HCI Group, Inc. (Form: 10-Q, Received: 11/09/2021 16:05:00)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q


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

For the quarterly period ended September 30, 2021


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

Commission File Number

001-34126

HCI Group, Inc.

(Exact name of Registrant as specified in its charter)


Florida		20-5961396
(State of Incorporation)		(IRS Employer Identification No.)

3802 Coconut Palm Drive
Tampa, FL 33619
(Address, including zip code, of principal executive offices)

(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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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


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

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The aggregate number of shares of the Registrant’s Common Stock, no par value, outstanding on November 3, 2021 was 10,250,656.

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page

	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets:
	September 30, 2021 (unaudited) and December 31, 2020	1-2
	Consolidated Statements of Income:
	Three and nine months ended September 30, 2021 and 2020 (unaudited)	3
	Consolidated Statements of Comprehensive Income:
	Three and nine months ended September 30, 2021 and 2020 (unaudited)	4
	Consolidated Statement of Equity:
	Three months ended September 30, 2021 (unaudited)	5
	Consolidated Statement of Stockholders’ Equity:
	Three months ended September 30, 2020 (unaudited)	6
	Consolidated Statement of Equity:
	Nine months ended September 30, 2021 (unaudited)	7
	Consolidated Statement of Stockholders’ Equity:
	Nine months ended September 30, 2020 (unaudited)	8
	Consolidated Statements of Cash Flows:
	Nine months ended September 30, 2021 and 2020 (unaudited)	9-11
	Notes to Consolidated Financial Statements (unaudited)	12-52

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52-67

Item 3	Quantitative and Qualitative Disclosures about Market Risk	67-69

Item 4	Controls and Procedures	69


	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	70

Item 1A	Risk Factors	70

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3	Defaults upon Senior Securities	71

Item 4	Mine Safety Disclosures	71

Item 5	Other Information	71

Item 6	Exhibits	72-81

Signatures		81

Certifications

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)


	September 30,		December 31,
	2021		2020
	(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $45,016 and $70,265, respectively and allowance for credit losses: $0 and $588, respectively)	$	46,053	$	71,722
Equity securities, at fair value (cost: $46,771 and $47,029, respectively)		50,223		51,130
Limited partnership investments		26,039		27,691
Investment in unconsolidated joint venture, at equity		370		705
Real estate investments		73,663		74,472
Total investments		196,348		225,720
Cash and cash equivalents		569,134		431,341
Restricted cash		2,400		2,400
Accrued interest and dividends receivable		463		588
Income taxes receivable		—		4,554
Premiums receivable, net (allowance: $3,756 and $2,053, respectively)		43,078		68,382
Prepaid reinsurance premiums		47,968		36,376
Reinsurance recoverable, net of allowance for credit losses:
Paid losses and loss adjustment expenses (allowance: $0 and $0, respectively)		9,658		14,127
Unpaid losses and loss adjustment expenses (allowance: $44 and $85, respectively)		39,468		71,019
Deferred policy acquisition costs		47,129		43,858
Property and equipment, net		13,946		12,767
Right-of-use assets - operating leases		2,576		4,002
Intangible assets, net		10,807		3,568
Funds held in trust for assumed business		79,965		—
Other assets		13,174		22,611
Total assets	$	1,076,114	$	941,313

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets – (Continued)

(Dollar amounts in thousands)


	September 30,		December 31,
	2021		2020
	(Unaudited)
Liabilities and Equity
Losses and loss adjustment expenses	$	203,177	$	212,169
Unearned premiums		334,299		269,399
Advance premiums		19,062		11,370
Assumed reinsurance balances payable		88		87
Reinsurance payable on paid losses and loss adjustment expenses		4,727		—
Accrued expenses		15,187		10,181
Income tax payable		3,574		—
Deferred income taxes, net		3,708		11,925
Revolving credit facility		—		23,750
Long-term debt		78,083		156,511
Lease liabilities - operating leases		2,578		4,014
Other liabilities		31,372		40,771
Total liabilities		695,855		740,177
Commitments and contingencies (Note 21)
Redeemable noncontrolling interest (Note 18)		87,731		—
Equity:
Common stock (no par value, 40,000,000 shares authorized, 9,591,079 and 7,785,617 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)		—		—
Additional paid-in capital		39,905		—
Retained income		250,808		199,592
Accumulated other comprehensive income, net of taxes		799		1,544
Total stockholders’ equity		291,512		201,136
Noncontrolling interests		1,016		—
Total equity		292,528		201,136
Total liabilities, redeemable noncontrolling interest and equity	$	1,076,114	$	941,313

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Revenue
Gross premiums earned	$	149,809		$	106,694		$	420,191		$	306,862
Premiums ceded		(55,577	)		(44,231	)		(145,112	)		(109,304	)
Net premiums earned		94,232			62,463			275,079			197,558
Net investment income		2,520			1,832			9,749			3,244
Net realized investment gains (losses)		1,232			177			4,952			(632	)
Net unrealized investment (losses) gains		(1,869	)		1,340			(649	)		(581	)
Credit losses on investments		—			(70	)		—			(596	)
Policy fee income		1,000			895			2,962			2,571
Gain on involuntary conversion		—			36,969			—			36,969
Other		2,102			421			3,502			1,591
Total revenue		99,217			104,027			295,595			240,124
Expenses
Losses and loss adjustment expenses		62,664			51,743			164,332			119,664
Policy acquisition and other underwriting expenses		23,340			14,210			69,574			39,027
General and administrative personnel expenses		11,537			9,871			31,733			27,969
Interest expense		1,664			2,856			5,743			8,846
Loss on repurchases of convertible senior notes		—			—			—			150
Loss on extinguishment of debt		—			98			—			98
Debt conversion expense		1,273			—			1,273			—
Other operating expenses		5,243			3,713			14,245			10,354
Total expenses		105,721			82,491			286,900			206,108
(Loss) income before income taxes		(6,504	)		21,536			8,695			34,016
Income tax (benefit) expense		(1,636	)		6,146			2,888			9,143
Net (loss) income		(4,868	)		15,390			5,807			24,873
Net income attributable to redeemable noncontrolling interest (Note 18)		(2,202	)		—			(5,175	)		—
Net loss attributable to noncontrolling interests		833			—			1,196			—
Net (loss) income after noncontrolling interests	$	(6,237	)	$	15,390		$	1,828		$	24,873
Basic (loss) earnings per share	$	(0.72	)	$	1.97		$	0.23		$	3.21
Diluted (loss) earnings per share	$	(0.72	)	$	1.70		$	0.22		$	3.03

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Net (loss) income	$	(4,868	)	$	15,390		$	5,807		$	24,873
Other comprehensive (loss) income:
Change in unrealized (loss) gain on investments:
Net unrealized gains (losses) arising during the period		(258	)		247			(341	)		56
Credit losses charged to income		—			70			—			596
Call and repayment gains charged to investment income		—			(15	)		(2	)		(231	)
Reclassification adjustment for net realized gains		(88	)		21			(665	)		(1,133	)
Net change in unrealized (losses) gains		(346	)		323			(1,008	)		(712	)
Deferred income taxes on above change		85			(79	)		247			174
Total other comprehensive (loss) income, net of income taxes		(261	)		244			(761	)		(538	)
Comprehensive (loss) income		(5,129	)		15,634			5,046			24,335
Comprehensive loss attributable to noncontrolling interests		839			—			1,212			—
Comprehensive (loss) income after noncontrolling interests	$	(4,290	)	$	15,634		$	6,258		$	24,335

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Equity

For the Three Months Ended September 30, 2021

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	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 June 30, 2021		8,265,640		$	—	$	—		$	215,612		$	1,054		$	216,666		$	1,383		$	218,049
Net loss		—			—		—			(4,346	)		—			(4,346	)		(522	)		(4,868	)
Net income attributable to redeemable noncontrolling interest		—			—		—			(1,891	)		—			(1,891	)		(311	)		(2,202	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(255	)		(255	)		(6	)		(261	)
Issuance of restricted stock		2,340			—		—			—			—			—			—			—
Forfeiture of restricted stock		(38,855	)		—		—			—			—			—			—			—
Common stock issued on conversions of 4.25% senior notes		1,361,954			—		82,339			—			—			82,339			—			82,339
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			472			472
Common stock dividends ($0.40 per share)		—			—		—			(3,261	)		—			(3,261	)		—			(3,261	)
Stock-based compensation		—			—		2,260			—			—			2,260			—			2,260
Additional paid-in capital shortfall adjustment allocated to retained income		—			—		(44,694	)		44,694			—			—			—			—
Balance at September 30, 2021		9,591,079		$	—	$	39,905		$	250,808		$	799		$	291,512		$	1,016		$	292,528

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended September 30, 2020

(Unaudited)

(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 June 30, 2020		7,794,048		$	—	$	—		$	183,689		$	1,396	$	185,085
Net income		—			—		—			15,390			—		15,390
Total other comprehensive income, net of income taxes		—			—		—			—			244		244
Issuance of restricted stock		2,680			—		—			—			—		—
Forfeiture of restricted stock		(2,369	)		—		—			—			—		—
Repurchase and retirement of common stock		(225	)		—		(12	)		—			—		(12	)
Repurchase and retirement of common stock under share repurchase plan		(457	)		—		(20	)		—			—		(20	)
Common stock dividends ($0.40 per share)		—			—		—			(3,117	)		—		(3,117	)
Stock-based compensation		—			—		2,162			—			—		2,162
Additional paid-in capital shortfall allocated to retained income		—			—		(2,130	)		2,130			—		—
Balance at September 30, 2020		7,793,677		$	—	$	—		$	198,092		$	1,640	$	199,732

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Equity

For the Nine Months Ended September 30, 2021

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	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)		—			—		—			6,692			—			6,692			(885	)		5,807
Net income attributable to redeemable noncontrolling interest		—			—		—			(4,864	)		—			(4,864	)		(311	)		(5,175	)
Cumulative effect of change in accounting principle		—			—		—			(3,018	)		—			(3,018	)		—			(3,018	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(745	)		(745	)		(16	)		(761	)
Issuance of restricted stock		553,426			—		—			—			—			—			—			—
Forfeiture of restricted stock		(49,965	)		—		—			—			—			—			—			—
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		1,361,954			—		82,339			—			—			82,339			—			82,339
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			2,228			2,228
Issuance of warrants, net of issuance costs (Note 18)		—			—		8,640			—			—			8,640			—			8,640
Common stock dividends ($1.20 per share)		—			—		—			(9,713	)		—			(9,713	)		—			(9,713	)
Stock-based compensation		—			—		6,943			—			—			6,943			—			6,943
Additional paid-in capital shortfall adjustment allocated to retained income		—			—		(62,119	)		62,119			—			—			—			—
Balance at September 30, 2021		9,591,079		$	—	$	39,905		$	250,808		$	799		$	291,512		$	1,016		$	292,528

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2020

(Unaudited)

(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		—			—		—			24,873			—			24,873
Total other comprehensive loss, net of income taxes		—			—		—			—			(538	)		(538	)
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		(14,727	)		—		—			—			—			—
Repurchase and retirement of common stock		(29,698	)		—		(1,338	)		—			—			(1,338	)
Repurchase and retirement of common stock under share purchase plan		(129,142	)		—		(5,161	)		—			—			(5,161	)
Common stock dividends ($1.20 per share)		—			—		—			(9,279	)		—			(9,279	)
Stock-based compensation		—			—		6,022			—			—			6,022
Additional paid-in capital shortfall allocated to retained income		—			—		414			(414	)		—			—
Balance at September 30, 2020		7,793,677		$	—	$	—		$	198,092		$	1,640		$	199,732

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2021			2020
Cash flows from operating activities:
Net income after noncontrolling interests	$	1,828		$	24,873
Net income attributable to noncontrolling interests		3,979			—
Net income		5,807			24,873
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		9,229			6,022
Net amortization of premiums (accretion of discounts) on investments in fixed-maturity securities		180			(21	)
Depreciation and amortization		4,276			6,499
Deferred income tax (benefit) expense		(6,989	)		5,032
Net realized investment (gains) losses		(4,952	)		632
Net unrealized investment losses		649			581
Credit loss expense - investments		—			596
Credit loss expense - reinsurance recoverable		(41	)		(363	)
Net (income) loss from unconsolidated joint venture		(423	)		46
Distribution received from unconsolidated joint venture		114			—
Net (income) loss from limited partnership interests		(3,491	)		2,058
Distributions received from limited partnership interests		2,345			650
Loss on repurchases of convertible senior notes		—			150
Loss on extinguishment of debt		—			98
Debt conversion expense		1,273			—
Gain on involuntary conversion		—			(36,969	)
Foreign currency remeasurement loss		48			40
Other non-cash items		37			57
Changes in operating assets and liabilities:
Accrued interest and dividends receivable		125			700
Income taxes		8,128			(1,671	)
Premiums receivable, net		25,304			(8,250	)
Prepaid reinsurance premiums		(11,592	)		(24,187	)
Reinsurance recoverable		36,061			37,404
Deferred policy acquisition costs		(3,271	)		(8,038	)
Funds held in trust for assumed business		(79,965	)		—
Other assets		5,727			(3,552	)
Losses and loss adjustment expenses		(8,992	)		4,648
Unearned premiums		64,900			57,773
Advance premiums		7,692			11,494
Assumed reinsurance balances payable		1			16
Reinsurance payable on paid losses and loss adjustment expenses		4,727			—
Accrued expenses and other liabilities		(8,236	)		1,212
Net cash provided by operating activities		48,671			77,530

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2021			2020
Cash flows from investing activities:
Investments in limited partnership interests		(837	)		(2,951	)
Distributions received from limited partnership interests		3,635			1,092
Distribution received from unconsolidated joint venture		623			—
Purchase of property and equipment		(2,583	)		(5,928	)
Purchase of real estate investments		(657	)		(3,052	)
Purchase of fixed-maturity securities		(10,504	)		(30,200	)
Purchase of equity securities		(72,707	)		(27,175	)
Purchase of short-term and other investments		(1,161	)		—
Compensation received for property relinquished through eminent domain		—			44,000
Proceeds from sales of fixed-maturity securities		18,838			79,284
Proceeds from calls, repayments and maturities of fixed-maturity securities		16,734			60,870
Proceeds from sales of equity securities		81,292			17,385
Proceeds from sales, redemptions and maturities of short-term and other investments		2,414			475
Net cash provided by investing activities		35,087			133,800
Cash flows from financing activities:
Cash dividends paid		(9,943	)		(9,508	)
Cash dividends received under share repurchase forward contract		230			229
Net repayment under revolving credit facility		(23,750	)		(1,000	)
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		(2,542	)		—
Proceeds from issuance of long-term debt		—			10,000
Repayment of long-term debt		(724	)		(16,812	)
Repurchases of convertible senior notes		—			(4,459	)
Repurchases of common stock		(1,308	)		(1,338	)
Repurchases of common stock under share repurchase plan		—			(5,161	)
Purchase of noncontrolling interests		(58	)		—
Debt conversion expense paid		(1,414	)		—
Debt issuance costs		(152	)		(165	)
Net cash provided by (used in) financing activities		54,077			(28,151	)
Effect of exchange rate changes on cash		(42	)		(6	)
Net increase in cash, cash equivalents, and restricted cash		137,793			183,173
Cash, cash equivalents, and restricted cash at beginning of period		433,741			229,918
Cash, cash equivalents, and restricted cash at end of period	$	571,534		$	413,091

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2021			2020
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	1,748		$	6,137
Cash paid for interest	$	6,686		$	7,137
Non-cash investing and financing activities:
Unrealized loss on investments in available-for-sale securities, net of tax	$	(761	)	$	(538	)
Receivable from maturities of fixed-maturity securities	$	18		$	—
Common stock issued on conversions of 4.25% senior notes	$	82,339		$	—
Warrants issued in Centerbridge transaction	$	9,217		$	—
Asset acquired under finance lease	$	7		$	—
Acquisition of intangibles:
Common stock issued	$	5,410		$	—
Contingent consideration payable	$	2,419		$	—

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

(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”) and TypTap Insurance Company (“TypTap”). Both HCPCI and TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida and in several other states. The operations of both insurance subsidiaries 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 the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TypTap Insurance Group, Inc. (“TTIG”) with a separate workforce, board of directors and financial reporting structure. In February 2021, TTIG received a capital investment from a third party representing a minority interest as described in Note 18 -- “Redeemable Noncontrolling Interest.” 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’s reportable segments now include HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Real estate operations are conducted by Greenleaf Capital, LLC, the Company’s real estate subsidiary, which is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities.

Assumed Business

Effective December 31, 2020, United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), ceded a portion of its personal lines insurance business in the states of Connecticut, New Jersey, Massachusetts, and Rhode Island to HCPCI. Under the reinsurance agreement, HCPCI provides 69.5% quota share reinsurance on all of United’s in-force, new and renewal policies in those states from December 31, 2020 through May 31, 2021. In exchange, HCPCI paid United an allowance of $4,400 towards already purchased catastrophe reinsurance and a provisional ceding commission of 25% of premium. That percentage could increase up to 31.5% depending on the direct loss ratio results from the reinsured business.

