to 1

 

1.50 to 1

Bermuda

   Years Ended December 31,
   2017  2016  2015

HCPCI:

      

Gross

  2.01 to 1  1.81 to 1  1.85 to 1

Net

  1.11 to 1  1.07 to 1  1.00 to 1

TypTap:

      

Gross

  0.33 to 1  0.09 to 1  *

Net

  0.27 to 1  0.07 to 1  *

*TypTap began operations in 2016.

Bermuda

The Bermuda Monetary Authority requires Claddaugh Casualty Insurance Company, Ltd. (“Claddaugh”), the Company’s Bermuda domiciled reinsurance subsidiary, to maintain minimum capital and surplus of $2,000.$2,000. At December 31, 20172022 and 2016,2021, Claddaugh’s statutory capital and surplus was approximately $63,000$65,992 and $88,000,$55,350, respectively. For the year ended December 31, 2017,2022, Claddaugh reported a statutory net loss of approximately $5,200 in contrast with statutory net profits of approximately $13,200 and $9,900 for$21,575. For the yearsyear ended December 31, 2016 and 2015, respectively.2021, Claddaugh reported a statutory net loss of approximately $2,850 as opposed to a statutory net income of approximately $1,400 for the year ended December 31, 2020. During 2017, Claddaugh made a dividend payment2022, the Company contributed approximately $31,868 of $20,000capital to the Company.Claddaugh. There were was no cash dividends paid by capital contribution to or return of capital from Claddaugh during 2016 and 2015.2021. During 2020, the Company contributed approximately $22,600 of capital to Claddaugh.

HCPCI and TypTap are subject to risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of minimum capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risks related to it. Pursuant to the RBC requirements, insurers having less statutory capital than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital

inadequacy. At December 31, 20172022 and 2016,2021, the Company’s insurance subsidiaries individually exceeded any applicable minimum risk-based capital requirements and no corrective actions have been required. As of December 31, 2017,2022, the combined statutory capital and surplus and minimum capital and surplus of the Company’s U.S. insurance subsidiaries were approximately $177,000$180,574 and $45,900,$59,324, respectively.

At December 31, 2022 and 2021, restricted net assets represented by the Company’s insurance subsidiaries amounted to $199,503 and $215,812, respectively.

Note 26 -- Related Party Transactions

On December 21, 2022, TTIG issued a demand promissory note to the Company for the principal amount of $15,000. The note bears an annual interest rate of 5.5% with a maturity date for the principal and unpaid accrued interest of December 21, 2025.

On June 1, 2022, TTIG issued a demand promissory note to the Company for the principal amount of $2,994. The note bears an annual interest rate of 3.25% with a maturity date for the principal and unpaid accrued interest of June 1, 2025.

On December 22, 2021, TTIG issued a demand promissory note to the Company for the principal amount of $40,000. The note bears an annual interest rate of 2.0% with a maturity date for the principal and unpaid accrued interest of June 30, 2023. See Note 28 -- “Subsequent Events” for additional information.

On February 12, 2021, the Company committed to provide a revolving line of credit with borrowing capacity of up to $60,000 to TTIG and the credit line would be available until the earlier of June 30, 2022 and the securing of alternative financing. This commitment ended on February 26, 2021 upon completion of the capital investment transaction by TTIG.

107


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 27 -- Condensed Financial Information of HCI Group, Inc.

AsCondensed financial information of December 31, 2017 and 2016, restricted net assets represented by the Company’s insurance subsidiaries amounted to $180,286 and $148,999, respectively.HCI Group, Inc. is as follows:

Balance Sheets

Note 25 — Related Party Transactions

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,755

 

 

$

10,366

 

Fixed-maturity securities, available for sale, at fair value

 

 

34

 

 

 

1,637

 

Equity securities, at fair value

 

 

8,662

 

 

 

11,513

 

Limited partnership investments

 

 

19,446

 

 

 

21,722

 

Note receivable – related party

 

 

58,102

 

 

 

40,022

 

Investment in subsidiaries

 

 

274,785

 

 

 

332,596

 

Property and equipment, net

 

 

805

 

 

 

712

 

Intangible assets, net

 

 

 

 

 

5,374

 

Right-of-use assets - operating leases

 

 

7,631

 

 

 

4,243

 

Income taxes receivable

 

 

 

 

 

3,281

 

Other assets

 

 

1,515

 

 

 

1,595

 

Total assets

 

$

473,735

 

 

$

433,061

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

1,618

 

 

$

2,560

 

Lease liabilities - operating leases

 

 

7,607

 

 

 

4,290

 

Income tax payable

 

 

8,427

 

 

 

 

Deferred income taxes, net

 

 

2

 

 

 

900

 

Revolving credit facility

 

 

 

 

 

15,000

 

Long-term debt

 

 

191,042

 

 

 

23,886

 

Due to related parties

 

 

102,443

 

 

 

63,060

 

Total liabilities

 

 

311,139

 

 

 

109,696

 

Total stockholders’ equity

 

 

162,596

 

 

 

323,365

 

Total liabilities and stockholders’ equity

 

$

473,735

 

 

$

433,061

 

Claddaugh has a reinsurance agreement with Oxbridge Reinsurance Limited (“Oxbridge”) whereby a portion of the business assumed from the Company’s insurance subsidiary, HCPCI, is ceded by Claddaugh to Oxbridge. With respect to the period from June 1, 2015 through May 31, 2016, Oxbridge assumed $11,600 of the total covered exposure for $3,340 in premiums. With respect to the period from June 1, 2016 through May 31, 2017, Oxbridge assumed $6,000 of the total covered exposure for approximately $3,400 in premiums. With respect to the period from June 1, 2017 through May 31, 2018, Oxbridge assumed $7,400 of the total covered exposure for approximately $3,400 in premiums. See Note 14 — “Reinsurance” – which includes the amounts due from and paid by Oxbridge during the years ended December 31, 2017 and 2016 with respect to benefits accrued in connection with the Oxbridge agreements. The premiums charged by Oxbridge are at rates which management believes to be competitive with market rates available to Claddaugh. Oxbridge has deposited funds into trust accounts to satisfy certain collateral requirements under its reinsurance contract with Claddaugh. Trust assets may be withdrawn by Claddaugh, the trust beneficiary, in the event amounts are due under the Oxbridge reinsurance agreement. Among the Oxbridge shareholders are Paresh Patel, the Company’s chief executive officer, who is also chairman of the board of directors for Oxbridge, and members of his immediate family and three of the Company’snon-employee directors including Sanjay Madhu who serves as Oxbridge’s president and chief executive officer.108


During 2015, 2016 and January 2017, one of the Company’s directors was a partner at a law firm that performs certain of the Company’s corporate legal matters. He retired from the practice of law on January 31, 2017. Fees incurred with respect to this law firm for the month ended January 31, 2017 and years ended December 31, 2016 and 2015 were approximately $6, $32 and $50, respectively.

In connection with the acquisition of Pineda Landings described in Note 6 — “Business Acquisition,” the Company incurred and paid $20 of legal fees in 2016 for services provided by a law firm that specializes in real estate transactions at which one immediate family member of the Company’s directors is employed.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Statements of Income

Note 26 — Condensed Financial Information of HCI Group, Inc.

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Net investment income (loss)

 

$

5,498

 

 

$

3,115

 

 

$

(676

)

Net realized investment (losses) gains

 

 

(1,154

)

 

 

3,344

 

 

 

330

 

Net unrealized investment (losses) gains

 

 

(1,609

)

 

 

92

 

 

 

229

 

Credit losses on investments

 

 

 

 

 

 

 

 

(20

)

Other income

 

 

1,138

 

 

 

222

 

 

 

 

Loss on repurchases of convertible senior notes

 

 

 

 

 

 

 

 

(150

)

Interest expense

 

 

(6,876

)

 

 

(5,467

)

 

 

(10,710

)

Debt conversion expense

 

 

 

 

 

(1,754

)

 

 

 

Operating expenses

 

 

(9,877

)

 

 

(9,056

)

 

 

(6,887

)

Loss before income tax benefit and equity in (loss) income of subsidiaries

 

 

(12,880

)

 

 

(9,504

)

 

 

(17,884

)

Income tax benefit

 

 

1,700

 

 

 

2,086

 

 

 

4,024

 

Net loss before equity in (loss) income of subsidiaries

 

 

(11,180

)

 

 

(7,418

)

 

 

(13,860

)

Equity in (loss) income of subsidiaries

 

 

(47,331

)

 

 

9,274

 

 

 

41,440

 

Net (loss) income

 

$

(58,511

)

 

$

1,856

 

 

$

27,580

 

Condensed financial information of HCI Group, Inc. is as follows:109


Balance Sheets

   December 31, 
   2017   2016 
Assets    

Cash and cash equivalents

  $53,755   $2,297 

Fixed-maturity securities, available for sale, at fair value

   34,529    4,483 

Equity securities, available for sale, at fair value

   10,238    7,289 

Equity securities, trading, at fair value

   1,045    —   

Limited partnership investments, at equity

   15,232    21,906 

Note receivable – related party

   7,280    —   

Investment in subsidiaries

   310,779    411,398 

Property and equipment, net

   617    664 

Income tax receivable

   3,023    1,563 

Other assets

   1,019    940 
  

 

 

   

 

 

 

Total assets

  $437,517   $450,540 
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity    

Accrued expenses and other liabilities

  $4,499   $2,952 

Deferred income taxes, net

   2,511    949 

Long-term debt

   211,890    121,436 

Due to related parties

   24,642    81,457 
  

 

 

   

 

 

 

Total liabilities

   243,542    206,794 

Total stockholders’ equity

   193,975    243,746 
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $437,517   $450,540 
  

 

 

   

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Statements of IncomeCash Flows

   Years Ended December 31, 
   2017  2016  2015 

Net investment income (loss)

  $2,799  $1,204  $(2,401

Net realized gains

   367   151   108 

Net unrealized gains

   92   —     —   

Other-than-temporary impairment losses

   (209  (15  (75

Gain on repurchases of convertible senior notes

   —     153   —   

Other income

   —     —     30 

Loss on repurchases of senior notes

   (743  —     —   

Interest expense

   (15,704  (10,346  (10,754

Operating expenses

   (5,489  (5,158  (7,346
  

 

 

  

 

 

  

 

 

 

Loss before income tax benefit and equity in income of subsidiaries

   (18,887  (14,011  (20,438

Income tax benefit

   9,605   4,878   7,835 
  

 

 

  

 

 

  

 

 

 

Net loss before equity in income of subsidiaries

   (9,282  (9,133  (12,603

Equity in income of subsidiaries

   2,389   38,154   78,464 
  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(6,893 $29,021  $65,861 
  

 

 

  

 

 

  

 

 

 

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(58,511

)

 

$

1,856

 

 

$

27,580

 