On January 18, 2021, the Company entered into a renewal rights agreement with United in connection with the assumed business. Under the agreement, the Company acquired all rights to renew and/or replace United’s homeowners insurance policies at the end of their respective policy periods in the states of Connecticut, Massachusetts, New Jersey and Rhode Island. The policy replacement date is June 1, 2021 or such other date as mutually agreed by both parties. The agreement also contains a non-compete clause that does not permit United to engage in marketing, selling, writing, renewing, or servicing any homeowners insurance contracts in these states until July 1, 2024. In return, United received 100,000 shares of HCI’s common stock and will receive a 6% commission on any replacement premium in excess of $80,000. The total commission will not exceed $3,100.

The Company and United agreed to postpone the policy replacement date under the renewal rights agreement to a later date and the Company, through HCPCI and TypTap, entered into a new quota share reinsurance agreement in June 2021 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in those states from June 1, 2021 through May 31, 2022. Under the new agreement, each insurance subsidiary assumes 50% of the business and pays United a ceding commission of 24% of premium.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 2 -- Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements for HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2021 and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2021. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020 included in the Company’s Form 10-K, which was filed with the SEC on March 12, 2021.

In preparing the interim unaudited consolidated financial statements, management was required to make certain judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

Material estimates that are particularly susceptible to significant change in the near term are related to the Company’s losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies specific to reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments, warrants, redeemable noncontrolling interest, intangible assets acquired from United, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements.

All significant intercompany balances and transactions have been eliminated.

Adoption of New Accounting Standards

Accounting Standards Update No. 2020-06. In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-06 (“ASU 2020-06”) Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 removes certain bifurcation models for convertible debt instruments and convertible preferred stock. Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. The amendments also remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amend the derivative scope exception guidance for contracts in an entity’s own equity. In addition, the amendments expand disclosure requirements for convertible instruments and simplify areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The Company elected to early adopt this update on January 1, 2021 using the modified retrospective method. The adoption of this update increased long-term debt by $3,999 and simultaneously decreased beginning retained income and deferred income tax liabilities by $3,018 and $981, respectively. The if-converted method will be the only permissible method for computing the dilutive effect of a convertible debt instrument. Interest expense no longer includes amortization of debt discount.

Funds Held in Trust for Assumed Business

The Company accounts for trust account deposits with regards to the quota share reinsurance agreements between the Company's insurance subsidiaries and United as funds held in trust for assumed business. This balance consists of funds deposited to establish the trust accounts and assumed premiums written net of provisional commission, any catastrophe cost allowance applicable, and paid losses and loss adjustment expenses.

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 sheet. The interest contains rights in dividends, voting, conversion, participation, liquidation preference and redemption. The redemption feature is not solely within the control of TTIG (See Note 18 -- “Redeemable Noncontrolling Interest”).

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 restricted stock 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.

Revenue from Claims Handling Services

The Company provides a claims handling service to a third-party insurance company. 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 handling 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The Company may incur additional costs for outsourced services in connection with the investigation, coverage analysis, adjustment, negotiation, settlement, defense or general handling 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 handling services is included in other revenue in the consolidated statement of income. For the three and nine months ended September 30, 2021, revenues from claims handling services were $1,709 and $1,916, respectively. At September 30, 2021, other assets included $768 of amounts receivable attributable to this service.

Stock-Based Compensation

The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is defined as the period during which a 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 service condition. Restricted stock grants with market conditions are expensed over the derived service period. Expensing market-based awards may be expedited if the conditions are met sooner than anticipated. The Company’s outstanding stock-based awards include stock options, warrants and restricted stock awards with service and market conditions. Compensation expense related to all awards is included in general and administrative personnel expenses. The Company receives a windfall tax benefit for certain stock option exercises 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 statements of income.

Reclassification

In response to the new reporting segment described in Note 1 -- “Nature of Operations,” the prior period segment information has been reclassified to conform with the current period presentation. TypTap and TypTap Management Company were removed from the segment previously referred to as Insurance Operations to form the new TypTap Group segment. The information technology companies which had previously been presented in the Corporate and Other segment were also added to the TypTap Group segment.

Note 3 -- Recent Accounting Pronouncements

Accounting Standards Update No. 2021-01. In January 2021, the FASB issued Accounting Standards Update No. 2021-01 (“ASU 2021-01”) Reference Rate Reform (Topic 848). This update refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities. ASU 2021-01 permits entities to apply certain optional expedients to modifications of interest rate indexes used for margining, discounting or contract price alignment of certain derivatives in connection with reference rate reform activities under way in global financial markets. It also extends optional expedients to account for a

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

derivative contract modified as a continuation of the existing contract and to continue hedge accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. ASU 2021-01 is effective immediately and does not have any material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2021-04. In May 2021, the FASB issued Accounting Standards Update No. 2021-04 (“ASU 2021-04”) Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This update clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. ASU 2021-04 is effective for the Company beginning with the first quarter of 2022 and will be applied prospectively. Early adoption is permitted. This guidance will not have a material impact on the Company’s consolidated financial statements.

Note 4 -- Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.


	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	569,134	$	431,341
Restricted cash		2,400		2,400
Total	$	571,534	$	433,741

Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 5 -- Investments

a) Available-for-Sale Fixed-Maturity Securities

The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At September 30, 2021 and December 31, 2020, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:


	Cost or Amortized		Allowance for Credit			Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Loss			Gain		Loss			Value
As of September 30, 2021
U.S. Treasury and U.S. government agencies	$	12,870	$	—		$	103	$	(20	)	$	12,953
Corporate bonds		27,736		—			851		(62	)		28,525
States, municipalities, and political subdivisions		1,757		—			60		—			1,817
Exchange-traded debt		2,185		—			104		—			2,289
Redeemable preferred stock		468		—			2		(1	)		469
Total	$	45,016	$	—		$	1,120	$	(83	)	$	46,053
As of December 31, 2020
U.S. Treasury and U.S. government agencies	$	13,759	$	—		$	210	$	(1	)	$	13,968
Corporate bonds		49,957		(579	)		1,570		(17	)		50,931
States, municipalities, and political subdivisions		3,023		—			60		(2	)		3,081
Exchange-traded debt		3,491		(9	)		230		(5	)		3,707
Redeemable preferred stock		35		—			—		—			35
Total	$	70,265	$	(588	)	$	2,070	$	(25	)	$	71,722

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021				December 31, 2020
	Cost or		Estimated		Cost or		Estimated
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale
Due in one year or less	$	12,413	$	12,497	$	21,122	$	21,258
Due after one year through five years		23,548		24,209		43,561		44,339
Due after five years through ten years		7,250		7,444		2,731		3,060
Due after ten years		1,805		1,903		2,851		3,065
	$	45,016	$	46,053	$	70,265	$	71,722

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and nine months ended September 30, 2021 and 2020 were as follows:


			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2021	$	4,158	$	94	$	(6	)
Three months ended September 30, 2020	$	1,098	$	13	$	(34	)
Nine months ended September 30, 2021	$	18,838	$	671	$	(6	)
Nine months ended September 30, 2020	$	79,284	$	1,743	$	(610	)

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

Securities with gross unrealized loss positions at September 30, 2021 and December 31, 2020, 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
	Gross			Estimated		Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
As of September 30, 2021	Loss			Value		Loss			Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(20	)	$	4,634	$	—		$	—	$	(20	)	$	4,634
Corporate bonds		(42	)		5,129		(20	)		331		(62	)		5,460
Redeemable preferred stock		(1	)		424		—			—		(1	)		424
Total available-for-sale securities	$	(63	)	$	10,187	$	(20	)	$	331	$	(83	)	$	10,518


	Less Than Twelve Months					Twelve Months or Longer				Total
	Gross			Estimated		Gross		Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized		Fair		Unrealized			Fair
As of December 31, 2020	Loss			Value		Loss		Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(1	)	$	1,337	$	—	$	—	$	(1	)	$	1,337
Corporate bonds		(17	)		3,085		—		—		(17	)		3,085
States, municipalities, and political subdivisions		(2	)		1,268		—		—		(2	)		1,268
Exchange-traded debt		(5	)		336		—		—		(5	)		336
Total available-for-sale securities	$	(25	)	$	6,026	$	—	$	—	$	(25	)	$	6,026

At September 30, 2021 and December 31, 2020, there were 32 and 12 securities, respectively, in an unrealized loss position.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

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



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



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 securities for the three and nine months ended September 30, 2021 and 2020:



	2021			2020
Balance at January 1	$	588		$	—
Credit loss expense		—			439
Reductions for securities sold		(9	)		—
Balance at March 31	$	579		$	439
Credit loss expense		—			87
Reductions for securities exchanged		(579	)		—
Balance at June 30	$	—		$	526
Credit loss expense		—			70
Balance at September 30	$	—		$	596

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At September 30, 2021 and December 31, 2020, 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
September 30, 2021	$	46,771	$	4,592	$	(1,140	)	$	50,223
December 31, 2020	$	47,029	$	4,649	$	(548	)	$	51,130

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2021			2020		2021			2020
Net (losses) gains recognized	$	(916	)	$	1,521	$	2,620		$	(2,363	)
Exclude: Net realized gains (losses) recognized for securities sold		953			181		3,269			(1,782	)
Net unrealized (losses) gains recognized	$	(1,869	)	$	1,340	$	(649	)	$	(581	)

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and nine months ended September 30, 2021 and 2020 were as follows:


			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2021	$	24,781	$	1,141	$	(188	)
Three months ended September 30, 2020	$	4,930	$	244	$	(63	)
Nine months ended September 30, 2021	$	81,292	$	4,266	$	(997	)
Nine months ended September 30, 2020	$	17,385	$	1,213	$	(2,995	)

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. The following table provides information related to the Company’s investments in limited partnerships:


	September 30, 2021						December 31, 2020
	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)	$	6,100	$	2,085		15.37	$	8,131	$	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)		4,198		—		1.76		5,512		—		1.76
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g)		6,179		1,401		0.18		6,513		1,401		0.18
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)		4,338		—		0.47		4,262		—		0.47

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


Value-oriented investments in mature real estate private equity funds and portfolio globally. (b)(j)		5,224		5,494	2.24		3,273		6,818	2.24
Risk-adjusted returns on credit and equity investments, primarily in private equity-owned companies. (b)(k)		—		5,000	—		—		—	—
Total	$	26,039	$	13,980		$	27,691	$	10,304

(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 a ten-year term. Although the capital commitment period has expired, there are still follow-on investments and pending commitments that require additional fundings.

(d)

Expected to have a three-year term from June 30, 2018. The term has been extended for a one-year additional period to June 30, 2022. Although the capital commitment period has ended, the general partner could still request an additional funding of approximately $843 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 a six-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)

Expected to have an eight-year term from November 27, 2019.

(k)

Expected to have an eight-year term after the final admission date.

The following is the summary of aggregated 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. The financial statements of these limited partnerships are audited annually.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Operating results:
Total income	$	(13,796	)	$	259,635		$	359,885		$	(1,421,381	)
Total expenses		(24,828	)		(26,637	)		(105,548	)		(107,157	)
Net (loss) income	$	(38,624	)	$	232,998		$	254,337		$	(1,528,538	)


	September 30,		December 31,
	2021		2020
Balance sheet:
Total assets	$	5,562,430	$	5,529,199
Total liabilities	$	505,843	$	612,048

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

For the three and nine months ended September 30, 2021, the Company recognized net investment income of $1,132 and $3,491, respectively. During the three and nine months ended September 30, 2021, the Company received total cash distributions of $1,535 and $5,980, respectively, including returns on investment of $553 and $2,345, respectively.

For the three and nine months ended September 30, 2020, the Company recognized net investment income of $689 and net investment loss of $2,058, respectively. During the three and nine months ended September 30, 2020, the Company received total cash distributions of $850 and $1,742, respectively, including returns on investment of $72 and $650, respectively.

At September 30, 2021 and December 31, 2020, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $26,474 and $29,272, respectively, and the Company’s maximum exposure to loss aggregated $26,039 and $27,691, respectively.

d) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At September 30, 2021 and December 31, 2020, the Company’s maximum exposure to loss relating to the variable interest entity was $370 and $705, respectively, representing the carrying value of the investment. In September 2021, FMKT Mel JV sold one of its remaining outparcels and recognized a gain on sale of $540. During the three months ended September 30, 2021, the Company received a cash distribution of $737, including return on investment of $114. There were no cash distributions during the nine months ended September 30, 2020. At September 30, 2021 and December 31, 2020, there was no undistributed income from this equity method investment. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Operating results:
Total revenues	$	540		$	—		$	540		$	—
Total expenses		(14	)		(19	)		(70	)		(51	)
Net income (loss)	$	526		$	(19	)	$	470		$	(51	)
The Company’s share of net income (loss)*	$	473		$	(18	)	$	423		$	(46	)

* Included in net investment income in the Company’s consolidated statements of income.


	September 30,		December 31,
	2021		2020
Balance sheet:
Property and equipment, net	$	362	$	705
Cash		37		70
Other		18		13
Total assets	$	417	$	788

Other liabilities	$	6	$	5
Members’ capital		411		783
Total liabilities and members’ capital	$	417	$	788
Investment in unconsolidated joint venture, at equity**	$	370	$	705

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

** Includes the 90% share of FMKT Mel JV’s operating results.

e) Real Estate Investments

Real estate investments consist of the following as of September 30, 2021 and December 31, 2020:


	September 30,			December 31,
	2021			2020
Land	$	39,069		$	39,069
Land improvements		11,917			11,917
Buildings		29,405			29,115
Tenant and leasehold improvements		1,488			1,487
Other		1,229			1,465
Total, at cost		83,108			83,053
Less: accumulated depreciation and amortization		(9,445	)		(8,581	)
Real estate investments	$	73,663		$	74,472

For the nine months ended September 30, 2021, the Company incurred a $21 loss on disposal of assets related to a closure of a restaurant. Depreciation and amortization expense related to real estate investments was $475 and $431 for the three months ended September 30, 2021 and 2020, respectively, and $1,445 and $1,318 for the nine months ended September 30, 2021 and 2020, respectively.

g) Net Investment Income (Loss)

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Available-for-sale fixed-maturity securities	$	266		$	771		$	1,091		$	3,529
Equity securities		322			336			1,013			970
Investment expense		(134	)		(125	)		(388	)		(367	)
Limited partnership investments		1,132			689			3,491			(2,058	)
Real estate investments		305			(34	)		3,646			(299	)
Net income (loss) from unconsolidated joint venture		473			(18	)		423			(46	)
Cash and cash equivalents		156			212			473			1,513
Short-term investments		—			1			—			2
Net investment income	$	2,520		$	1,832		$	9,749		$	3,244

For the nine months ended September 30, 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 to enforce a guaranty of a commercial lease.

h) Other Investments

From time to time, the Company may invest in financial assets other than stocks, mutual funds and bonds. For the three and nine months ended September 30, 2021, net realized gains related to other investments were

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

$191 and $1,018, respectively. There were net realized gains of $17 related to other investments for the three and nine months ended September 30, 2020.

Note 6 -- Comprehensive Income (Loss)

Comprehensive income (loss) includes net income 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 allowance for 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:


	Three Months Ended									Three Months Ended
	September 30, 2021									September 30, 2020
	Before			Income Tax			Net of			Before			Income Tax			Net of
	Tax			Effect			Tax			Tax			Effect			Tax
Net unrealized (losses) gains	$	(258	)	$	(63	)	$	(195	)	$	247		$	61		$	186
Credit losses on investments		—			—			—			70			17			53
Call and repayment gains charged to investment income		—			—			—			(15	)		(4	)		(11	)
Reclassification adjustment for realized (gains) losses		(88	)		(22	)		(66	)		21			5			16
Total other comprehensive (losses) gains	$	(346	)	$	(85	)	$	(261	)	$	323		$	79		$	244


	Nine Months Ended									Nine Months Ended
	September 30, 2021									September 30, 2020
	Before			Income Tax			Net of			Before			Income Tax			Net of
	Tax			Effect			Tax			Tax			Effect			Tax
Net unrealized (losses) gains	$	(341	)	$	(83	)	$	(258	)	$	56		$	14		$	42
Credit losses on investments		—			—			—			596			146			450
Call and repayment gains charged to investment income		(2	)		(1	)		(1	)		(231	)		(56	)		(175	)
Reclassification adjustment for realized gains		(665	)		(163	)		(502	)		(1,133	)		(278	)		(855	)
Total other comprehensive losses	$	(1,008	)	$	(247	)	$	(761	)	$	(712	)	$	(174	)	$	(538	)

Note 7 -- Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair 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 asset, 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 SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Valuation Methodology

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.

Restricted Cash

Restricted cash represents cash held by state authorities and the carrying value approximates fair value.

Fixed-Maturity and Equity Securities

Estimated fair values of the Company’s fixed-maturity and equity 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.

Revolving Credit Facility

The Company’s revolving credit facility is a variable-rate loan. The interest rate is periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, its carrying value approximates fair value.