Adjustments to reconcile net (loss) income to net cash provided by
   operating activities:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

6,430

 

 

 

5,874

 

 

 

4,488

 

Net realized investment losses (gains)

 

 

1,154

 

 

 

(3,344

)

 

 

(330

)

Net unrealized investment losses (gains)

 

 

1,609

 

 

 

(92

)

 

 

(229

)

Net (accretion of discount) amortization of premiums on investments
   in fixed-maturity securities

 

 

(110

)

 

 

3

 

 

 

(42

)

Depreciation and amortization

 

 

1,403

 

 

 

1,490

 

 

 

4,686

 

Net (income) loss from limited partnership investments

 

 

(3,345

)

 

 

(2,608

)

 

 

1,781

 

Distributions from limited partnership interests

 

 

2,123

 

 

 

1,477

 

 

 

844

 

Credit losses on investments

 

 

 

 

 

 

 

 

20

 

Debt conversion expense

 

 

 

 

 

1,754

 

 

 

 

Loss on repurchases of convertible senior notes

 

 

 

 

 

 

 

 

150

 

Equity in loss (income) of subsidiaries

 

 

47,331

 

 

 

(9,274

)

 

 

(41,440

)

Deferred income taxes

 

 

(895

)

 

 

232

 

 

 

(935

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Income taxes

 

 

11,708

 

 

 

5,067

 

 

 

(9,791

)

Other assets

 

 

(2,805

)

 

 

2,679

 

 

 

(629

)

Accrued expenses and other liabilities

 

 

4,078

 

 

 

(5,620

)

 

 

1,096

 

Due to related parties

 

 

38,696

 

 

 

5,360

 

 

 

17,438

 

Net cash provided by operating activities

 

 

48,866

 

 

 

4,854

 

 

 

4,687

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Investments in limited partnership interests

 

 

(1,261

)

 

 

(2,616

)

 

 

(3,376

)

Investment in note receivable – related party

 

 

(15,000

)

 

 

(40,000

)

 

 

(22,000

)

Purchase of fixed-maturity securities

 

 

(52,576

)

 

 

(1,685

)

 

 

(7

)

Purchase of equity securities

 

 

(11,406

)

 

 

(76,786

)

 

 

(35,855

)

Purchase of short-term and other investments

 

 

(42

)

 

 

(1,307

)

 

 

(200

)

Purchase of intangible assets

 

 

(3,800

)

 

 

 

 

 

 

Purchase of property and equipment

 

 

(581

)

 

 

(365

)

 

 

(742

)

Proceeds from sales of fixed-maturity securities

 

 

86

 

 

 

134

 

 

 

447

 

Proceeds from calls, repayments and maturities of fixed-maturity
   securities

 

 

54,178

 

 

 

145

 

 

 

27

 

Proceeds from sales of equity securities

 

 

10,975

 

 

 

78,555

 

 

 

30,688

 

Proceeds from sales, redemptions and maturities of short-term and other
   investments

 

 

570

 

 

 

3,618

 

 

 

537

 

Collection of note receivable – related party

 

 

 

 

 

23,280

 

 

 

 

Distributions received from limited partnership interests

 

 

4,759

 

 

 

2,567

 

 

 

1,614

 

Dividends received from subsidiary

 

 

51,500

 

 

 

41,900

 

 

 

52,500

 

Return of capital from subsidiary

 

 

 

 

 

 

 

 

9

 

Investment in subsidiaries

 

 

(41,868

)

 

 

(10,000

)

 

 

(22,629

)

Net cash (used in) provided by investing activities

 

 

(4,466

)

 

 

17,440

 

 

 

1,013

 

(continued)

110


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Statements of Cash Flows – (Continued)

   Years Ended December 31, 
   2017  2016  2015 

Cash flows from operating activities:

    

Net (loss) income

  $(6,893 $29,021  $65,861 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

    

Stock-based compensation

   2,630   2,878   4,341 

Net realized investment gains

   (367  (151  (108

Net unrealized investment gains

   (92  —     —   

Amortization of premiums on investments in fixed-maturity securities

   51   —     1 

Depreciation and amortization

   6,673   3,899   3,996 

(Income) loss from limited partnership investments

   (1,354  (523  3,277 

Distributions from limited partnership interests

   881   544   12 

Other-than-temporary impairment losses

   209   15   75 

Gain on repurchases of convertible senior notes

   —     (153  —   

Loss on repurchases of senior notes

   743   —     —   

Loss from disposal of property and equipment

   17   —     —   

Equity in income of subsidiaries

   (2,389  (38,154  (78,464

Deferred income taxes

   (4,224  (1,542  (3,218

Changes in operating assets and liabilities:

    

Income taxes receivable

   (1,461  (1,563  2,596 

Other assets

   (106  (129  228 

Accrued expenses and other liabilities

   1,544   (716  689 

Income taxes payable

   —     (1,518  1,279 

Due to related parties

   (54,896  60,075   (14,831
  

 

 

  

 

 

  

 

 

 

Net cash (used in) provided by operating activities

   (59,034  51,983   (14,266
  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

    

Investment in limited partnership interest

   (4,611  (2,710  (19,956

Investment in note receivable – related party

   (7,280  —     —   

Purchase of fixed-maturity securities

   (31,034  (371  (384

Purchase of equity securities, available for sale

   (8,939  (2,853  (3,196

Purchase of equity securities, trading

   (3,544  —     —   

Purchase of property and equipment

   (306  (202  (371

Proceeds from sales of fixed-maturity securities

   667   423   259 

Proceeds from calls, repayments and maturities of fixed-maturity securities

   —     130   —   

Proceeds from sales of equity securities, available for sale

   6,262   2,602   5,475 

Proceeds from sales of equity securities, trading

   2,624   —     —   

Distributions from limited partnership interests

   11,758   —     —   

Dividends received from subsidiary

   105,000   19,000   92,700 

Investment in subsidiaries

   —     (25,250  (78,536
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

   70,597   (9,231  (4,009
  

 

 

  

 

 

  

 

 

 

 

 

Years Ended December 31,

 

 

 

2022

 

 

2021

 

 

2020

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(71,242

)

 

 

(1,314

)

 

 

(1,547

)

Repurchases of common stock under share repurchase plan

 

 

(17,070

)

 

 

 

 

 

(5,161

)

Repurchases of convertible senior notes

 

 

 

 

 

 

 

 

(4,459

)

Debt issuance costs

 

 

(6,041

)

 

 

(152

)

 

 

 

Cash dividends paid

 

 

(15,233

)

 

 

(14,065

)

 

 

(12,694

)

Cash dividends received under share repurchase forward contract

 

 

76

 

 

 

306

 

 

 

306

 

Net (repayment) borrowing under revolving credit facility

 

 

(15,000

)

 

 

(8,750

)

 

 

14,000

 

Proceeds from exercise of common stock options

 

 

 

 

 

 

 

 

63

 

Debt conversion expense paid

 

 

 

 

 

(1,895

)

 

 

 

Proceeds from issuance of long-term debt

 

 

172,500

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(1

)

 

 

(2

)

 

 

(2

)

Net cash provided by (used in) financing activities

 

 

47,989

 

 

 

(25,872

)

 

 

(9,494

)

Net increase (decrease) in cash and cash equivalents

 

 

92,389

 

 

 

(3,578

)

 

 

(3,794

)

Cash and cash equivalents at beginning of year

 

 

10,366

 

 

 

13,944

 

 

 

17,738

 

Cash and cash equivalents at end of year

 

$

102,755

 

 

$

10,366

 

 

$

13,944

 

111


HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Statements of Cash Flows (Continued)

   Years Ended December 31, 
   2017  2016  2015 

Cash flows from financing activities:

    

Repurchases of common stock

   (30,718  (464  (792

Repurchases of common stock under share repurchase plan

   (15,154  (20,026  (1,610

Repurchases of convertible senior notes

   —     (11,347  —   

Repurchases of senior notes

   (40,250  —     —   

Debt issuance costs paid

   (4,975  —     —   

Cash dividends paid to stockholders

   (13,906  (12,438  (12,428

Cash dividends received under share repurchase forward contract

   1,073   747   747 

Proceeds from exercise of stock options

   75   150   263 

Proceeds from issuance of long-term debt

   143,750   —     —   

Tax benefits on stock-based compensation

   —     641   2,295 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   39,895   (42,737  (11,525
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

   51,458   15   (29,800

Cash and cash equivalents at beginning of year

   2,297   2,282   32,082 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

  $53,755  $2,297  $2,282 
  

 

 

  

 

 

  

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts, unless otherwise stated)

Note 27 —28 -- Subsequent Events

Since January 1, 2023, the Tampa office building property that was previously leased to an unaffiliated company has been used in operations by the Company and serves as TTIG’s corporate headquarters. As a result, it is reclassified out of real estate investments to property and equipment on the consolidated balance sheet subsequent to December 31, 2022.

On January 15, 2018,11, 2023, the Company’s Board of Directors declared a quarterly dividend of $0.35$0.40 per common share. The dividends are scheduled for paymentpayable on March 16, 201817, 2023 to stockholders of record on February 16, 2018.17, 2023.

On January 26, 2018, Greenleaf Essence, LLC,12, 2023, HCPCI and TypTap received approval from the FLOIR to discontinue flood insurance policies written in Florida with policy cancellation effective dates no later than May 31, 2023. The reason for discontinuation is primarily attributable to the increased costs and reduced availability of flood reinsurance. The discontinuation will not have a wholly own subsidiary and partymaterial impact to athe Company’s results of operations.

On January 17, 2023, the Company received the final distribution of $18 from FMKT Mel JV, the unconsolidated joint venture whichthat the Company consolidated ashad a 90% equity interest in which was liquidated on December 31, 2022.

On February 5, 2023, the primary beneficiary to its operations, purchasedCompany’s Board of Directors extended the maturity date for the principal and unpaid accrued interest of the noncontrolling member for $539. SeeConsolidated Variable Interest Entity in Note 4 — “Investment.” The transaction was accounted for as an equity transaction. As a result, there was no gain or loss recognized. On the same day, the Company entered into an agreement$40,000 demand promissory note with TTIG to lease office space at a new location in Miami Lakes, Florida for its claims related administration. The lease commenced on March 1, 2018 and has an initial term of approximately three years. Rent expense will be recorded on a straight-line basis over the lease term. Future minimum lease payments, inclusive of sales tax, are as follows:June 30, 2025.

Year

  Amount 

2018

  $116 

2019

   158 

2020

   163 

2021

   41 
  

 

 

 

Total minimum future payments

  $478 
  

 

 

 

On February 8, 2018, the Company granted 40,000 shares of restricted stock and options to purchase 110,000 of the Company’s common shares at an exercise price of $40 per share to its chief executive officer, Paresh Patel. The options will expire on February 8, 2028. These share-based awards were granted pursuant to the 2012 Plan and will vest in equal annual installments over four years, so long as Mr. Patel remains employed by the Company. The grant date fair values of the restricted stock and options were $1,397 and $939, respectively.