Long-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
4.25% Convertible senior notes	2037	Quoted price
3.90% Promissory note	2032	Discounted cash flow method/Level 3 inputs
3.75% Callable promissory note	2036	Discounted cash flow method/Level 3 inputs
4.55% Promissory note	2036	Discounted cash flow method/Level 3 inputs

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Assets Measured at Estimated Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2021 and December 31, 2020:


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2021
Financial Assets:
Cash and cash equivalents	$	569,134	$	—	$	—	$	569,134
Restricted cash	$	2,400	$	—	$	—	$	2,400
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	10,253	$	2,700	$	—	$	12,953
Corporate bonds		28,525		—		—		28,525
State, municipalities, and political subdivisions		—		1,817		—		1,817
Exchange-traded debt		2,289		—		—		2,289
Redeemable preferred stock		469		—		—		469
Total available-for-sale securities	$	41,536	$	4,517	$	—	$	46,053
Equity securities	$	50,223	$	—	$	—	$	50,223


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of December 31, 2020
Financial Assets:
Cash and cash equivalents	$	431,341	$	—	$	—	$	431,341
Restricted cash	$	2,400	$	—	$	—	$	2,400
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	11,236	$	2,732	$	—	$	13,968
Corporate bonds		50,931		—		—		50,931
State, municipalities, and political subdivisions		—		3,081		—		3,081
Exchange-traded debt		3,707		—		—		3,707
Redeemable preferred stock		35		—		—		35
Total available-for-sale securities	$	65,909	$	5,813	$	—	$	71,722
Equity securities	$	51,130	$	—	$	—	$	51,130

Assets and Liabilities Carried at Other Than Estimated Fair Value

The following tables present fair value information for assets and liabilities that are carried on the consolidated balance sheets at amounts other than fair value as of September 30, 2021 and December 31, 2020:


	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
As of September 30, 2021
Financial Liabilities:
Long-term debt:
4.25% Convertible senior notes	$	56,227	$	—	$	103,490	$	—	$	103,490
3.90% Promissory note		9,371		—		—		10,598		10,598
3.75% Callable promissory note		7,241		—		—		7,986		7,986
4.55% Promissory note		5,208		—		—		6,159		6,159
Total long-term debt	$	78,047	$	—	$	103,490	$	24,743	$	128,233

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

(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, 2020
Financial Liabilities:
Revolving credit facility	$	23,750	$	—	$	23,750	$	—	$	23,750
Long-term debt:
4.25% Convertible senior notes	$	133,964	$	—	$	147,236	$	—	$	147,236
3.90% Promissory note		9,617		—		—		10,044		10,044
3.75% Callable promissory note		7,502		—		—		7,747		7,747
4.55% Promissory note		5,385		—		—		5,809		5,809
Total long-term debt	$	156,468	$	—	$	147,236	$	23,600	$	170,836

Note 8 -- Intangible Assets, Net

The Company’s intangible assets, net consist of the following:


	September 30,			December 31,
	2021			2020
Anchor tenant relationships (a)	$	1,761		$	1,761
In-place leases		4,215			4,215
Policy renewal rights - United		7,634			—
Non-compete agreement - United (b)		195			—
Total, at cost		13,805			5,976
Less: accumulated amortization		(2,998	)		(2,408	)
Intangible assets, net	$	10,807		$	3,568

The remaining weighted-average amortization periods for the intangible assets at September 30, 2021 are summarized in the table below:


Anchor tenant relationships*		12.6 years
In-place leases		9.9 years
Policy renewal rights - United		(c)

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

(a)

An anchor tenant is a tenant that attracted more customers than other tenants.

(b)

The entire amount was fully amortized in June 2021.

(c)

Will be amortized over four years after the policy replacement date.

The Company recorded intangible assets of $7,829 representing the renewal rights and non-compete agreement described in Note 1 -- “Nature of Operations” in exchange for 100,000 shares of HCI’s common stock and contingent consideration which is a 6% commission on any replacement premium in excess of $80,000. The contingent consideration was estimated at $2,419 which was included in other liabilities on the consolidated balance sheet. Due to the postponement of the renewal and/or replacement of United’s policies as described in Note 1 -- "Nature of Operations,” amortization of the policy renewal rights intangible asset has yet to begin.

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 purchase of the renewal rights and non-compete intangible assets as an asset acquisition. Total consideration paid consisted of $5,410 worth of HCI’s common stock plus a contingent liability of $2,419.

Note 9 -- Other Assets

The following table summarizes the Company’s other assets:


	September 30,		December 31,
	2021		2020
Benefits receivable related to retrospective reinsurance contracts	$	1,819	$	10,920
Prepaid expenses		3,493		2,365
Deposits		969		445
Lease acquisition costs, net		521		453
Other		6,372		8,428
Total other assets	$	13,174	$	22,611

Note 10 -- Revolving Credit Facility

In March 2021, the Company repaid the entire credit facility balance of $23,750. For the three months ended September 30, 2021 and 2020, interest expense was $24 and $108, respectively, including $25 and $39 of amortization of issuance costs, respectively. For the nine months ended September 30, 2021 and 2020, interest expense was $153 and $423, respectively, including $74 and $118 of amortization of issuance costs, respectively. At September 30, 2021, the Company was in compliance with all required covenants with no borrowings outstanding. The borrowing capacity of the facility is now $65,000.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 11 -- Long-Term Debt

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


	September 30,			December 31,
	2021			2020
4.25% Convertible senior notes, due March 1, 2037	$	56,409		$	139,200
3.90% Promissory note, due through April 1, 2032		9,519			9,777
3.75% Callable promissory note, due through September 1, 2036		7,337			7,607
4.55% Promissory note, due through August 1, 2036		5,287			5,470
Finance lease liabilities, due through October 15, 2024		36			43
Total principal amount		78,588			162,097
Less: unamortized discount and issuance costs*		(505	)		(5,586	)
Total long-term debt	$	78,083		$	156,511

* Effective January 1, 2021, the balance includes only unamortized issuance costs. See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies.”

The following table summarizes future maturities of long-term debt as of September 30, 2021, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.


Due in 12 months following September 30,
2021	$	57,409
2022		1,036
2023		1,065
2024		1,106
2025		1,151
Thereafter		16,821
Total	$	78,588

Information with respect to interest expense related to long-term debt is as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2021		2020			2021		2020
Interest Expense:
Contractual interest	$	1,421	$	1,736		$	4,832	$	5,374
Non-cash expense (a)		219		1,053			758		3,174
Capitalized interest (b)		—		(41	)		—		(125	)
	$	1,640	$	2,748		$	5,590	$	8,423

(a)

Includes amortization of debt discount and issuance costs. Amortization of debt discount discontinued effective January 1, 2021. See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies” for additional information.

(b)

Interest was capitalized for a construction project.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Convertible Senior Notes

4.25% Convertible Notes. The Company’s recent cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of September 30, 2021, the conversion rate of the Company’s 4.25% Convertible Notes was 16.4668 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.73 per share.

As the Company’s common shares traded above 130% of the conversion price for at least 20 trading days during the final 30 trading days of both the second and third quarters of 2021, the 4.25% Convertible Notes are convertible by all holders beginning July 1 through December 31, 2021 in accordance with the terms specified in the indenture.

During the third quarter of 2021, the Company entered into various agreements with certain holders of the 4.25% Convertible Notes whereby the holders converted $82,480 in aggregate principal of 4.25% Convertible Notes for aggregate consideration of 1,356,835 shares of HCI’s common stock and $1,414 of cash consideration. These transactions were accounted for as induced conversions based on the limited period of time the offers were open and the inclusion of cash consideration being one of the conversion options specified in the indenture. As such, the Company recognized debt conversion expense of $1,273 during the three months ended September 30, 2021 consisting of the difference between the fair value of all consideration transferred and the fair value of common stock issued.

An additional $311 in aggregate principal of 4.25% Convertible Notes were converted by election from holders of 4.25% Convertible Notes for aggregate consideration of 5,119 shares of HCI’s common stock during the three months ended September 30, 2021.

As of September 30, 2021, the remaining amortization period of the debt issuance costs for the 4.25% Convertible Notes was expected to be 5 months.

Note 12 -- Reinsurance

The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and 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, the Company is entitled to a 30% ceding commission on ceded premiums written. The reinsurance premiums under one flood catastrophe excess of loss reinsurance 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

(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 contracts on premiums written and earned is as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Premiums Written:
Direct	$	143,426		$	116,464		$	396,781		$	364,942
Assumed		30,840			(13	)		88,311			(92	)
Gross written		174,266			116,451			485,092			364,850
Ceded		(55,577	)		(44,231	)		(145,112	)		(109,304	)
Net premiums written	$	118,689		$	72,220		$	339,980		$	255,546
Premiums Earned:
Direct	$	120,763		$	106,337		$	346,788		$	303,956
Assumed		29,046			357			73,403			2,906
Gross earned		149,809			106,694			420,191			306,862
Ceded		(55,577	)		(44,231	)		(145,112	)		(109,304	)
Net premiums earned	$	94,232		$	62,463		$	275,079		$	197,558

During the three and nine months ended September 30, 2021, the Company recognized ceded losses of $1,830 and $2,424, respectively, as a reduction in losses and loss adjustment expenses. During the three and nine months ended September 30, 2020, the Company recognized ceded losses of $1,871 and $2,220, respectively, as a reduction in losses and loss adjustment expenses. At September 30, 2021 and December 31, 2020, there were 54 and 38 reinsurers, respectively, participating in the Company’s reinsurance program. Total net amounts recoverable and receivable from reinsurers at September 30, 2021 and December 31, 2020 were $49,126 and $85,146, respectively. Approximately 66.4% of the gross reinsurance recoverable balance at September 30, 2021 was receivable from three reinsurers, including the Florida Hurricane Catastrophe Fund, a state trust fund. Based on all available information considered in the rating-based method, the Company recognized decreases in credit loss expense of $13 and $41 for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2020, the Company derecognized credit loss expenses of $14 and $363, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $44 and $85 at September 30, 2021 and December 31, 2020, respectively.

The Company has reinsurance contracts that include retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three and nine months ended September 30, 2021, the Company recognized reductions in premiums ceded of $1,364 and $9,619, respectively, related to these adjustments in the consolidated statements of income. For the three and nine months ended September 30, 2020, the Company recognized reductions in premiums ceded of $4,680 and $10,440, respectively.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Amounts receivable pursuant to retrospective provisions are reflected in other assets. At September 30, 2021 and December 31, 2020, other assets included $1,819 and $10,920, respectively. In June 2021, the Company received $18,720 of premium refund under the retrospective reinsurance contract that ended May 31, 2021. Management believes the credit risk associated with the collectability of accrued benefits is minimal as the amount receivable is concentrated with two reinsurers and the Company monitors the creditworthiness of these reinsurers based on available information about each reinsurer’s financial condition.

Effective January 2021, the Company began providing quota share reinsurance on all in-force, new and renewal policies issued by United. The policies were issued in the states of Connecticut, New Jersey, Massachusetts and Rhode Island. For the three and nine months ended September 30, 2021, assumed premiums written related to United were $30,840 and $88,311, respectively. At September 30, 2021, the Company had a net balance of $6,636 due from United, consisting of premiums receivable of $14,951 offset by ceding commission payable of $3,588 and payable on paid losses and loss adjustment expenses of $4,727.

Note 13 -- Losses and Loss Adjustment Expenses

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

The Company primarily writes insurance in the states which could be exposed to hurricanes or other natural catastrophes. The occurrence of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.

Activity in the liability for losses and LAE is summarized as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Net balance, beginning of period*	$	154,901		$	123,129		$	141,065		$	98,174
Incurred, net of reinsurance, related to:
Current period		53,834			50,543			147,064			116,839
Prior period		8,830			1,200			17,268			2,825
Total incurred, net of reinsurance		62,664			51,743			164,332			119,664
Paid, net of reinsurance, related to:
Current period		(31,663	)		(21,175	)		(59,265	)		(36,988	)
Prior period		(22,237	)		(9,386	)		(82,467	)		(36,539	)
Total paid, net of reinsurance		(53,900	)		(30,561	)		(141,732	)		(73,527	)
Net balance, end of period		163,665			144,311			163,665			144,311
Add: reinsurance recoverable before allowance for credit losses		39,512			75,034			39,512			75,034
Gross balance, end of period	$	203,177		$	219,345		$	203,177		$	219,345

* Net balance represents beginning-of-period liability for unpaid losses and LAE less beginning-of-period reinsurance recoverable for unpaid losses and LAE.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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 estimates are adjusted. During the three and nine months ended September 30, 2021, the Company recognized losses related to prior periods of $8,830 and $17,268, respectively, primarily to increase the reserve for the 2020 loss year resulting from increased litigation with regards to Hurricane Sally and Tropical Storm Eta. Losses and LAE for the three and nine months ended September 30, 2021 included estimated losses, net of reinsurance, of approximately $19,830 and $43,330, respectively, related to policies assumed from United, approximately $9,767 and $12,367, respectively, of which pertained to TypTap.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 14 -- Segment Information

The Company identifies its operating divisions or segments 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 now has four 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 operations, 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 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 performance based on revenue and operating income.

For the three months ended September 30, 2021 and 2020, revenues from the HCPCI insurance operations segment before intracompany elimination represented 73.9% and 59.1%, respectively, and revenues from the TypTap Group segment represented 24.0% and 12.6%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2021 and 2020, revenues from the HCPCI insurance operations segment before intracompany elimination represented 76.4% and 73.8%, respectively, and revenues from the TypTap Group segment represented 20.7% and 12.7%, respectively, of total revenues of all operating segments. At September 30, 2021 and December 31, 2020, HCPCI insurance operations’ total assets represented 60.2% and 68.9%, respectively, and TypTap Group’s total assets represented 26.3% and 16.7%, respectively, of the combined assets of all operating segments.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The following tables present 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.


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Three Months Ended September 30, 2021	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned	$	98,256		$	51,553		$	—	$	—		$	—		$	149,809
Premiums ceded		(36,955	)		(20,135	)		—		—			1,513			(55,577	)
Net premiums earned		61,301			31,418			—		—			1,513			94,232
Net income from investment portfolio		831			102			—		172			778			1,883
Policy fee income		693			307			—		—			—			1,000
Other		2,087			480			2,336		489			(3,290	)		2,102
Total revenue		64,912			32,307			2,336		661			(999	)		99,217
Expenses:
Losses and loss adjustment expenses		36,928			24,224			—		—			1,512			62,664
Amortization of deferred policy acquisition costs		12,402			9,250			—		—			—			21,652
Other policy acquisition expenses		633			1,110			—		—			(55	)		1,688
Interest expense		—			1			231		1,432			—			1,664
Depreciation and amortization		18			342			576		171			(603	)		504
Debt conversion expense		—			—			—		1,273			—			1,273
Personnel and other operating expenses		5,896			7,685			814		3,734			(1,853	)		16,276
Total expenses		55,877			42,612			1,621		6,610			(999	)		105,721
Income (loss) before income taxes	$	9,035		$	(10,305	)	$	715	$	(5,949	)	$	—		$	(6,504	)
Total revenue from non-affiliates (c)	$	65,629		$	32,701		$	1,997	$	402
Gross premiums written	$	118,280		$	55,987

(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)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Three Months Ended September 30, 2020	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned (c)	$	89,283		$	19,854		$	—	$	—		$	(2,443	)	$	106,694
Premiums ceded		(36,503	)		(10,171	)		—		—			2,443			(44,231	)
Net premiums earned		52,780			9,683			—		—			—			62,463
Net income from investment portfolio		1,866			363			—		1,340			(290	)		3,279
Policy fee income		684			211			—		—			—			895
Other		759			24			39,353		290			(3,036	)		37,390
Total revenue		56,089			10,281			39,353		1,630			(3,326	)		104,027
Expenses:
Losses and loss adjustment expenses		44,338			7,405			—		—			—			51,743
Amortization of deferred policy acquisition costs		10,433			3,536			—		—			—			13,969
Other policy acquisition expenses		160			531			—		—			56			747
Interest expense		—			—			463		2,631			(238	)		2,856
Depreciation and amortization		21			279			567		179			(585	)		461
Loss on repurchases of convertible senior notes		—			—			—		—			—			—
Loss on extinguishment of debt		—			—			98		—			—			98
Personnel and other operating expenses		5,896			4,527			1,325		3,428			(2,559	)		12,617
Total expenses		60,848			16,278			2,453		6,238			(3,326	)		82,491
(Loss) income before income taxes	$	(4,759	)	$	(5,997	)	$	36,900	$	(4,608	)	$	—		$	21,536
Total revenue from non-affiliates (d)	$	55,227		$	10,778		$	38,859	$	1,208
Gross premiums written	$	89,102		$	27,349

(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 consist of $86,840 from HCPCI and $2,443 from a reinsurance company.