On February 20, 2018,14, 2023, the Company entered into a subscriptionconditional agreement with another limited partnershipto sell its retail shopping center investment property in Sorrento, Florida to a non-affiliate for a price of $13,418. Subject to due diligence, the sale is expected to be completed within 45 days after the contract date.

On February 16, 2023, the Company entered into a conditional agreement to sell its retail shopping center investment property in Melbourne, Florida to a non-affiliate for a price of $18,500. Subject to due diligence, the sale is expected to be completed within 45 days after the contract date.

On February 27, 2023, United’s Florida-domiciled residential insurance subsidiary was placed into receivership by the State of Florida due to its financial insolvency. Under the existing contracts, United is responsible for payment of ceded premiums owed to the Company while the Company is responsible for adjudicating and committedpaying claims. At December 31, 2022, the Company had a net amount due to provide $5,000United of capital$1,114 and funds withheld for investment.assumed business in trust accounts totaling $48,772 for the benefit of policies assumed from, and TPA services provided to, United. The capital is callable atCompany cannot predict the discretionactions a receiver might take, which may include cancellation of policies subject to the quota share contracts, termination of the general partner duringTPA service agreement and restrictions on, or use of, funds held in trust. Any such actions could have a commitment period.material adverse effect on the Company’s financial position and results of operations.


112


ITEM 9 –Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A –Controls and Procedures

ITEM 9AControls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report (December 31, 2017)2022). Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.

Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule13a-15(f) and15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2017,2022, our internal control over financial reporting was effective.

Dixon Hughes Goodman,FORVIS, LLP, an independent registered public accounting firm, has audited the 20172022 consolidated financial statements included in this Annual Report on Form10-K and, as part of their audit, has issued an attestation report, included herein, on our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B –Other Information

None.

113


ITEM 9C –Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

114


PART III

ITEM 10 –Directors, Executive Officers and Corporate Governance

Code of Ethics

We have adopted a code of ethics applicable to all of our employees and directors, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer). We have posted the text of our code of ethics to our Internet web site: www.hcigroup.com.www.hcigroup.com. Select “Investor Information” onat the top and then select “Corporate Governance” and then “Code of Conduct.” We intend to disclose any change to or waiver from our code of ethics by posting such change or waiver to our Internet web sitewebsite within the same section as described above.

The other information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.2022.

ITEM 11 –Executive Compensation

The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.2022.

ITEM 12 –Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.2022.

Securities authorized for issuance under equity compensation plans are summarized under Part II – Item 5 of this Form10-K.

The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.

2022.

ITEM 14 –Principal AccountingAccountant Fees and Services

The following table sets forth the aggregate fees for services related to the years ended December 31, 20172022 and 20162021 provided by Dixon Hughes Goodman,FORVIS, LLP, our principal accountant:accountant (in thousands):

  2017   2016 

 

2022

 

 

2021

 

Audit fees (a)

  $370   $388 

 

$

590

 

 

$

540

 

All other fees (b)

   75    —   

 

 

420

 

 

 

182

 

  

 

   

 

 

 

$

1,010

 

 

$

722

 

  $445   $388 
  

 

   

 

 

(a)Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements, review of our quarterly financial statements included in our quarterly reports on Form10-Q, and audit services provided in connection with other statutory and regulatory filings.
(b)All Other Fees represent fees billed for services provided to us not otherwise included in the category above.
(a)
Audit fees represent fees billed for professional services rendered for the audit of our annual financial statements, reviews of our quarterly financial statements included in our quarterly reports on Form 10-Q, and audit services provided in connection with other statutory and regulatory filings.
(b)
All other fees represent fees billed for services provided to us not otherwise included in the category above.

The Audit Committeepre-approved all 20172022 engagements and fees for services provided by our principal accountant. The Independent Registered Public Accounting Firm is FORVIS, LLP (PCAOB Firm ID No. 686) located in Tampa, Florida.

Other information required under this item is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.

2022.

115


PART IV

ITEM 15 –Exhibits,Exhibit and Financial Statement Schedules

(a) Financial Statements, Financial Statement Schedules and Exhibits

(a)Financial Statements, Financial Statement Schedules and Exhibits

(1) Consolidated Financial Statements: See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

(1)Consolidated Financial Statements: See Index to Consolidated Financial Statements in Part II, Item 8 of this Form10-K.

(2) Financial Statement Schedules:

(2)Financial Statement Schedules:

Any supplemental information we are required to file with respect to our property and casualty insurance operations is included in Part II, Item 8 of this Form10-K or is not applicable.

(3) Exhibits: See the exhibit listing set forth below:

(3)Exhibits: See the exhibit listing set forth below:

The following documents are filed as part of this report:

EXHIBIT

NUMBER

DESCRIPTION

3.1

Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 7, 2013.

3.1.1

Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form8-K filed October 18, 2013.

3.2

  3.1.2

Bylaws.Articles of Amendment to Articles of Incorporation cancelling the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed May 15, 2020.

  3.2

Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q 8-K filed August 7, 2013.September 13, 2019.

4.1

Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed November 7, 2013.

4.2

Supplement No.Common Stock Purchase Warrant, dated February 26, 2021, issued by HCI Group, Inc. to CB Snowbird Holdings, L.P. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 1, dated as of January 17, 2013, to the 2021.