(d)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2021	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned	$	300,827		$	119,364		$	—	$	—		$	—		$	420,191
Premiums ceded		(104,236	)		(42,229	)		—		—			1,353			(145,112	)
Net premiums earned		196,591			77,135			—		—			1,353			275,079
Net income from investment portfolio		5,261			933			—		4,059			3,799			14,052
Policy fee income		2,106			856			—		—			—			2,962
Other		3,420			1,130			9,849		1,316			(12,213	)		3,502
Total revenue		207,378			80,054			9,849		5,375			(7,061	)		295,595
Expenses:
Losses and loss adjustment expenses		110,008			52,976			—		—			1,348			164,332
Amortization of deferred policy acquisition costs		43,906			20,541			—		—			—			64,447
Other policy acquisition expenses		2,170			3,071			—		—			(114	)		5,127
Interest expense		—			91			972		4,950			(270	)		5,743
Depreciation and amortization		56			942			1,737		711			(1,841	)		1,605
Debt conversion expense		—			—			—		1,273			—			1,273
Personnel and other operating expenses		17,317			21,007			3,332		8,901			(6,184	)		44,373
Total expenses		173,457			98,628			6,041		15,835			(7,061	)		286,900
Income (loss) before income taxes	$	33,921		$	(18,574	)	$	3,808	$	(10,460	)	$	—		$	8,695
Total revenue from non-affiliates (c)	$	206,743		$	80,893		$	8,833	$	4,641
Gross premiums written	$	323,490		$	161,602

(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)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2020	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned (c)	$	255,273		$	54,829		$	—	$	—		$	(3,240	)	$	306,862
Premiums ceded		(93,466	)		(19,078	)		—		—			3,240			(109,304	)
Net premiums earned		161,807			35,751			—		—			—			197,558
Net income (loss) from investment portfolio		3,787			383			3		(1,714	)		(1,024	)		1,435
Policy fee income		1,987			584			—		—			—			2,571
Other		1,431			87			44,331		1,695			(8,984	)		38,560
Total revenue		169,012			36,805			44,334		(19	)		(10,008	)		240,124
Expenses:
Losses and loss adjustment expenses		97,621			22,043			—		—			—			119,664
Amortization of deferred policy acquisition costs		27,103			9,222			—		—			—			36,325
Other policy acquisition expenses		1,789			1,419			—		—			—			3,208
Interest expense		—			1			1,434		8,090			(679	)		8,846
Depreciation and amortization		63			820			1,862		466			(1,793	)		1,418
Loss on repurchases of convertible senior notes		—			—			—		150			—			150
Loss on extinguishment of debt		—			—			98		—			—			98
Personnel and other operating expenses		16,161			13,244			3,982		10,548			(7,536	)		36,399
Total expenses		142,737			46,749			7,376		19,254			(10,008	)		206,108
Income (loss) before income taxes	$	26,275		$	(9,944	)	$	36,958	$	(19,273	)	$	—		$	34,016
Total revenue from non-affiliates (d)	$	167,891		$	37,421		$	42,907	$	(996	)
Gross premiums written	$	302,142		$	62,708

(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 consist of $252,033 from HCPCI and $3,240 from a reinsurance company.

(d)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

The following table presents segment assets reconciled to the Company’s total assets in the consolidated balance sheets:


	September 30,			December 31,
	2021			2020
Segments:
HCPCI Insurance Operations	$	616,948		$	648,600
TypTap Group		294,931			157,581
Real Estate Operations		129,198			128,383
Corporate and Other		61,629			29,022
Consolidation and Elimination		(26,592	)		(22,273	)
Total assets	$	1,076,114		$	941,313

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 15 -- Leases

The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases:


	September 30,		December 31,
	2021		2020
Operating leases:
ROU Assets	$	2,576	$	4,002
Liabilities	$	2,578	$	4,014
Finance leases:
ROU Assets	$	86	$	79
Liabilities	$	36	$	43

The following table summarizes 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 63 months	Yes	(a), (b)
Office space	3 to 10 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 September 30, 2021, maturities of lease liabilities were as follows:


	Leases
	Operating		Finance
Due in 12 months following September 30,
2021	$	1,464	$	20
2022		1,188		15
2023		—		2
Total lease payments		2,652		37
Less: interest and foreign taxes		74		1
Total lease obligations	$	2,578	$	36

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The following table provides quantitative information with regards to the Company’s operating and finance leases.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Lease costs:
Finance lease costs:
Amortization – ROU assets*	$	4	$	4	$	13	$	13
Interest expense		—		1		1		2
Operating lease costs*		386		404		1,231		560
Short-term lease costs*		100		44		250		135
Total lease costs	$	490	$	453	$	1,495	$	710
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases					$	1	$	1
Operating cash flows – operating leases					$	1,237	$	566
Financing cash flows – finance leases					$	14	$	13

	September 30,
	2021
Weighted-average remaining lease term:
Finance leases (in years)		3.0
Operating leases (in years)		2.6
Weighted-average discount rate:
Finance leases (%)		3.5
Operating leases (%)		2.8

* Included in other operating expenses of the consolidated statements of income.

The following table summarizes the Company’s operating leases in which the Company is a lessor:


		Renewal	Other Terms and
Class of Assets	Initial Term	Option	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 16 -- Income Taxes

During the three months ended September 30, 2021, the Company recorded approximately $1,636 of income tax benefit, which resulted in an effective tax rate of 25.2%. During the three months ended September 30, 2020, the Company recorded approximately $6,146 of income taxes, which resulted in an effective tax rate of 28.5%. The decrease in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the non-deductibility of certain executive compensation during the three months ended September 30, 2020. During the nine months ended September 30, 2021 and 2020, the Company recorded approximately $2,888 and $9,143, respectively, of income taxes, which resulted in effective tax rates of 33.2% and 26.9%, respectively. The increase in the effective tax rate in 2021 as compared with the corresponding period in the prior year was primarily attributable to an increase in non-deductible compensation expense related to

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

restricted stock granted to certain executives. The Company’s estimated annual effective tax rate differs from the statutory federal tax rate due to state and foreign income taxes as well as certain nondeductible and tax-exempt items.

Note 17 -- Earnings Per Share

U.S. GAAP requires the Company to use the two-class method in computing basic earnings per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings per share during periods of net income or loss. For a majority-owned subsidiary, its basic and diluted earnings 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 per share at a consolidated level.

A summary of the numerator and denominator of the basic and diluted earnings per common share is presented below.


	Three Months Ended								Three Months Ended
	September 30, 2021								September 30, 2020
	Loss			Shares (a)		Per Share			Income			Shares (a)		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Net (loss) income	$	(4,868	)						$	15,390
Less: Net income attributable to redeemable noncontrolling interest		(2,202	)							—
Less: TypTap Group's net loss attributable to non-HCI common stockholders and TypTap Group's participating securities		774								—
Net (loss) income attributable to HCI		(6,296	)							15,390
Less: Loss (income) attributable to participating securities		537								(865	)
Basic (Loss) Earnings Per Share:
(Loss) income allocated to common stockholders		(5,759	)		8,023	$	(0.72	)		14,525			7,356	$	1.97
Effect of Dilutive Securities:
Stock options*		—			—					—			37
Convertible senior notes* (b)		—			—					1,903			2,284
Diluted (Loss) Earnings Per Share:
(Loss) income available to common stockholders and assumed conversions	$	(5,759	)		8,023	$	(0.72	)	$	16,428			9,677	$	1.70


(a)	Shares in thousands.
(b)	See Adoption of New Accounting Standards under Note 2 -- “Summary of Significant Accounting Policies” for additional information.
*	For the three months ended September 30, 2021, stock options and convertible senior notes were excluded due to anti-dilutive effect.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	Nine Months Ended							Nine Months Ended
	September 30, 2021							September 30, 2020
	Income			Shares (a)		Per Share		Income			Shares (a)		Per Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Net income	$	5,807						$	24,873
Less: Net income attributable to redeemable noncontrolling interest		(5,175	)						—
Less: TypTap Group's net loss attributable to non-HCI common stockholders and TypTap Group's participating securities		1,191							—
Net income attributable to HCI		1,823							24,873
Less: Income attributable to participating securities		(37	)						(1,309	)
Basic Earnings Per Share:
Income allocated to common stockholders		1,786			7,676	$	0.23		23,564			7,350	$	3.21
Effect of Dilutive Securities:
Stock options		—			182				—			17
Convertible senior notes* (b)		—			—				5,787			2,330
Warrants		—			234				—			—
Diluted Earnings Per Share:
Income available to common stockholders and assumed conversions	$	1,786			8,092	$	0.22	$	29,351			9,697	$	3.03


(a)	Shares in thousands.
(b)	See Adoption of New Accounting Standards under Note 2 -- “Summary of Significant Accounting Policies” for additional information.
*	For the nine months ended September 30, 2021, convertible senior notes were excluded due to anti-dilutive effect.

Note 18 -- 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 proceeds will be used for TypTap’s operations and continued expansion. The Company incurred $6,262 of related issuance costs. 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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 determined by an independent valuation firm selected by TTIG’s board of directors. Management determined that the redemption was not probable at September 30, 2021.

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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The following table summarizes the activity of redeemable noncontrolling interest during the nine months ended September 30, 2021:



Balance at January 1, 2021	$	—
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		458
Accretion - increasing dividend rates		336
Balance at March 31, 2021	$	85,892
Increase (decrease):
Accrued cash dividends		1,250
Accretion - increasing dividend rates		929
Balance at June 30, 2021	$	88,071
Increase (decrease):
Dividends paid		(2,542	)
Accrued cash dividends		1,250
Accretion - increasing dividend rates		952
Balance at September 30, 2021	$	87,731

*Net decrease related to warrants of $8,640.

For the three months ended September 30, 2021, net income attributable to redeemable noncontrolling interest was $2,202, consisting of accrued cash dividends of $1,250 and accretion related to increasing dividend rates of $952. For the nine months ended September 30, 2021, net income attributable to redeemable noncontrolling interest was $5,175, consisting of accrued cash dividends of $2,958 and accretion related to increasing dividend rates of $2,217.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 19 -- Equity

Stockholders’ Equity

Common Stock

The Company’s 2020 stock repurchase plan was considered to be expired and there was no new stock repurchase plan approved by the Board of Directors during 2021.

On December 19, 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020. On March 13, 2020, the Board approved a new stock repurchase plan for 2020 to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended September 30, 2020, the Company repurchased and retired a total of 457 shares at a weighted average price per share of $43.76 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2020 was $20 or $43.79 per share. During the nine months ended September 30, 2020, the Company repurchased and retired a total of 129,142 shares at a weighted average price per share of $39.93 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2020 was $5,161 or $39.96 per share.

On July 7, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on September 17, 2021 to stockholders of record on August 20, 2021.

Warrants

At September 30, 2021, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock. These warrants were issued by HCI to the Lead Investor described in Note 18 -- “Redeemable Noncontrolling Interest.”

Noncontrolling Interests

According to its amended Articles of Incorporation, TTIG is authorized to issue 183 million shares of common stock with a par value of $0.001 per share, and 37,502,000 shares of preferred stock. In February 2021, TTIG issued 10 million shares of Series A Preferred Stock (see Note 18 -- “Redeemable Noncontrolling Interest”). At September 30, 2021, there were 81,278,175 shares of TTIG’s common stock outstanding, of which 6,278,175 shares were not owned by HCI.

In May 2021, TTIG repurchased and retired a total of 52,015 shares of its common stock surrendered by its employees to satisfy payroll tax liabilities associated with the vesting of restricted shares. The total cost of purchasing noncontrolling interests was $58.

Note 20 -- Stock-Based Compensation

2012 Omnibus Incentive Plan

The Company currently has outstanding stock-based awards granted under the Plan which is currently active and available for future grants. At September 30, 2021, there were 1,117,275 shares available for grant.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Stock Options

Stock options granted and outstanding under the incentive plans vest over periods ranging from immediately vested to five years and are exercisable over the contractual term of ten years.

A summary of the stock option activity for the three and nine months ended September 30, 2021 and 2020 is as follows (option amounts not in thousands):


						Weighted
				Weighted		Average
				Average		Remaining	Aggregate
	Number of			Exercise		Contractual	Intrinsic
	Options			Price		Term	Value
Outstanding at January 1, 2021		440,000		$	45.25	7.6 years	$	3,113
Outstanding at March 31, 2021		440,000		$	45.25	7.3 years	$	13,464
Outstanding at June 30, 2021		440,000		$	45.25	7.1 years	$	23,883
Outstanding at September 30, 2021		440,000		$	45.25	6.8 years	$	29,238
Exercisable at September 30, 2021		275,000		$	43.40	6.3 years	$	18,782

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 March 31, 2020		440,000		$	45.25	8.3 years	$	—
Outstanding at June 30, 2020		440,000		$	45.25	8.1 years	$	1,184
Outstanding at September 30, 2020		440,000		$	45.25	7.8 years	$	2,321
Exercisable at September 30, 2020		165,000		$	42.17	7.0 years	$	1,334

The following table summarizes information about options exercised for the three and nine months ended September 30, 2021 and 2020 (option amounts not in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Options exercised		—		—		—		10,000
Total intrinsic value of exercised options	$	—	$	—	$	—	$	288
Tax benefits realized	$	—	$	—	$	—	$	71

For the three months ended September 30, 2021 and 2020, the Company recognized $221 and $300, respectively, of compensation expense which was included in general and administrative personnel expenses. For the nine months ended September 30, 2021 and 2020, the Company recognized $663 and $880, respectively, of compensation expense. Deferred tax benefits related to stock options were $3 and $19 for the three months ended September 30, 2021 and 2020, respectively, and $4 and $57 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, there was $1,226 and $1,889, 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 1.8 years.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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 nine months ended September 30, 2020:


	2020
Expected dividend yield		3.48	%
Expected volatility		38.68	%
Risk-free interest rate		1.63	%
Expected life (in years)		5

Restricted Stock Awards

From time to time, the Company has granted and may grant restricted stock awards to its 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 common 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Information with respect to the activity of unvested restricted stock awards during the three and nine months ended September 30, 2021 and 2020 is as follows:


	Number of			Weighted
	Restricted			Average
	Stock			Grant Date
	Awards			Fair Value
Nonvested at January 1, 2021		423,787		$	43.79
Granted		548,086		$	36.95
Vested		(41,250	)	$	42.18
Cancelled		(141,600	)	$	43.76
Forfeited		(2,050	)	$	45.67
Nonvested at March 31, 2021		786,973		$	39.11
Granted		3,000		$	76.00
Vested		(68,541	)	$	43.80
Cancelled		(1,160	)	$	45.96
Forfeited		(9,060	)	$	46.44
Nonvested at June 30, 2021		711,212		$	38.71
Granted		2,340		$	96.60
Forfeited		(38,855	)	$	38.05
Nonvested at September 30, 2021		674,697		$	38.95

Nonvested at January 1, 2020		396,760		$	41.71
Granted		45,000		$	44.97
Vested		(31,250	)	$	40.97
Forfeited		(7,138	)	$	42.60
Nonvested at March 31, 2020		403,372		$	42.12
Granted		145,000		$	45.59
Vested		(104,926	)	$	41.16
Forfeited		(5,220	)	$	43.75
Nonvested at June 30, 2020		438,226		$	43.48
Granted		2,680		$	54.36
Vested		(625	)	$	41.02
Forfeited		(2,369	)	$	45.60
Nonvested at September 30, 2020		437,912		$	43.54

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $2,039 and $1,862 for the three months ended September 30, 2021 and 2020, respectively, and $6,280 and $5,142 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, there was approximately $21,628 and $13,666, 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 2.9 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 three and nine months ended September 30, 2021 and 2020.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Deferred tax benefits recognized	$	420	$	353	$	879	$	956
Tax benefits realized for restricted stock and paid dividends	$	70	$	47	$	1,482	$	1,286
Fair value of vested restricted stock	$	—	$	26	$	4,742	$	5,625

In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to TypTap Group (See Note 1 -- “Nature of Operations”). In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Subsidiary Equity Plan

On February 26, 2021, TTIG’s Board of Directors approved the 2021 Equity Incentive Plan (the “2021 Plan”) which is an incentive plan denominated in TTIG’s common shares. The 2021 Plan provides for broad-based equity awards to employees and nonemployee directors of TypTap Group. The maximum number of shares that may be issued under the 2021 Plan is 7,000,000 shares. In February 2021, TTIG issued a total of 5,749,300 shares of restricted stock to the employees who transitioned to TypTap Group. For the three months ended September 30, 2021, TypTap Group recognized compensation expense related to restricted stock of $472, and for the nine months ended September 30, 2021, TypTap Group recognized compensation expense related to restricted stock of $2,286.

On September 27, 2021, TTIG’s Board of Directors terminated the 2021 Plan and replaced it with the 2021 Omnibus Incentive Plan (the “2021 Omnibus Plan”). The initial maximum number of shares that may be issued under the 2021 Omnibus Plan is 7,700,000 shares. At September 30, 2021, there was approximately $4,846 of total unrecognized compensation expense related to nonvested restricted stock.

Note 21 -- Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contracts

As of September 30, 2021, the Company has contractual obligations related to two multi-year reinsurance contracts. These contracts may be cancelled only with the other party’s consent or when their respective experience accounts are positive at the end of each contract year. The table below presents the future minimum aggregate premium amounts payable to the reinsurer.


Due in 12 months following September 30,
2021	$	9,095
2022*		9,095
2023*		4,093
Total	$	22,283

*Premiums payable after May 31, 2022 are estimated.

Capital Commitments

As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At September 30, 2021, there was an aggregate unfunded balance of $13,980.

Note 22 -- Related Party Transactions

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 has ended on February 26, 2021 after the investment transaction described in Note 18 -- “Redeemable Noncontrolling Interest.”

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 23 -- Subsequent Events

On October 1, 2021, TTIG granted options to purchase an aggregate of 6,450,000 shares of its common stock at an exercise price of $23 per share to its chief executive officer, Paresh Patel, and certain other executives. The options will have a 10-year term and were granted pursuant to TTIG's 2021 Omnibus Plan. The options will vest over a four-year period, so long as the optionees remain employed by TTIG. TTIG is currently in the process of determining the grant date fair value of the options.

On October 5, 2021, a significant portion of market-based restricted stock awards that were granted in February 2021 met the condition for vesting. As a result, the expensing of an unrecognized balance of $7,130 will be accelerated and the expense related to these awards will be recognized over the next twelve months.