  4.3

Indenture, dated as of January  17, 2013,May 23, 2022, by and between HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) and The Bank of New York Mellon Trust Company, N.A., as Trustee. Incorporated by reference to the correspondingly numbered exhibit to our Form8-K filed January 17, 2013.

4.3Form of 8.00% Senior Note due 2020 (included in Exhibit 4.2). Incorporated by reference to the correspondingly numbered exhibit to our Form8-K filed January 17, 2013.
4.4Indenture, dated as of January  17, 2013, between HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.4 to Amendment No. 1the corresponding numbered exhibit to our Registration Statement on FormS-3 (FileNo. 333-185228) 10-Q filed December 10, 2012.August 9, 2022.

  4.6

FormDescription of Subordinated Indenture.Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended. Incorporated by reference to the correspondinglycorresponding numbered exhibit to Amendment No.  1 to our Registration Statement on FormS-3 (FileNo. 333-185228) 10-K filed December 10, 2012.March 12, 2021.

  4.7

  4.9

Rights Agreement, dated as of October 18, 2013, between HCI Group, Inc. and American Stock Transfer  & Trust Company, LLC, which includes as Exhibit A thereto a summary of the terms of the Series B Junior Participating Preferred Stock, as Exhibit B thereto the Form of Right Certificate, and as Exhibit C thereto the Summary of Rights to Purchase Preferred Shares. Incorporated by reference to Exhibit 4.1 to our Form8-K filed October 18, 2013.
  4.7.1Amendment, dated as of April 18, 2017, to the Rights Agreement, by and between the Company and American Stock Transfer  & Trust Company, LLC, dated as of October 18, 2013. Incorporated by reference to Exhibit 4.1 to our Form8-K filed April 24, 2017.
  4.8Indenture, dated December  11, 2013, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. (including Global Note). Incorporated by reference to Exhibit 4.1 to our Form8-K filed December 12, 2013.
  4.9

See Exhibits 3.1, 3.1.1, 3.1.2 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining certain rights of security holders.

  4.10

Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.1 of our Form8-K filed March 3, 2017.

  4.11

Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form8-K filed March 3, 2017.

10.1

Excess of Loss Retrocession Contract (flood), effective June 1, 2014, issued to Homeowners Choice Property  & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 6, 2014.

  10.2**ExecutivePreferred Stock Purchase Agreement, dated May  1, 2007 betweenFebruary 26, 2021, among TypTap Insurance Group, Inc., HCI Group, Inc. (formerly known as Homeowners Choice, Inc.), and Richard R. Allen. Incorporated by reference to the correspondingly numbered exhibit to our Registration Statement on FormS-1 (FileNo. 333-150513), originally filed April 30, 2008, effective July 24, 2008, as amended.

10.3Reimbursement Contract effective June 1, 2016 between Homeowners Choice Property  & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.4Reimbursement Contract effective June 1, 2017 between Homeowners Choice Property  & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund.CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q 8-K filed August 3, 2017.March 1, 2021.

10.2

Amended and Restated Articles of Incorporation of TypTap Insurance Group, Inc. filed February 26, 2021. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

10.3

Shareholders Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., CB Snowbird Holdings, L.P., HCI Group, Inc., and the other shareholders party thereto. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

10.4

Parent Guaranty Agreement, dated February 26, 2021, between HCI Group, Inc. and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

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10.5**

Restated HCI Group, Inc. 2012 Omnibus Incentive Plan.Plan as revised April 26, 2022. Incorporated by reference to Exhibit 99.1 ofthe corresponding numbered exhibit to our Form8-K 10-Q filed March 23, 2017.May 6, 2022.

10.6**

HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 29, 2008.

10.7**

Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q filed August 3, 2017.

10.8

Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2016, issued to Homeowners Choice Property  & Casualty Insurance Company, Inc. by subscribing reinsurers (National Fire). Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.

10.9Multi-Year Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2016, issued to Homeowners Choice Property  & Casualty Insurance Company, Inc. by subscribing reinsurers (Claddaugh). Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.10Working Layer Catastrophe Excess of Loss Specific Retrocession Contract effective June  1, 2016 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.11Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2016,2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to the correspondingly numbered exhibitExhibit 10.131 to our Form10-Q filed August 3, 2016.9, 2022.

10.12

10.9

Property Catastrophe First Excess of Loss Specific Retrocession Contract effective June  1, 2016 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.

10.13Reinstatement Premium Protection Reinsurance Contract effective June 1, 2016 by Homeowners Choice Property  & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.14Property Catastrophe Third Excess of Loss Reinsurance Contract effective June 1, 2016 issued to Homeowners Choice Property  & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.15Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2016 issued to Homeowners Choice Property  & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 3, 2016.
10.16Working Layer Catastrophe Excess of Loss Specific Retrocession Contract effective June  1, 2017 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q filed August 3, 2017.
10.17Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 20172022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to the corresponding number exhibitExhibit 10.132 to our Form10-Q filed August 3, 2017.9, 2022.

10.18

10.10

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.133 to our Form 10-Q filed August 9, 2022.

10.11

Property Catastrophe Second Event Excess of Loss Reinsurance Contract effective June 1, 20172022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.134 to our Form 10-Q filed August 9, 2022.

10.12

Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.135 to our Form 10-Q filed August 9, 2022.

10.13

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.136 to our Form 10-Q filed August 9, 2022.

10.14

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.137 to our Form 10-Q filed August 9, 2022.

10.15

Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.138 to our Form 10-Q filed August 9, 2022.