On October 15, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 17, 2021 to stockholders of record on November 19, 2021.

During the months of October and November 2021, an additional $27,846 and $4,340, respectively, of aggregate principal amount of the 4.25% Convertible Notes was converted for 458,533 and 71,464 shares, respectively, of HCI's common stock and aggregate cash consideration of $481. The Company recognized debt conversion expense of $481 for certain of the conversions.

In 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 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, 2022 through December 31, 2022. The Company’s insurance subsidiaries, as member insurers, will be required to collect and remit the pass-through assessments to FIGA on a quarterly basis.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2021. Unless the context requires otherwise, as used in this Form 10-Q, the terms “HCI,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in whole dollars unless specified otherwise.

Forward-Looking Statements

In addition to historical information, this quarterly report contains forward-looking statements as defined under federal securities laws. Such statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. 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 effects 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 the novel coronavirus (“COVID-19”) pandemic; and other risks and uncertainties detailed herein and from time to time in our SEC reports.

OVERVIEW – General

HCI Group, Inc. is a Florida-based InsurTech company with operations in property and casualty insurance, reinsurance, real estate and information technology. After the reorganization of our business in the first quarter of 2021, we now manage our operations in the following organizational segments, based on managerial emphasis and evaluation of financial and operating performances:

HCPCI Insurance Operations



Property and casualty insurance



Reinsurance and other auxiliary operations

TypTap Group



Property and casualty insurance



Information technology

Real Estate Operations

Other Operations



Holding company operations

For the three months ended September 30, 2021 and 2020, revenues from HCPCI insurance operations before intracompany elimination represented 73.9% and 59.1%, respectively, and revenues from TypTap Group represented 24.0% and 12.6%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2021 and 2020, revenues from HCPCI insurance operations before intracompany

elimination represented 76.4% and 73.8%, respectively, and revenues from TypTap Group represented 20.7% and 12.7%, respectively, of total revenues of all operating segments. At September 30, 2021 and December 31, 2020, HCPCI insurance operations’ total assets represented 60.2% and 68.9%, respectively, and TypTap Group’s total assets represented 26.3% and 16.7%, respectively, of the combined assets of all operating segments. See Note 14 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

HCPCI Insurance Operations

Property and Casualty Insurance

HCPCI provides various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. HCPCI is authorized to write residential property and casualty insurance in the states of Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas. Currently, Florida is HCPCI’s primary market.

Effective January 2021, HCPCI began providing 69.5% quota share reinsurance on all in-force, new and renewal policies issued by United Property & Casualty Insurance Company, a subsidiary of United Insurance Holdings Corporation (“United”) in the states of Connecticut, New Jersey, Massachusetts and Rhode Island. In exchange, HCPCI paid United an allowance of $4,400,000 towards previously purchased catastrophe reinsurance and a provisional ceding commission of 25% of premium. That percentage can increase up to 31.5% depending on the direct loss ratio results from the reinsured business.

We and United agreed to postpone the policy replacement date under the renewal rights agreement to a later date and we, through HCPCI and TypTap, entered into a new quota share reinsurance agreement in June 2021 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in those states from June 1, 2021 through May 31, 2022. Under the new agreement, HCPCI assumes 50% of the business and pays United a ceding commission of 24% of premium. Annual premiums from the total assumed business approximate $120,000,000. HCPCI will receive 50% of the total premiums.

Reinsurance and other auxiliary operations

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

TypTap Group

Property and Casualty Insurance

TypTap Insurance Group, Inc. ("TTIG"), our majority-owned subsidiary, currently has four subsidiaries: TypTap Insurance Company (“TypTap”), TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India. TTIG is primarily engaged in the property and casualty insurance business and is currently using in-house developed technology to collect and analyze claims and other supplemental data to generate savings and efficiency for its insurance operations.

TypTap, TTIG’s insurance subsidiary, has been the primary source of our organic growth in gross written premium since 2016. TypTap’s policies in force have increased from 6,721 in January 2018 to 48,897 at September 30, 2021. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida. As of October 26, 2021, TypTap has been approved to offer homeowners coverage in 17 states outside of Florida. In addition to the expansion in TypTap business, we also expect future growth from the United policies assigned to TypTap through the renewal rights agreement acquired by HCI.

In connection with the aforementioned new quota share agreement with United, TypTap assumes 50% of the business. TypTap will receive approximately $60,000,000 of annual premiums and pays a ceding commission of 24% of premium.

Information Technology

Our information technology operations include a team of experienced software developers with extensive knowledge in developing web-based products and applications for mobile device. The operations, which are in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products or services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors. These products include SAMSTM, Harmony, AtlasViewer and ClaimColony®.

Real Estate Operations

Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes. Properties used in operations consist of one Tampa office building and a secondary insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.

Other Operations

Holding company operations

Activities of our holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a reportable segment comprise the operations of this segment.

Recent Events

On October 1, 2021, TTIG granted options to purchase an aggregate of 6,450,000 shares of its common stock at an exercise price of $23 per share to its chief executive officer, Paresh Patel, and certain other executives. The options will have a 10-year term and were granted pursuant to TTIG's 2021 Omnibus Incentive Plan. The options will vest over a four-year period, so long as the optionees remain employed by TTIG. TTIG is currently in the process of determining the grant date fair value of the options.

On October 15, 2021, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 17, 2021 to stockholders of record on November 19, 2021.

During the months of October and November 2021, an additional $27,846,000 and $4,340,000, respectively, of aggregate principal amount of the 4.25% Convertible Notes was converted for 458,533 and 71,464 shares, respectively, of HCI's common stock and aggregate cash consideration of approximately $481,000. We recognized debt conversion expense of $481,000 for certain of the conversions.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020 (dollar amounts in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Revenue
Gross premiums earned	$	149,809		$	106,694		$	420,191		$	306,862
Premiums ceded		(55,577	)		(44,231	)		(145,112	)		(109,304	)
Net premiums earned		94,232			62,463			275,079			197,558
Net investment income		2,520			1,832			9,749			3,244
Net realized investment gains (losses)		1,232			177			4,952			(632	)
Net unrealized investment (losses) gains		(1,869	)		1,340			(649	)		(581	)
Credit losses on investments		—			(70	)		—			(596	)
Policy fee income		1,000			895			2,962			2,571
Gain on involuntary conversion		—			36,969			—			36,969
Other income		2,102			421			3,502			1,591
Total revenue		99,217			104,027			295,595			240,124
Expenses
Losses and loss adjustment expenses		62,664			51,743			164,332			119,664
Policy acquisition and other underwriting expenses		23,340			14,210			69,574			39,027
General and administrative personnel expenses		11,537			9,871			31,733			27,969
Interest expense		1,664			2,856			5,743			8,846
Loss on repurchases of convertible senior notes		—			—			—			150
Loss on extinguishment of debt		—			98			—			98
Debt conversion expense		1,273			—			1,273			—
Other operating expenses		5,243			3,713			14,245			10,354
Total expenses		105,721			82,491			286,900			206,108
(Loss) income before income taxes		(6,504	)		21,536			8,695			34,016
Income tax (benefit) expense		(1,636	)		6,146			2,888			9,143
Net (loss) income		(4,868	)		15,390			5,807			24,873
Net income attributable to noncontrolling interests		(1,369	)		—			(3,979	)		—
Net (loss) income after noncontrolling interests	$	(6,237	)	$	15,390		$	1,828		$	24,873
Ratios to Net Premiums Earned:
Loss Ratio		66.50	%		82.84	%		59.74	%		60.57	%
Expense Ratio		45.69	%		49.23	%		44.56	%		43.76	%
Combined Ratio		112.19	%		132.07	%		104.30	%		104.33	%
Ratios to Gross Premiums Earned:
Loss Ratio		41.83	%		48.50	%		39.11	%		39.00	%
Expense Ratio		28.74	%		28.82	%		29.17	%		28.17	%
Combined Ratio		70.57	%		77.32	%		68.28	%		67.17	%
Earnings Per Share Data:
Basic	$	(0.72	)	$	1.97		$	0.23		$	3.21
Diluted	$	(0.72	)	$	1.70		$	0.22		$	3.03

Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020

Our results of operations for the three months ended September 30, 2021 reflect a net loss of approximately $4,868,000 or $0.72 diluted loss per share, compared with a net income of approximately $15,390,000 or $1.70 diluted earnings per share, for the three months ended September 30, 2020. The quarter-over-quarter decrease was primarily due to a one-time gain on involuntary conversion of $36,969,000 included in our 2020 results, a $10,921,000 increase in losses and loss adjustment expenses, a $9,130,000 increase in policy acquisition and other underwriting expenses, and a $1,530,000 increase in other operating expenses, offset by an increase in net premiums earned of $31,769,000, a $1,681,000 increase in other income, and a $1,192,000 decrease in interest expense.

Revenue

Gross Premiums Earned on a consolidated basis for the three months ended September 30, 2021 and 2020 were approximately $149,809,000 and $106,694,000, respectively. HCPCI gross premiums earned were $98,256,000 for the three months ended September 30, 2021 compared to $86,840,000 for the three months ended September 30, 2020. The increase included $29,046,000 of gross premiums earned from the United insurance policies assumed. TypTap’s gross premiums earned were $51,553,000 versus $19,854,000 for the same comparative period with the increase due to a greater number of policies in force from the organic growth in TypTap’s business and from the business assumed from United beginning June 1, 2021.

Premiums Ceded for the three months ended September 30, 2021 and 2020 were approximately $55,577,000 and $44,231,000, respectively, representing 37.1% and 41.5%, respectively, of gross premiums earned. The $11,346,000 increase was primarily attributable to higher reinsurance costs for the 2021 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion. Reinsurance costs were offset by a reduction in premiums ceded attributable to retrospective provisions under multi-year reinsurance agreements.

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 as defined in a quota share agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. For the three months ended September 30, 2021, premiums ceded included a decrease of $1,364,000 related to retrospective provisions compared with a decrease of $4,680,000 for the three months ended September 30, 2020. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended September 30, 2021 and 2020 totaled approximately $118,689,000 and $72,220,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2021 resulted from an increase in gross premiums written from the United insurance policies assumed and the growth of TypTap business. We had approximately 156,000 policies in force at September 30, 2021 (excluding policies assumed from United) as compared with approximately 157,000 policies in force at September 30, 2020.

Net Premiums Earned for the three months ended September 30, 2021 and 2020 were approximately $94,232,000 and $62,463,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended September 30, 2021 and 2020 (amounts in thousands):


	Three Months Ended
	September 30,
	2021			2020
Net Premiums Written	$	118,689		$	72,220
Increase in Unearned Premiums		(24,457	)		(9,757	)
Net Premiums Earned	$	94,232		$	62,463

Net Investment Income for the three months ended September 30, 2021 and 2020 was approximately $2,520,000 and $1,832,000, respectively. The $688,000 increase was primarily attributable to a $782,000 increase in income from limited partnership and real estate investments and a $491,000 increase in income from our investment in an unconsolidated joint venture, offset by a $505,000 decrease in interest income from fixed-maturity security investments. See Net Investment Income (loss) under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Realized Investment Gains for the three months ended September 30, 2021 and 2020 were approximately $1,232,000 and $177,000, respectively. The $1,055,000 increase was primarily attributable to net gains from selling equity securities.

Net Unrealized Investment Losses for the three months ended September 30, 2021 were approximately $1,869,000 versus net unrealized investment gains of approximately $1,340,000 for the three months ended September 30, 2020. The decrease was primarily due to the sales of equity securities with aggregate net gains during the quarter.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $62,664,000 and $51,743,000 for the three months ended September 30, 2021 and 2020, respectively. The increase was attributable to additional losses associated with the growth in TypTap’s business during 2021 and was offset by lower third quarter 2021 losses at HCPCI when compared with 2020. TypTap experienced an additional $5,150,000 of losses related to growth in its homeowners business, $6,535,000 of losses from policies assumed from United, and $2,887,000 in combined losses from hurricanes Henri and Ida. HCPCI third quarter 2021 losses were comparatively lower due to 2020 losses of $17,679,000 from Hurricane Sally, $4,850,000 of losses from policies acquired from Anchor Property & Casualty Insurance Company, offset by third quarter 2021 losses of $6,535,000 from policies assumed from United, and $2,305,000 resulting from re-estimation of losses from Hurricane Sally. Both companies recorded additional losses during the quarter totaling a combined $4,165,000 from re-assessing losses from Tropical Storm Eta, a fourth quarter 2020 event. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2021 and 2020 were approximately $23,340,000 and $14,210,000 on a consolidated basis, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, and premium taxes. Policy acquisition expenses for HCPCI insurance operations were $13,035,000 for the three months ended September 30, 2021 compared to $10,593,000 for the three months ended September 30, 2020. The increase was due to amortization of increased costs associated with the policies assumed from United. TypTap Group policy acquisition expenses were $10,360,000 versus $4,067,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months and the policies assumed from United.

Debt Conversion Expense for the three months ended September 30, 2021 was approximately $1,273,000, representing costs associated with certain of the conversions of our 4.25% convertible senior notes.

General and Administrative Personnel Expenses for the three months ended September 30, 2021 and 2020 were approximately $11,537,000 and $9,871,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-based compensation expenses, 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 a project to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The period-over-period increase of $1,666,000 was primarily attributable to higher stock-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2021.

Income Tax Benefit for the three months ended September 30, 2021 was approximately $1,636,000 for state, federal, and foreign income taxes resulting in an effective tax rate of 25.2%. This compared with approximately $6,146,000 of income tax expense for the three months ended September 30, 2020, resulting in an effective tax rate of 28.5%. The decrease in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the non-deductibility of certain executive compensation during the three months ended September 30, 2020.

Ratios:

The loss ratio applicable to the three months ended September 30, 2021 (losses and loss adjustment expenses incurred related to net premiums earned) was 66.5% compared with 82.8% for the three months ended September 30, 2020. The decrease was primarily due to an increase in net premiums earned.

The expense ratio applicable to the three months ended September 30, 2021 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 45.7% compared with 49.2% for the three months ended September 30, 2020. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in interest expense, offset by the increase in losses and loss adjustment expenses and the increase in policy acquisition, underwriting and 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 three months ended September 30, 2021 was 112.2% compared with 132.0% for the three months ended September 30, 2020. The decrease in 2021 was attributable to the factors described above.

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 three months ended September 30, 2021 was 70.6% compared with 77.3% for the three months ended September 30, 2020. The decrease in 2021 was attributable to the factors described above.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Our results of operations for the nine months ended September 30, 2021 reflect net income of approximately $5,807,000 or $0.22 diluted earnings per share, compared with approximately $24,873,000 or $3.03 diluted earnings per share, for the nine months ended September 30, 2020. The period-over-period decrease in net income was primarily due to a $44,668,000 increase in losses and loss adjustment expenses, a one-time gain on involuntary conversion of $36,969,000 included in our 2020 results, and a $30,547,000 increase in policy acquisition and other underwriting expenses, offset by an increase in net premiums earned of $77,521,000, a $12,617,000 increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses), and a $3,103,000 decrease in interest expense.

Revenue

Gross Premiums Earned on a consolidated basis for the nine months ended September 30, 2021 and 2020 were approximately $420,191,000 and $306,862,000, respectively. HCPCI gross premiums earned were $300,827,000 for the nine months ended September 30, 2021 compared to $252,033,000 for the nine months ended September 30, 2020. The increase included $73,403,000 of gross premiums earned from the United insurance policies assumed. TypTap’s gross premiums earned were $119,364,000 versus $54,829,000 for the same comparative period with the increase due to a greater number of policies in force from the growth in TypTap’s business.

Premiums Ceded for the nine months ended September 30, 2021 and 2020 were approximately $145,112,000 and $109,304,000, respectively, representing 34.5% and 35.6%, respectively, of gross premiums earned. The $35,808,000 increase was primarily attributable to higher reinsurance costs for the 2021 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion. Reinsurance costs were offset by a reduction in premiums ceded attributable to retrospective provisions under multi-year reinsurance agreements.

For the nine months ended September 30, 2021, premiums ceded included a decrease of $4,680,000 related to retrospective provisions compared with a net reduction of $10,440,000 for the nine months ended September 30, 2020. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the nine months ended September 30, 2021 and 2020 totaled approximately $339,980,000 and $255,546,000, respectively. The $84,434,000 increase in 2021 resulted primarily from the factors described earlier.

Net Premiums Earned for the nine months ended September 30, 2021 and 2020 were approximately $275,079,000 and $197,558,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months ended September 30, 2021 and 2020 (amounts in thousands):


	Nine Months Ended
	September 30,
	2021			2020
Net Premiums Written	$	339,980		$	255,546
Increase in Unearned Premiums		(64,901	)		(57,988	)
Net Premiums Earned	$	275,079		$	197,558

Net Investment Income for the nine months ended September 30, 2021 and 2020 was approximately $9,749,000 and $3,244,000, respectively. The $6,505,000 increase was primarily attributable to losses from limited partnership investments in 2020 due to the economic effects of the COVID-19 pandemic and a net gain of $2,790,000 recognized in 2021 for a legal settlement received from The Kroger Co. See Net Investment Income (loss) under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Unrealized Investment Losses for the nine months ended September 30, 2021 and 2020 were approximately $649,000 and $581,000, respectively. The decrease was primarily due to the sales of equity securities with aggregate net gains during the nine months ended September 30, 2021.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $164,332,000 and $119,664,000 for the nine months ended September 30, 2021 and 2020, respectively. The increase was attributable to additional losses associated with the growth in TypTap’s business during 2021 and was offset by lower 2021 losses at HCPCI when compared with 2020. TypTap experienced an additional $13,985,000 of losses related to growth in its homeowners business, $9,116,000 of losses from policies assumed from United, and $2,887,000 in combined losses from hurricanes Henri and Ida. HCPCI 2021 losses for the nine months were comparatively lower due to 2020 losses of $17,679,000 from Hurricane Sally, $13,000,000 of losses from policies acquired from Anchor Property & Casualty Insurance Company, offset by 2021 losses of $27,712,000 from policies assumed from United, and $2,812,000 resulting from re-estimation of losses from Hurricane Sally. Both companies recorded additional losses during the nine months totaling a combined $8,000,000 from re-assessing losses from Tropical Storm Eta, a fourth quarter 2020 event. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2021 and 2020 were approximately $69,574,000 and $39,027,000 on a consolidated basis, respectively. Policy acquisition expenses for HCPCI insurance operations were $46,076,000 for the nine months ended September 30, 2021 compared to $28,892,000 for the nine months ended September 30, 2020. The increase was due to amortization of increased costs associated with the policies assumed from United. TypTap Group policy acquisition expenses were $23,612,000 versus $10,641,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months and the policies assumed from United.

General and Administrative Personnel Expenses for the nine months ended September 30, 2021 and 2020 were approximately $31,733,000 and $27,969,000, respectively. The period-over-period increase of $3,764,000 was primarily attributable to higher stock-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2021.

Interest Expense for the nine months ended September 30, 2021 and 2020 was approximately $5,743,000 and $8,846,000, respectively. The decrease resulted from the early adoption of ASC 2020-06 “Debt - Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s own Equity.” As described in Note 2 -- “Summary of Significant Accounting Policies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q, 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 reversed January 1, 2021. As a result, interest expense no longer includes amounts representing the amortization of the discount.

Income Tax Expense for the nine months ended September 30, 2021 and 2020 was approximately $2,888,000 and $9,143,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 33.2% for 2021 and 26.9% for 2020. The increase in the effective tax rate was primarily due to the non-deductibility of certain executive compensation.

Ratios:

The loss ratio applicable to the nine months ended September 30, 2021 (losses and loss adjustment expenses incurred related to net premiums earned) was 59.7% compared with 60.6% for the nine months ended September 30, 2020. The decrease was primarily due to an increase in net premiums earned.

The expense ratio applicable to the nine months ended September 30, 2021 was 44.6% compared with 43.7% for the nine months ended September 30, 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 interest expense.

The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the nine months ended September 30, 2021 was 104.3% compared with 104.3% for the nine months ended September 30, 2020.

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 nine months ended September 30, 2021 was 68.3% compared with 67.2% for the nine months ended September 30, 2020. The increase in 2021 was primarily attributable to the 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 hurricanes and tropical storms affecting Florida, our primary market, 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 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 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 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. With the exception of litigated claims, substantially all of our losses and loss adjustment expenses are fully settled and paid within 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 and real estate acquisitions.

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

The following table summarizes the principal and interest payment obligations of our indebtedness at September 30, 2021:


	Maturity Date	Interest Payment Due Date
4.25% Convertible senior notes	March 2037	March 1 and September 1
3.75% Callable promissory note	Through September 2036	1st day of each month
4.55% Promissory note	Through August 2036	1st day of each month
3.90% Promissory note	Through April 2032	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

See Note 11 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Limited Partnership Investments

Our limited partnership investments consist of six private equity funds managed by their general partners. Four 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. Although capital commitments for two of the remaining funds have expired, the general partners may request additional funds under certain circumstances. At September 30, 2021, there was an aggregate unfunded capital balance of $13,980,000. See Limited Partnership Investments under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Real Estate Investments

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 investments. Thus, we may consider increasing our real estate investment portfolio should an opportunity arise.

We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. FMKT Mel JV’s real estate portfolio consists of outparcels for ground lease or sale. 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.

Sources and Uses of Cash

Cash Flows for the Nine Months Ended September 30, 2021

Net cash provided by operating activities for the nine months ended September 30, 2021 was approximately $48,671,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $38,484,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $35,087,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $100,130,000, the proceeds from redemptions and maturities of fixed-maturity securities of $16,734,000, and distributions received from limited partnership investments of $3,635,000, offset by the purchases of fixed-maturity and equity securities of $83,211,000, and the purchases of property and equipment of $2,583,000. Net cash provided by financing activities totaled $54,077,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $9,713,000 of net cash dividend payments, net repayment of our revolving credit facility of $23,750,000, and $1,308,000 used in share repurchases.

Cash Flows for the Nine Months Ended September 30, 2020

Net cash provided by operating activities for the nine months ended September 30, 2020 was approximately $77,530,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $39,624,000) and $27,092,000 of net cash receipts from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Due to the inclusion of the cash receipt from Anchor, net cash provided by operating activities was higher than usual. Net cash provided by investing activities of $133,800,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $96,669,000, the proceeds from redemptions and maturities of fixed-maturity securities of $60,870,000, and $44,000,000 of compensation received for the property taken by the power of eminent domain, offset by the purchases of fixed-maturity and equity securities of $57,375,000, the purchase of real estate investments of $3,052,000, limited partnership investments of $2,951,000, and the purchases of property and equipment of $5,928,000. Net cash used in financing activities totaled $28,151,000, which consisted of $16,533,000 used to repay 3.95% and 4% promissory notes, $9,279,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, and $6,499,000 used in our share repurchases, and net repayment of our revolving credit facility of $1,000,000, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000.

Investments

The main objective of our investment policy is to maximize our after-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, and fixed-maturity and equity securities.

At September 30, 2021, we had $96,276,000 of fixed-maturity and equity 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. To maximize the gains from fixed-maturity investments in a low interest rate environment, we have decreased our holdings in fixed-maturity securities since the beginning of 2020.

In the future, we may alter our investment policy as 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 September 30, 2021, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 21 -- “Commitments and Contingencies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q and Contractual Obligations and Commitment below for additional information.

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 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, stock-based compensation expense, 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

Our liability for losses and loss adjustment expense (“Reserves”) is specific to property insurance, which is our insurance division’s only line of business. The Reserves include both case reserves on reported claims and our reserves for incurred but not reported (“IBNR”) losses. At each period end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are adjusted.

The IBNR represents our estimate of the ultimate cost of all claims that have occurred but have not been reported to us, and in some cases may not yet be known to the insured, and future development of reported claims. Estimating the IBNR component of our Reserves involves considerable judgment on the part of management. At September 30, 2021, $151,669,000 of the total $203,177,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $51,508,000 relates to known cases which have been reported but not yet fully settled in which case we have established a reserve based on currently available information and our best estimate of the cost to settle each claim. At September 30, 2021, $33,889,000 of the $51,508,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $212,169,000 at December 31, 2020 to $203,177,000 at September 30, 2021. The $8,992,000 decrease is comprised of reductions in our Reserves of $30,790,000 specific to Hurricane Irma and Hurricane Michael, and reductions in our non-catastrophe Reserves of $43,738,000 for 2020 and $17,895,000 for 2019 and prior loss years, offset by $76,228,000 in reserves established for the 2021 loss year and additional reserves of $7,203,000 for Hurricane Sally and Tropical Storm Eta. The Reserves established for 2021 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2021. The decrease of $61,633,000 specific to our 2020 and prior loss-year reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at September 30, 2021 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us. However, these estimates are continually reviewed by management as they are subject to significant variability and may be impacted by trends in claim severity and frequency or unusual exposures that have not yet been identified. As part of the process, we review historical data and consider 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 loss adjustment expenses. 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.

Economic Impact of Reinsurance Contracts with Retrospective Provisions

Two of our reinsurance contracts include retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience 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.

For the three months ended September 30, 2021 and 2020, we accrued benefits of $1,364,000 and $4,680,000, respectively. For the nine months ended September 30, 2021 and 2020, we accrued benefits of $9,619,000 and $10,440,000, respectively. The accrual of benefits was recognized as a reduction in ceded premiums.

As of September 30, 2021, we had $1,819,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement. In June 2021, we collected $18,720,000 of premium refund from a reinsurer for the reinsurance contract that ended May 31, 2021.

We believe the credit risk associated with the collectability of accrued benefits is minimal based on available information about the reinsurer’s financial position and the reinsurer’s demonstrated ability to comply with contract terms.

Stock-Based Compensation Expense

We account for stock-based compensation using a recognition method based on fair value. For restricted stock with service based vesting conditions, fair value is determined by the market price of the stock on the 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 or derived service periods. We develop our estimates based on historical data and market information.

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 transaction, we purchased the right, but not the obligation, to offer homeowners insurance coverage to all current policyholders of the seller in certain states on the agreed-upon policy replacement date. The renewal rights agreement also contains 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 agreement 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. Intangible assets are amortized over their estimated useful lives. Intangible assets are evaluated periodically to ensure that there is no impairment to carrying value and no change required in the amortization period.

Warrants and Redeemable Noncontrolling Interest

In the capital investment transaction completed by TTIG 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 value and expected term of the warrants were estimated with assistance from a third-party valuation specialist using a Monte Carlo simulation model. Total proceeds from the capital 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 18 -- “Redeemable Noncontrolling Interest” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

The above and other accounting estimates and their related risks that we consider to be our critical accounting estimates are more fully described in our Annual Report on Form 10-K, which we filed with the SEC on March 12, 2021. For the nine months ended September 30, 2021, there have been no other material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to our Notes to Unaudited Consolidated Financial Statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolios at September 30, 2021 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-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 Board of 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 are 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.

We classify our fixed-maturity securities as available-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 or 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 September 30, 2021 (amounts in thousands):


Hypothetical Change in Interest Rates	Estimated Fair Value		Change in Estimated Fair Value			Percentage Increase (Decrease) in Estimated Fair Value
300 basis point increase	$	43,019	$	(3,034	)		-6.59	%
200 basis point increase		44,030		(2,023	)		-4.39	%
100 basis point increase		45,042		(1,011	)		-2.20	%
100 basis point decrease		46,867		814			1.77	%
200 basis point decrease		47,320		1,267			2.75	%
300 basis point decrease		47,365		1,312			2.85	%

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.

The following table presents the composition of our fixed-maturity securities, by rating, at September 30, 2021 (amounts in thousands):


			% of Total				% of Total
	Amortized		Amortized		Estimated		Estimated
Comparable Rating	Cost		Cost		Fair Value		Fair Value
AAA	$	678		2.0	$	692		2.0
AA+, AA, AA-		14,379		32.0		14,465		31.0
A+, A, A-		13,934		31.0		14,080		31.0
BBB+, BBB, BBB-		13,688		30.0		14,477		31.0
BB+, BB, BB-		468		1.0		469		1.0
CCC+, CC and Not rated		1,869		4.0		1,870		4.0
Total	$	45,016		100.0	$	46,053		100.0

Equity Price Risk

Our equity investment portfolio at September 30, 2021 included common stocks, perpetual preferred stocks, mutual funds and exchange traded funds. We may incur losses due to adverse 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 September 30, 2021 (amounts in thousands):


			% of Total
	Estimated		Estimated
	Fair Value		Fair Value
Stocks by sector:
Financial	$	12,303		24
Technology		4,210		8
Consumer		3,840		8
Communications		2,584		5
Other (1)		3,771		8
		26,708		53
Mutual funds and exchange traded funds by type:
Debt		17,780		35
Equity		5,735		12
Total	$	50,223		100

(1)

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At September 30, 2021, we did not have any material exposure to foreign currency related risk.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, our chief executive officer and our chief financial officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, implementation of possible controls and procedures depends on management’s judgment in evaluating their benefits relative to costs.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The Company is 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 and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

ITEM 1A – RISK FACTORS

With the exception of the item described below, there have been no material changes from the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 12, 2021.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

Sales of Unregistered Securities and Use of Proceeds

On January 18, 2021, we issued 100,000 shares of our common stock to United in exchange for the renewal rights and non-compete agreement.

On February 26, 2021, warrants to purchase 750,000 shares of our common stock were issued to the lead investor in our subsidiary’s capital investment transaction.

(b)

Repurchases of Securities

None

Working Capital Restrictions and Other Limitations on Payment of Dividends

We are not subject to working capital restrictions or other limitations on the payment of dividends. Our insurance subsidiaries, however, are subject to restrictions on the dividends they may pay. Those restrictions could impact HCI’s ability to pay future dividends.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholder 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. Additionally, a Florida domestic insurer may not make dividend payments or distributions to its stockholder without prior approval of the Florida Office of Insurance Regulation if the dividend or distribution would exceed the larger of (1) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward, (2) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (3) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three year carry forward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains.

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Office of Insurance Regulation (1) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards 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% 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 Florida Office of Insurance Regulation 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% 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 Florida Office of Insurance Regulation or (2) 30 days after the Florida Office of Insurance Regulation has received notice of such dividend or distribution and has not disapproved it within such time.

During the nine months ended September 30, 2021, our insurance subsidiaries paid dividends of $11,900,000 to HCI.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

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 Form 10-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 Form 8-K filed October 18, 2013.

3.2		Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-Q filed September 13, 2019.

4.1		Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed November 7, 2013.

4.2		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, 2021.

4.6		Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 12, 2021.

4.8		Indenture, 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 Form 8-K filed December 12, 2013.

4.9		See Exhibits 3.1, 3.1.1 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 Form 8-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 Form 8-K filed March 3, 2017.

10.1		Preferred Stock Purchase Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., 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.

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.


10.5**		Restated HCI Group, Inc. 2012 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.1 of our Form 8-K filed March 23, 2017.

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 Form 10-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 Form 10-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 Form 10-Q filed August 3, 2016.

10.9		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) (Arch), effective: June 1, 2020, 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 7, 2020.

10.10		Reinstatement Premium Protection Reinsurance Contract (Chubb), effective: June 1, 2020, 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 7, 2020.

10.11		Property Catastrophe First Excess of Loss Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.

10.12		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat), effective: June 1, 2020, 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 7, 2020.

10.13		Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat), effective: June 1, 2020, 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 7, 2020.

10.14		Property Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.


10.15		Property Catastrophe First Excess of Loss Reinsurance Contract (Endurance), effective: June 1, 2020, 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 7, 2020.

10.16		Reinstatement Premium Protection Reinsurance Contract (Fidelis), effective: June 1, 2020, 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 7, 2020.

10.17		Property Catastrophe First Excess of Loss Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.

10.18		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) (Hiscox), effective: June 1, 2020, 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 7, 2020.

10.19		Reinstatement Premium Protection Reinsurance Contract (For Cat Excess) (Hiscox), effective: June 1, 2020, 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 7, 2020.

10.20		Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat) (Hiscox), effective: June 1, 2020, 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 7, 2020.

10.21		Reinstatement Premium Protection Reinsurance Contract (Horseshoe), effective: June 1, 2020, 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 7, 2020.

10.22		Property Catastrophe Excess of Loss Reinsurance Contract (Munich), effective: June 1, 2020, 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 7, 2020.

10.23		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat), effective: June 1, 2020, 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 7, 2020.


10.24		Reinstatement Premium Protection Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.

10.25		Top Layer Property Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.

10.26		Reinstatement Premium Protection Reinsurance Contract (Transatlantic), effective: June 1, 2020, 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 7, 2020.

10.27		Endorsement No. 1 to the Flood Catastrophe Excess of Loss Reinsurance Contract, effective: July 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by National Liability and Fire Insurance Company. 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 7, 2020.

10.28		Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, 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 7, 2020.

10.29		Reimbursement Contract effective June 1, 2020 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 corresponding numbered exhibit to our Form 10-Q filed August 7, 2020.

10.30		Reimbursement Contract effective June 1, 2020 between TypTap Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020.

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 Form 10-Q filed August 6, 2021.

10.32		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.

10.33		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.

10.34		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 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.

10.41		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 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.

10.45		Flood 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.

10.46**		Written Description of Non-Employee Director Compensation Arrangement adopted September 9, 2019 establishing compensation of our non-employee directors. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 6, 2019.

10.47		Policy Replacement Agreement, dated February 12, 2020, by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and Anchor Property & Casualty Insurance Company together with Anchor Insurance Managers, Inc. Incorporated by reference to Exhibit 99.1 of our Form 8-K filed February 14, 2020.

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.

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.

10.57		Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 of our Form 10-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 Form 8-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 Form 8-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.

10.88**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.2 to our Form 8-K filed January 11, 2017.

10.89**		Employment Agreement between Paresh Patel and HCI Group, Inc. dated December 30, 2016. Incorporated by reference to the exhibit numbered 99.1 to our Form 8-K filed December 30, 2016.

10.99**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.1 to our Form 8-K filed January 11, 2017.

10.100**		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 Form 10-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 exhibit 99.1 to our Form 8-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 exhibit 99.2 to our Form 8-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.

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.

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 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.

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 - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL documents.

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 (formatted as Inline XBRL and contained in Exhibit 101)

** Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements 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, who has signed this report on behalf of the Company.


	HCI GROUP, INC.

November 9, 2021	By:	/s/ Paresh Patel
		Paresh Patel
		Chief Executive Officer
		(Principal Executive Officer)

November 9, 2021	By:	/s/ James Mark Harmsworth
		James Mark Harmsworth
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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.