10.16

Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.139 to our Form 10-Q filed August 9, 2022.

10.17

Sixth Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.140 to our Form 10-Q filed August 9, 2022.

10.18

Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.141 to our Form 10-Q filed August 9, 2022.

10.19

Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.142 to our Form 10-Q filed August 9, 2022.

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10.20

Flood Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.143 to our Form 10-Q filed August 9, 2022.

10.21

Property Catastrophe Shared Multi-Region Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.144 to our Form 10-Q filed August 9, 2022.

10.22

Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.145 to our Form 10-Q filed August 9, 2022.

10.23

Reimbursement Contract effective June 1, 2022 between TypTap Insurance Company and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to Exhibit 10.146 to our Form 10-Q filed August 9, 2022.

10.24

Reimbursement Contract effective June 1, 2022 between Homeowners Choice Property & Casualty Insurance Company, Inc. and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to Exhibit 10.147 to our Form 10-Q filed August 9, 2022.

10.31

Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q filed August 3, 2017.6, 2021.

  10.19

10.32

Reinstatement Premium ProtectionProperty Catastrophe Excess of Loss Reinsurance Contract effective June 1, 20172021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q filed August 3, 2017.6, 2021.

  10.23

10.33

AssumptionReinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.34

Joinder, Second Amendment to Credit Agreement and Modification of Other Loan Documents.Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed January 28, 2021.

10.40

Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective October 15, 2014June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by and betweensubscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.41

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.42

Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.43

Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.44

7th Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and CitizensTypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.45

Flood Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Corporation.Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been

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omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.48**

TypTap Insurance Group, Inc. 2021 Equity Incentive Plan. Incorporated by reference to Exhibit 10.5 of our Form 8-K filed March 1, 2021.

10.49**

Form of Restricted Stock Award Agreement of TypTap Insurance Group, Inc. Incorporated by reference to Exhibit 10.6 of our Form 8-K filed March 1, 2021.

10.50

Exchange Agreement, dated August 26, 2021, by and between HCI Group, Inc. and Citadel Equity Fund Ltd. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 9, 2021.

10.51**

Stock Option Agreement between Paresh Patel and TypTap Insurance Group, Inc. dated October 1, 2021. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed October 7, 2021.

10.52**

TypTap Insurance Group, Inc. 2021 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.2 of our Form 8-K filed October 7, 2021.

10.53

Purchase Agreement, dated May 18, 2022, by and among HCI Group, Inc., JMP Securities LLC and Truist Securities, Inc., as representatives of the several purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form8-K filed January 28, 2015.May 23, 2022.

  10.24

10.57**

Assumption Agreement effective November 9, 2017 by and between Homeowners Choice Property  & Casualty Insurance Company, Inc. and Citizens Property Insurance Corporation. Incorporated by reference to Exhibit 10.24 of our Form8-K filed December 21, 2017.

  10.28**Restricted Stock Agreement dated May  8, 2012 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 30,000 shares of restricted common stock to Richard R. Allen. Incorporated by reference to Exhibit 10.28 of our Form8-K filed May 10, 2012.
  10.30**Restricted Stock Agreement dated May  8, 2012 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 20,000 shares of restricted common stock to Andrew L. Graham. Incorporated by reference to Exhibit 10.30 of our Form8-K filed May 10, 2012.
  10.34**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 400,000 shares of restricted common stock to Paresh Patel. Incorporated by reference to Exhibit 10.34 of our Form8-K filed May 21, 2013. See Exhibit 10.90
  10.35**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Sanjay Madhu. Incorporated by reference to Exhibit 10.35 of our Form8-K filed May 21, 2013. See Exhibit 10.91
  10.36**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to George Apostolou. Incorporated by reference to Exhibit 10.36 of our Form8-K filed May 21, 2013. See Exhibit 10.92
  10.37**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Harish Patel. Incorporated by reference to Exhibit 10.37 of our Form8-K filed May 21, 2013. See Exhibit 10.93

  10.38**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Gregory Politis. Incorporated by reference to Exhibit 10.38 of our Form8-K filed May 21, 2013. See Exhibit 10.94
  10.39**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Anthony Saravanos. Incorporated by reference to Exhibit 10.39 of our Form8-K filed May 21, 2013. See Exhibit 10.95
  10.40**Restricted Stock Agreement dated May  16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Martin Traber. Incorporated by reference to Exhibit 10.40 of our Form8-K filed May 21, 2013. See Exhibit 10.96
  10.52**Restricted Stock Agreement dated August  29, 2013 whereby HCI Group, Inc. issued 10,000 shares of restricted common stock to Anthony Saravanos. Incorporated by reference to Exhibit 10.52 of our Form8-K filed August 29, 2013.
  10.53**Restricted Stock Agreement dated November  12, 2013 whereby HCI Group, Inc. issued 24,000 shares of restricted common stock to Wayne Burks. Incorporated by reference to Exhibit 10.11 of our Form8-K filed November 13, 2013. See Exhibit 10.97
  10.54**Restricted Stock Agreement dated November  12, 2013 whereby HCI Group, Inc. issued 24,000 shares of restricted common stock to James J. Macchiarola. Incorporated by reference to Exhibit 10.12 of our Form8-K filed November  13, 2013. See Exhibit 10.98
  10.56Prepaid Forward Contract, dated December 5, 2013 and effective as of December  11, 2013, between HCI Group, Inc. and Deutsche Bank AG, London Branch. Incorporated by reference to Exhibit 10.1 of our Form8-K filed December 12, 2013.
  10.57Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 ofthe corresponding numbered exhibit to our Form10-Q for the quarter ended March 31, 2014 filed May 1, 2014.