EXHIBIT 10.50

Exchange Agreement

August 26, 2021

HCI Group Inc.

4.25% Convertible Senior Notes due 2037

The undersigned investor (the “Investor”), for itself and on behalf of the beneficial owners listed on Exhibit A hereto (“Accounts”) for whom the Investor holds contractual and investment authority (each, including the Investor if it is a party exchanging Notes (as defined below), an “Exchanging Investor”), hereby agrees to exchange, with HCI Group Inc., a Florida corporation (the “Company”), certain 4.25% Convertible Senior Notes due 2037, CUSIP 40416EAD5 (the “Notes”) for shares (“Shares”) of the Company’s common stock, no par value per share (the “Common Stock”), pursuant to this exchange agreement (this “Agreement”). The Investor understands that the exchange (the “Exchange”) is being made without registration of the offer or sale of the Shares under the Securities Act of 1933, as amended (the “Securities Act”), or any securities laws of any state of the United States or of any other jurisdiction in a private placement pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and that each Exchanging Investor participating in the Exchange is required to be an institutional “accredited investor” within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act. Capitalized terms used but not defined in this Agreement have the respective meanings set forth in the indenture, dated as of March 3, 2017 (the “Indenture”) between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”).

Exchange. On the basis of the representations, warranties and agreements herein contained and subject to the terms and conditions herein set forth, the Investor hereby agrees to exchange for itself and on behalf of the Exchanging Investors, an aggregate principal amount of the Notes set forth on Exhibit A hereto (the “Exchanged Notes”) for:

(a)

a number of Shares per $1,000 principal amount of such Exchanged Notes equal to 15.7626; plus

(b)

an additional number of Shares per $1,000 principal amount of such Exchanged Notes equal to the quotient of (i) $74.32 divided by (ii) the average of the Daily VWAPs (as defined below) over the Reference Period (as defined below) (the aggregate number of Shares under clause (a) and (b), the “Share Consideration”); plus

(c)

$18.75 per $1,000 principal amount of such Exchanged Notes.

in each case, as adjusted in good faith by the Company for the following events occurring on or after the date hereof and prior to the Closing Date: any stock dividend, stock split, stock combination, reclassification and/or any transaction for which the Conversion Price of the Notes would be adjusted pursuant to the Indenture.

For the avoidance of doubt, in lieu of issuing any fractional share of Common Stock as part of the Share Consideration, the Company will deliver to such Exchanging Investor a cash amount equal to the product of the related fraction and the Last Reported Sale Price on the final Trading Day of the Reference Period (collectively with the cash issued under clause (c) above, the “Cash

Consideration”). No cash will be paid to any Exchanging Investor in respect of any accrued and unpaid interest on the Exchanged Notes as part of the Share Consideration and the Cash Consideration (collectively, the “Exchange Consideration”); provided that the Exchanging Investor shall receive payment of accrued interest on the Exchanged Notes for the six-month period ended September 1, 2021 in connection with the Company’s payment on or about September 1, 2021 to record holders of the Notes as of August 15, 2021.

“Business Day” means any day other than a Saturday, a Sunday or a day on which the Federal Reserve Bank of New York is authorized or required by law or executive order to close or be closed.

“Daily VWAP” means, for each Trading Day (as defined below) in the Reference Period (as defined below), the per share volume-weighted average price of the Common Stock as displayed under the heading “Bloomberg VWAP” on Bloomberg page “HCI <equity> AQR” (or its equivalent successor if such page is not available) in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on such Trading Day, and excluding trades greater than 20,000 shares as determined by inputting 20,000 in the upper parameter of the Vol Filter (or if such volume-weighted average price is unavailable, the Last Reported Sale Price on such day). The “Daily VWAP” shall be determined without regard to after-hours trading or any other trading outside of the regular trading session trading hours.

“Last Reported Sale Price” of the Common Stock on any date means the closing sale price per share (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the principal U.S. national or regional securities exchange on which the Common Stock is traded.

“Market Disruption Event” means (a) a failure by the primary U.S. national or regional securities exchange or market on which the Common Stock is listed or admitted for trading to open for trading during its regular trading session or (b) the occurrence or existence prior to 1:00 p.m., New York City time, on any Scheduled Trading Day (as defined in the Indenture) for the Common Stock for more than one half-hour period in the aggregate during regular trading hours of any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant stock exchange or otherwise) in the Common Stock or in any options contracts or futures contracts relating to the Common Stock.

“Reference Period” means the period of five (5) consecutive Trading Days commencing on the first Trading Day following the date hereof.

“Trading Day” means a day on which (a) there is no Market Disruption Event and (b) trading in the Common Stock generally occurs on The New York Stock Exchange (“NYSE”) or, if the Common Stock is not then listed on NYSE, on the principal other U.S. national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a U.S. national or regional securities exchange, on the principal other market on which the Common Stock is then listed or admitted for trading, except that if the Common Stock is not so listed or admitted for trading, “Trading Day” means a Business Day.

The Investor agrees that it and any Exchanging Investor shall not deliver a Notice of Conversion with respect to any Exchanged Notes and the Investor and each Exchanging Investor shall hold the Exchanged Notes until the Closing (as defined below). In consideration for the performance of their obligations

hereunder (including as described in the immediately preceding sentence), the Company agrees to deliver the Exchange Consideration on the Closing Date (as defined below) to each Exchanging Investor in exchange for its Exchanged Notes.

The Exchange shall occur in accordance with the procedures set forth in Exhibit B.2 hereto (the “Exchange Procedures”); provided that each of the Company and the Investor acknowledges that the delivery of the Shares to any Exchanging Investor may be delayed due to procedures and mechanics within the system of The Depositary Trust Company (“DTC”) or other events beyond the Company’s control and that such a delay will not be a default under this Agreement so long as (i) the Company is using its reasonable best efforts to effect the issuance of the Shares and any such delay does not exceed five (5) Business Days after the Closing Date (provided that if such time limit is exceeded, the Investor may terminate this agreement by written notice to the Company), or (ii) such delay arises due to a failure by Investor to deliver settlement instructions in accordance with Section 3(o); provided, further, that no delivery of Shares will be made until the Exchanged Notes have been properly submitted for exchange in accordance with the Exchange Procedures and no accrued interest will be payable by reason of any delay in making such delivery.

The closing of the Exchange (the “Closing”) shall take place remotely via the exchange of documents and signatures at 10:00 a.m., New York City time, on the first Business Day after the last day of the Reference Period (the “Closing Date”), or at such other time and place as the Company and the Investor may mutually agree. On the Closing Date, subject to satisfaction of the conditions precedent specified herein and the prior receipt by the Company from the Investor of the Exchanged Notes, the Company shall deliver the Share Consideration to the DTC account specified by the Investor for each relevant Exchanging Investor in Exhibit B.1.

Representations and Warranties and Covenants of the Company. As of the date hereof and the Closing Date, the Company represents and warrants to, and covenants with, the Exchanging Investors, and all such covenants, representations and warranties shall survive the Closing, that:

(a)

The Company and each of its subsidiaries are entities duly organized, validly existing and in good standing under the laws of the jurisdiction in which each is formed, and have the requisite power and authority to own their properties and to carry on their business as now being conducted, except in the case of the Company’s subsidiaries as would not reasonably be expected to have a material adverse effect on the business, properties, assets, liabilities, operations (including results thereof), or financial condition of the Company or its subsidiaries, taken as a whole. The Company and each of its subsidiaries is duly qualified as a foreign entity to do business (where such concept exists) and is in good standing in every jurisdiction (where such concept exists) in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a material adverse effect on the business, properties, assets, liabilities, operations (including results thereof), or condition (financial or otherwise) of the Company or its subsidiaries, taken as a whole. The Company has the power, authority and capacity to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the Exchange contemplated hereby. No consent, approval, order or authorization of, or registration, declaration or filing with any governmental entity is required on the part of the Company or any of its subsidiaries in connection with the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Exchange, except as may be required under any state or federal securities laws or that may be made or obtained after the Closing without penalty.

(b)

This Agreement has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding at law or in equity.

(c)

This Agreement and consummation of the Exchange will not violate, conflict with or result in a breach of or default under (i) the charter or bylaws of the Company, (ii) any agreement or instrument to which the Company is a party or by which the Company or any of its assets or subsidiaries are bound, or (iii) assuming the truth and accuracy of the representations and warranties and compliance with the covenants of the Investor and each Exchanging Investor herein, any laws, regulations or governmental or judicial decrees, injunctions or orders applicable to the Company and its subsidiaries, except in the case of clauses (ii) or (iii), where such violations, conflicts, breaches or defaults that would not, individually or in the aggregate, materially and adversely affect the financial position, results of operations or prospects of the Company and its subsidiaries taken as a whole, or materially impair the ability of the Company to perform its obligations under this Agreement or to consummate the transactions contemplated by this Agreement.

(d)

When issued, delivered and paid for in the manner set forth in this Agreement, the Shares will (i) be validly issued, fully paid and non-assessable, (ii) be free and clear of any Liens (as defined below), option, equity or other adverse claim thereto, including claims or rights under any voting trust agreements, shareholder agreements or other agreements to which the Company is a party, and (iii) will not be subject to any preemptive, participation, rights of first refusal or other similar rights under the corporation law of the State of Florida or any agreement or arrangement to which the Company is a party (other than any such rights that will be waived prior to the Closing). Assuming the accuracy of the Investor’s and each Exchanging Investor’s representations and warranties hereunder, the Shares (a) will be issued in the Exchange in reliance on the exemption from the registration requirements of the Securities Act pursuant to 4(a)(2) of the Securities Act, (b) will be issued in CUSIP No. 40416E103, and (c) will be issued in compliance with all applicable securities laws, and at the Closing, be free of any restrictive legend and any restrictions on transfer under Rule 144 promulgated under the Securities Act.

(e)

At or before the Closing, the Company will have submitted to the NYSE a Supplemental Listing Application with respect to the Share Consideration. The execution of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby does not require the consent, approval, authorization, order, registration or qualification of, or filing with, any governmental authority, non-governmental regulatory authorities, except as may be required under any state or federal securities laws or that may be made or obtained after the Closing without penalty.

(f)

From January 1, 2021 to the date of this Agreement, the Company has timely filed all reports, schedules, forms, proxy statements, statements and other documents required to be filed by it with the Securities and Exchange Commission (the “SEC”) pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or timely filed notifications of late filings for any of the foregoing (all of the foregoing filed prior to the date hereof and all exhibits and appendices included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC

promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied in all material respects with applicable accounting requirements of Regulations S-X and have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(g)

Without the prior written consent of the Investor, the Company shall not disclose the name of the Investor or any Exchanging Investor in any filing or announcement, unless such disclosure is required by applicable law, rule, regulation or legal process based on advice of counsel.

(h)

There is no action, lawsuit, arbitration, claim or proceeding pending or, to the knowledge of the Company, threatened, against the Company that would reasonably be expected to impede the consummation of the Exchange.

(i)

The Company hereby agrees to publicly disclose on or before 8:00 a.m., New York City time, on the first Business Day after the date hereof (the “Disclosure Time”), the exchange of the Exchanged Notes as contemplated by this Agreement in a press release or a Current Report on Form 8-K. The Company hereby acknowledges and agrees that any such press release or Current Report on Form 8-K will disclose all confidential information communicated by the Company to the Investor or any Exchanging Investor in connection with the Exchange to the extent the Company believes such confidential information could reasonably be expected to constitute material non-public information, if any, with respect to the Exchange or otherwise. The Company agrees that any confidentiality or other obligations undertaken by the Investor under any agreement between the Company (and/or any of its representatives) and the Investor shall terminate at the Disclosure Time. The Company agrees that it shall, upon request, execute and deliver any additional documents deemed by the Trustee to be reasonably necessary to complete the Exchange.

(j)

The Company understands that the Investor and each Exchanging Investor and others will rely upon the truth and accuracy of the foregoing representations, warranties and covenants and agrees that if any of the representations and warranties deemed to have been made by it are no longer accurate, the Company shall promptly notify the Investor and each Exchanging Investor prior to the Closing. The Company understands that, unless the Company notifies the Investor and each Exchanging Investor in writing to the contrary before the Closing, each of the Company’s representations and warranties contained in this Agreement will be deemed to have been reaffirmed and confirmed as of the Closing.

(k)

The Company shall not disclose information regarding the Investor’s positions or transactions in the account at one of its prime brokers to any of Investor’s other prime brokers or to any other person (other than the Company’s agents or representatives).

Representations and Warranties and Covenants of the Investor. As of the date hereof and as of the Closing Date (except as otherwise set forth below), the Investor hereby, for itself and on behalf of the Exchanging Investors, represents and warrants to, and covenants with, the Company, and all such covenants, representations and warranties shall survive the Closing, that:

(a)

The Investor and each Exchanging Investor is a corporation, limited partnership, limited liability company or other entity, as the case may be, duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation.

(b)

The Investor has all requisite corporate (or other applicable entity) power and authority to execute and deliver this Agreement for itself and on behalf of the Exchanging Investors and to carry out and perform its obligations under the terms hereof and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Investor and constitutes the legal, valid and binding obligation of the Investor and each Exchanging Investor, enforceable in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding at law or in equity. If the Investor is executing this Agreement on behalf of an Account, (i) the Investor has all requisite discretionary and contractual authority to enter into this Agreement on behalf of, and, bind, each Account, and (ii) Exhibit A attached to this Agreement contains a true, correct and complete list of (A) the name of each Account and (B) the principal amount of each Account’s Exchanged Notes, as applicable.

(c)

Each of the Exchanging Investors is the current sole beneficial owner, and as of the Closing will be the sole legal and beneficial owner, of the Exchanged Notes set forth on Exhibit A attached to this Agreement. When the Exchanged Notes are exchanged, the Company will acquire good, marketable and unencumbered title thereto, free and clear of all liens, mortgages, pledges, security interests, restrictions, charges, encumbrances or adverse claims, rights or proxies of any kind (“Liens”). None of the Exchanging Investors has, nor prior to the Closing, will have, in whole or in part, other than pledges or security interests that an Exchanging Investor may have created in favor of a prime broker under and in accordance with its prime brokerage agreement with such broker, (x) assigned, transferred, hypothecated, pledged, exchanged, submitted for conversion pursuant to the Indenture or otherwise disposed of any of its Exchanged Notes (other than to the Company pursuant hereto), or (y) given any person or entity any transfer order, power of attorney or other authority of any nature whatsoever with respect to its Exchanged Notes.

(d)

The execution, delivery and performance of this Agreement by the Investor and compliance by the Investor and each Exchanging Investor with all provisions hereof and the consummation of the transactions contemplated hereby, including the Exchange, will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except as may be required under the securities or Blue Sky laws of the various states), (ii) constitute a breach or violation of any of the terms or provisions of, or result in a default under, (x) the organizational documents of any of the Investor or any Exchanging Investor or (y) any material indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Investor or any of the Exchanging Investors is a party or by which such Investor or Exchanging Investor is bound, or (iii) violate or conflict with any applicable law or any rule, regulation, judgment, decision, order or decree of any court or any governmental body or agency having jurisdiction over the Investor or any of the Exchanging Investors, except in the case of clauses (ii)(y) or (iii), where such violations, conflicts, breaches or defaults would not, individually or in the aggregate, materially impair the ability of the Investor or

any Exchanging Investor to perform its obligations under this Agreement or to consummate the transactions contemplated by this Agreement.

(e)

The Investor and each Exchanging Investor has such knowledge, skill and experience in business, financial and investment matters so that it is capable of evaluating the merits and risks with respect to the Exchange and an investment in the Shares. With the assistance of the Investor’s and each Exchanging Investor’s own professional advisors, to the extent that the Investor and Exchanging Investor has deemed appropriate, such Exchanging Investor has made its own legal, tax, accounting and financial evaluation of the merits and risks of an investment in the Shares and the consequences of the Exchange and this Agreement and the Investor and Exchanging Investor has made its own independent decision that the investment in the Shares is suitable and appropriate for the Investor and Exchanging Investor. The Investor and each Exchanging Investor has considered the suitability of the Shares as an investment in light of the Investor and such Exchanging Investor’s circumstances and financial condition and is able to bear the risks associated with an investment in the Shares.

(f)

The Investor confirms that it and each Exchanging Investor is not relying on any communication (written or oral) of the Company or any of its affiliates or representatives as investment advice or as a recommendation to acquire the Shares in the Exchange. It is understood that information provided by the Company or any of its affiliates and representatives shall not be considered investment advice or a recommendation to participate in the Exchange, and that none of the Company or any of its affiliates or representatives is acting or has acted as an advisor to the Investor or any Exchanging Investor in deciding to participate in the Exchange.

(g)

The Investor confirms that the Company has not (i) given the Investor or any Exchanging Investor any guarantee, representation or warranty as to the potential success, return, effect or benefit (either legal, regulatory, tax, financial, accounting or otherwise) of an investment in the Shares or (ii) except as provided in Section 2(a)-(d), made any representation or warranty to the Investor or any Exchanging Investor regarding the legality of an investment in the Shares under applicable legal investment or similar laws or regulations. The Investor confirms that it and each Exchanging Investor is not relying and has not relied, upon any statement, advice (whether accounting, tax, financial legal or other), representation or warranty by the Company or any of its affiliates or representatives, except for the representations and warranties made by the Company in this Exchange Agreement, and that the Investor has made its own independent decision that the investment in the Shares is suitable and appropriate for the Investor and the Exchanging Investors.