10.58

Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc., as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form8-K filed February 28, 2017.

10.59

Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated by reference to Exhibit 10.1 of our Form8-K filed March 3, 2017.

10.60

Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank. Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018.

10.61

Fourth Amendment to Credit Agreement and Modification of Note and Other Loan Documents, dated November 7, 2022. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 9, 2022.

10.62

Fifth Amendment to Credit Agreement and Modification of Other Loan Documents, dated December 1, 2022. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed December 7, 2022.

10.88**

Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibitExhibit 99.2 to our Form8-K filed January 11, 2017.

  10.89*

10.99**

Employment Agreement between Paresh Patel and HCI Group, Inc. dated December  30, 2016. Incorporated by reference to the exhibit numbered 99.1 to our Form8-K filed December 30, 2016.

  10.90**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.91**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Sanjay Madhu and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.92**Amendment dated March 2, 2016 to Restricted Stock Award Contract between George Apostolou and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.93**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Harish Patel and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.94**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Gregory Politis and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.95**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Anthony Saravanos and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.96**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Martin Traber and HCI Group, Inc. dated May  16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.97**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Wayne Burks and HCI Group, Inc. dated November  12, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.
  10.98**Amendment dated March 2, 2016 to Restricted Stock Award Contract between Jim Macchiarola and HCI Group, Inc. dated November  12, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form10-K filed March 4, 2016.

  10.99**Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibitExhibit 99.1 to our Form8-K filed January 11, 2017.

  10.100*

10.101**

Restricted Stock Award Contract between Mark Harmsworth and HCI Group, Inc. dated December  5, 2016. Incorporated by reference to the corresponding numbered exhibit to our Form10-Q filed August 3, 2017.

  10.101**Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibitExhibit 99.1 to our Form8-K filed February 14, 2018.

10.102**

Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibitExhibit 99.2 to our Form8-K filed February 14, 2018.

10.103**

Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 22, 2019.

10.104**

Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 22, 2019.

10.105**

Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 23, 2020.

10.106**

Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 23, 2020.

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  14

10.107

Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.108

Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.109

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.110

Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.111

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.112

Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.113

Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.114

Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.115

Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.116

Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.117

Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.118

Non-Florida Property Catastrophe $6MXS$4M Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.119

Non-Florida Reinstatement Premium Protection Reinsurance Contract (For $6MXS$4M Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.120

Reimbursement Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.121

Reimbursement Contract effective June 1, 2021 issued to TypTap Insurance Company by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

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10.122

Multi-Year Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.123

Multi-Year Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.124

Property Quota Share Reinsurance Contract effective December 31, 2020 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.125

Renewal Rights Agreement effective January 18, 2021 by and among United Property and Casualty Insurance Company, United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.126

Property Quota Share Reinsurance Contract effective June 1, 2021 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.127

Renewal Rights Agreement effective December 30, 2021 by and among United Property and Casualty Insurance Company, United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.128

Property Quota Share Reinsurance Contract effective December 31, 2021 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.129

Property Quota Share Reinsurance Contract effective June 1, 2022 issued to United Property and Casualty Insurance Company by TypTap Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 9, 2022.

14

Code of Conduct of HCI Group, Inc. Incorporated by reference to the correspondingly numbered exhibit to our Form10-Q filed August 7, 2013.

21

Subsidiaries of HCI Group, Inc.

23.1

Consent of Dixon Hughes GoodmanFORVIS, LLP.

31.1

Certification of the Chief Executive Officer

31.2

Certification of the Chief Financial Officer

32.1

Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350

32.2

Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350

101.INS

Inline XBRL Instance Document.

101.SCH

Inline XBRL Taxonomy Extension Schema.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF

Inline XBRL Definition Linkbase.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

**Management contract or compensatory plan.

SIGNATURES**Management contract or compensatory plan.

121


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HCI GROUP, INC.

HCI GROUP, INC.

March 7, 201810, 2023

By

By

/s/ Paresh Patel

Paresh Patel, Chief Executive Officer and

Chairman of The Board of Directors

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 7, 201810, 2023

By

By

/s/ Paresh Patel

Paresh Patel, Chief Executive Officer and

Chairman of The Board of Directors

(Principal Executive Officer)

March 7, 201810, 2023

By

By

/s/ James Mark Harmsworth

James Mark Harmsworth,

Chief Financial Officer

(Principal Financial and Accounting Officer)

March 7, 201810, 2023

By

By

/s/ George ApostolouKarin Coleman

George Apostolou,

Karin Coleman, Chief Operating Officer and

Director

March 7, 201810, 2023

By

By

/s/ Wayne Burks

Wayne Burks, Director

March 7, 201810, 2023

By

By/s/ James Macchiarola
James Macchiarola, Director
March 7, 2018By

/s/ Sanjay Madhu

Sanjay Madhu, Director

March 7, 201810, 2023

By

By/s/ Harish M. Patel
Harish M. Patel, Director
March 7, 2018By

/s/ Gregory Politis

Gregory Politis, Director

March 7, 201810, 2023

By

By

/s/ Peter Politis

Peter Politis, Director

March 10, 2023

By

/s/ Anthony Saravanos

Anthony Saravanos, Director

March 7, 201810, 2023

By

By

/s/ Martin A. TraberLauren Valiente

Lauren Valiente, Director

Martin A. Traber,

March 10, 2023

By

/s/ Susan Watts

Susan Watts, Director

A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

122