(h)

The Investor and each Exchanging Investor is familiar with the business and financial condition and operations of the Company and the Investor and each Exchanging Investor has had the opportunity to conduct its own investigation of the Company and the Shares. The Investor and each Exchanging Investor has had access to the SEC filings of the Company and such other information concerning the Company and the Shares as it deems necessary to enable it to make an informed investment decision concerning the Exchange. The Investor and each Exchanging Investor has been offered the opportunity to ask such questions of the Company and its representatives and received answers thereto, as it deems necessary to enable it to make an informed investment decision concerning the Exchange.

(i)

Each Exchanging Investor is an institutional “accredited investor” as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. The Investor agrees to furnish any additional information regarding the Investor or any Exchanging Investor reasonably requested by the Company or any of its affiliates to assure compliance with applicable U.S. federal and state securities laws in connection with the Exchange.

(j)

The Investor and each Exchanging Investor is not, and has not been during the consecutive three month period preceding the date hereof and as of the Closing, will not be, a director, officer or “affiliate” within the meaning of Rule 144 promulgated under the Securities Act (an “Affiliate”) of the Company. During the preceding twelve (12) months, no Exchanging Investor acquired any of the Exchanged Notes, directly or indirectly, from any person known by the Investor to be Affiliate of the Company.

(k)

Neither the Investor nor any Exchanging Investor is directly, or indirectly through one or more intermediaries, controlling or controlled by, or under direct or indirect common control with, the Company.

(l)

Each Exchanging Investor is acquiring the Shares solely for its own beneficial account, for investment purposes, and not with a view to, or for resale in connection with, any distribution of the Shares. The Investor and each Exchanging Investor understands that the offer and sale of the Shares have not been registered under the Securities Act or any state securities laws and are being issued without registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act, which exemption depends in part upon the investment intent of the Exchanging Investors and the accuracy of the other representations and warranties made by the Investor or behalf of the Exchanging Investors in this Agreement. The Investor and the Exchanging Investors understand that the Company is relying upon the representations, warranties and agreements contained in this Agreement (and any supplemental information provided to the Company by the Investor or the Exchanging Investors) for the purpose of determining whether this transaction meets the requirements for such exemption(s) and to issue the Shares without legends as set forth herein.

(m)

The Investor acknowledges that the terms of the Exchange have been mutually negotiated between the Investor and the Company. The Investor was given a meaningful opportunity to negotiate the terms of the Exchange.

(n)

The Investor will, upon request, execute and deliver, for itself and on behalf of any Exchanging Investor, any additional documents deemed by the Company and the Trustee or the transfer agent to be reasonably necessary to complete the transactions contemplated by this Agreement.

(o)

No later than one (1) Business Day after the date hereof, the Investor agrees to deliver to the Company settlement instructions substantially in the form of Exhibit B.1 attached to this Agreement for each of the Exchanging Investors.

(p)

The Investor and each Exchanging Investor understands that the Company will rely upon the truth and accuracy of the foregoing representations, warranties and covenants and agrees that if any of the representations and warranties deemed to have been made by it or the Exchanging Investors are no longer accurate, the Investor shall promptly notify the Company prior to the Closing. The Investor understands that, unless the Investor notifies the Company in writing to the contrary before the Closing, each of the Investor’s and Exchanging Investors’ representations and warranties contained in this Agreement will be deemed to have been reaffirmed and confirmed as of the Closing. If the Investor is exchanging any Exchanged Notes and acquiring the Shares as a fiduciary or agent for one or more accounts (including for purposes of this Section 3(p), the Accounts which are Exchanging Investors), it represents that (i) it has sole investment discretion with respect to each such account, (ii) it has full power to make the foregoing representations, warranties and covenants on behalf of such account and (iii) it has contractual authority with respect to each such account.

(q)

The Investor and each Exchanging Investor understands that no federal, state, local or foreign agency has passed upon the merits or risks of an investment in the Shares or made any finding or determination concerning the fairness or advisability of this investment.

(r)

The Investor and each Exchanging Investor is a resident of the jurisdiction set forth on Exhibit B.1 attached to this Agreement.

(s)

Each Exchanging Investor together with its Affiliates collectively beneficially own and will beneficially own as of the Closing Date (but without giving effect to the transactions contemplated hereby) (a) less than 5% of the outstanding Common Stock and (b) less than 5% of the aggregate number of votes that may be cast by holders of those outstanding securities of the Company that entitle the holders thereof to vote generally on all matters submitted to the Company’s stockholders for a vote (the “Voting Power”). No Exchanging Investor is a subsidiary, Affiliate or, to its knowledge, otherwise closely-related to any director or officer of the Company or beneficial owner of 5% or more of the outstanding Common Stock or Voting Power (each such director, officer or beneficial owner, a “Related Party”). To the Exchanging Investor’s knowledge, no Related Party beneficially owns 5% or more of the outstanding voting equity, or votes entitled to be cast by the outstanding voting equity, of the applicable Exchanging Investor.

Conditions to Obligations of the Investor and the Company. The obligations of the Investor and the Exchanging Investors and of the Company under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions precedent: (a) the representations and warranties of the Company contained in Section 2 hereof (with respect to the Investor and Exchanging Investors) and of the Investor contained in Section 3 hereof (with respect to the Company) shall be true and correct as of the Closing in all respects with the same effect as though such representations and warranties had been made as of the Closing and (b) no provision of any applicable law or any judgment, ruling, order, writ, injunction, award or decree of any governmental authority shall be in effect prohibiting or making illegal the consummation of the transactions contemplated by this Agreement.

Waiver, Amendment. Neither this Agreement nor any provisions hereof or thereof shall be modified, changed or discharged, except by an instrument in writing, signed by the Company and the Investor.

Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by either the Company or the Investor without the prior written consent of the other.

Waiver of Jury Trial. EACH OF THE COMPANY AND THE INVESTOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING ARISING OUT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to such state’s rules concerning conflicts of laws that might provide for any other choice of law.

Submission to Jurisdiction. Each of the Company and the Investor: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be instituted exclusively in the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York; (b) waives any

objection that it may now or hereafter have to the venue of any such suit, action or proceeding; and (c) irrevocably consents to the jurisdiction of the aforesaid courts in any such suit, action or proceeding. Each of the Company and the Investor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

10.

Venue. Each of the Company and the Investor irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in Section 9. Each of the Company and the Investor irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

11.

Service of Process. Each of the Company and the Investor irrevocably consents to service of process in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of the Company or the Investor to serve process in any other manner permitted by law.

12.

Notices. All notices and other communications to the Company provided for herein shall be in writing and shall be deemed to have been duly given if delivered personally, sent by prepaid overnight courier (providing written proof of delivery) or sent by confirmed facsimile transmission or electronic mail and will be deemed given on the date so delivered (or, if such day is not a Business Day, on the first subsequent Business Day) to the following addresses, or in the case of the Investor, the address provided on Exhibit B.1 attached to this Agreement (or such other address as the Company or the Investor shall have specified by notice in writing to the other):

If to the Company:

HCI Group Inc.

3802 Coconut Palm Drive

Tampa, Florida 33619

with a copy to (which shall not constitute notice):

Curt Creely, Esquire

Foley & Lardner LLP

100 North Tampa St., Suite 2700

Tampa, Florida 33602

ccreely@foley.com

13.

Binding Effect. The provisions of this Agreement shall be binding upon and accrue to the benefit of the Company, the Investor and the Exchanging Investors and their respective heirs, legal representatives, successors and assigns. This Agreement constitutes the entire agreement between the Company and the Investor with respect to the subject matters hereof. This Agreement may be executed by one or more of the parties hereto in any number of separate counterparts (including by facsimile or other electronic means, including telecopy, email or otherwise), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile or other transmission (e.g., “pdf” or “tif” format) shall be effective as delivery of a manually executed counterpart hereof.

14.

Notification of Changes. After the date of this Agreement, each of the Company and the Investor hereby covenants and agrees to notify the other upon the occurrence of any event prior to the Closing of the Exchange pursuant to this Agreement that would cause any representation, warranty or covenant of the Company or the Investor, as the case may be, contained in this Agreement to be false or incorrect.

15.

Severability. If any term or provision of this Agreement (in whole or in part) is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other

term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction.

16.

Survival. The representations and warranties of the Company and the Investor contained in this Agreement or made by or on behalf of the Exchanging Investors pursuant to this Agreement shall survive the consummation of the transactions contemplated hereby.

17.

Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned (a) by mutual agreement of the Company and the Investor in writing or (b) by either the Company or the Investor if the conditions to such party’s obligations set forth herein have not been satisfied (unless waived by the party entitled to the benefit thereof), and the Closing has not occurred on or before September 14, 2021 without liability of either the Company or the Investor or the Exchanging Investors, as the case may be; provided that neither the Company nor the Investor shall be released from liability hereunder if this Agreement is terminated and the transactions abandoned by reason of the failure of the Company or the Investor or the Exchanging Investors, as the case may be to have performed its obligations hereunder. Except as provided above, if this Agreement is terminated and the transactions contemplated hereby are not concluded as described above, this Agreement will become void and of no further force and effect.

18.

Taxation. The Investor acknowledges that, if an Exchanging Investor is a United States person for U.S. federal income tax purposes, either (i) the Company must be provided with a correct taxpayer identification number (“TIN,” generally a person’s social security or federal employer identification number) and certain other information on a properly completed and executed Internal Revenue Service (“IRS”) Form W-9, or (ii) another basis for exemption from backup withholding must be established. The Investor further acknowledges that, if an Exchanging Investor is not a United States person for U.S. federal income tax purposes, the Company must be provided with a properly completed and executed IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8IMY (and all required attachments) or other applicable IRS Form W-8, attesting to that non-U.S. Exchanging Investor’s foreign status and certain other information, including information establishing an exemption from withholding under Sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended (the “Code”). The Investor further acknowledges that any Exchanging Investor may be subject to 30% U.S. federal withholding or 24% U.S. federal backup withholding on certain payments made to such Exchanging Investor unless such Exchanging Investor properly establishes an exemption from, or a reduced rate of, such withholding or backup withholding. The Company and its agents shall be entitled to deduct and withhold from any consideration payable pursuant to this Agreement such amounts as are required to be deducted or withheld under applicable law. To the extent any such amounts are withheld and remitted to the appropriate taxing authority, such amounts shall be treated for all purposes as having been paid to the Exchanging Investor to whom such amounts otherwise would have been paid.

19.

Section and Other Headings. The section and other headings contained in Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

[SIGNATURE PAGE FOLLOWS]



	HCI Group Inc.
	By Name: Paresh Patel Title: Chief Executive Officer

Please confirm that the foregoing correctly sets forth the agreement between the Company and the Investor by signing in the space provided below for that purpose.

AGREED AND ACCEPTED:

Investor:

CITADEL EQUITY FUND LTD.,

in its capacity as described in the first paragraph hereof

Name:

Title: Authorized Signatory

Exchanging Investor Information


Exchanging Investor	Aggregate Principal Amount of Exchanged Notes
Citadel Equity Fund Ltd	46,997,000

Exchanging Investor:

Citadel Equity Fund Ltd.

______________________________________________

Investor Address:

131 South Dearborn Street, Chicago, Illinois 60603

Telephone: 312-395-3269

Country of Residence:

Cayman Islands

Taxpayer Identification Number:

98-0339176

Details regarding any position, transaction, or agreement with Citadel are highly confidential, and may not be shared with unauthorized parties. Accordingly, communications between the issuer and a Prime Broker for Citadel cannot include details regarding Citadel positions or transactions that pertain to another Prime Broker.

Barclays: 10,930,000 principal

Account for Notes:

DTC Participant Number: 229

DTC Participant Name: Barclays Capital Inc

DTC Participant Phone Number: 212-528-1151

DTC Participant Contact Email: N/A – Citadel can coordinate email communication if necessary

FFC Account #: N/A

Account # at Bank/Broker: N/A

Account for Shares (if different from Notes):

DTC Participant Number:

DTC Participant Name:

DTC Participant Phone Number:

DTC Participant Contact Email:

FFC Account #:

Account # at Bank/Broker:

Wire instructions:


Bank Name:	The Bank of New York Mellon
Bank Routing #:	021000018
Account Number:	8901328197
Account Name	Barclays Bank PLC Prime Broker
FFC Account Name:	Citadel Equity Fund Ltd
FFC Account Number:	22056679
Broker Contact Name:	Richard Reid
Broker Contact Phone:	212-528-1151

BNP Paribas: 12,544,000 principal

Account for Notes:

DTC Participant Number: 2147

DTC Participant Name: BNP Paribas, New York Branch

DTC Participant Phone Number: 312-237-3329

DTC Participant Contact Email: N/A – Citadel can coordinate email communication if necessary

FFC Account #: N/A

Account # at Bank/Broker: N/A

Account for Shares (if different from Notes):

DTC Participant Number:

DTC Participant Name:

DTC Participant Phone Number:

DTC Participant Contact Email:

FFC Account #:

Account # at Bank/Broker:

Wire Instructions:


Bank Name:	BNP Paribas, NA
Bank Routing #:	026 007 689
Account Number:	61661700177
Account Name	BNP Paribas Prime Brokerage, Inc.
FFC Account Name:	Citadel Equity Fund Ltd
FFC Account Number:	3130196912
Broker Contact Name	Bill Gardner
Broker Contact Phone:	312-237-3329

UBS: 11,786,000 principal

Account for Notes:

DTC Participant Number: 642

DTC Participant Name: UBS Securities LLC

DTC Participant Phone Number: 212-713-1116

DTC Participant Contact Email: N/A – Citadel can coordinate email communication if necessary

FFC Account #: N/A

Account # at Bank/Broker: N/A

Account for Shares (if different from Notes):

DTC Participant Number:

DTC Participant Name:

DTC Participant Phone Number:

DTC Participant Contact Email:

FFC Account #:

Account # at Bank/Broker:

Wire Instructions:


Bank Name:	UBS AG, STAMFORD
Bank Routing #:	026 007 993
Account Number:	101-WA-797414-000
Account Name:	UBS Securities LLC
FFC Account Name:	Citadel Equity Fund Ltd
FFC Account Number:	75292374
Broker Contact Name:	Michael Hallett
Broker Contact Phone:	212-713-1116

Wells Fargo: 11,737,000 principal

Account for Notes:

DTC Participant Number: 2072

DTC Participant Name: Wells Fargo Bank, N.A.

DTC Participant Phone Number: 212-822-4892

DTC Participant Contact Email: N/A – Citadel can coordinate email communication if necessary

FFC Account #: N/A

Account # at Bank/Broker: N/A

Account for Shares (if different from Notes):

DTC Participant Number:

DTC Participant Name:

DTC Participant Phone Number:

DTC Participant Contact Email:

FFC Account #:

Account # at Bank/Broker:

Wire Instructions:


Bank Name:	Wells Fargo Bank, N.A
Bank Routing #:	121000248
Account Number:	4087268249
Account Name:	Wells Fargo Bank, N.A.
FFC Account Name:	Citadel Equity Fund Ltd
FFC Account Number:	2RU00069
Broker Contact Name:	DJ Johnson
Broker Contact Phone:	212-822-4892

Exchange Procedures

NOTICE TO INVESTOR

These are the Exchange Procedures for the settlement of the exchange of 4.25% Convertible Senior Notes due 2037, CUSIP 40416EAD5 (the “Exchanged Notes”) of HCI Group, Inc., a Florida corporation (the “Company”), for the Shares to be issued as Exchange Consideration (as defined in and pursuant to the Agreement between you and the Company), which is expected to occur on or about September 3, 2021. To ensure timely settlement for the Exchange Consideration, please follow the instructions as set forth below.

These instructions supersede any prior instructions you received. Your failure to comply with these instructions may delay your receipt of the Exchange Consideration.

To deliver Exchanged Notes:

You must direct the eligible DTC participant through which you hold a beneficial interest in the Exchanged Notes on September [●], 3, 2021, no later than 9:00 a.m., New York City time, to perform a free delivery through DTC for the aggregate principal amount of Exchanged Notes set forth on Exhibit A of the Agreement to be exchanged for Shares.

To receive Exchange Consideration:

You must direct the eligible DTC participant on September 3, 2021, no later than 9:00 a.m., New York City time, to perform a free delivery through DTC for the aggregate principal amount of Exchanged Notes set forth on Exhibit A of the Agreement to be exchanged for Shares.

American Stock Transfer is the Transfer Agent and Registrar for the Common Stock.

Closing: On September 3, 2021, after the Company receives your Exchanged Notes and your delivery instructions as set forth above, and subject to the satisfaction of the conditions to Closing as set forth in your Exchange Agreement, the Company will deliver the Exchange Consideration in respect of the Exchanged Notes in accordance with the delivery instructions above.

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Paresh Patel, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HCI Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Paresh Patel
November 9, 2021		Paresh Patel
		Chief Executive Officer (Principal Executive Officer)

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.

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James Mark Harmsworth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HCI Group, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ James Mark Harmsworth
November 9, 2021		James Mark Harmsworth
		Chief Financial Officer (Principal Financial and Accounting Officer)

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.

Exhibit 32.1

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of HCI Group, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2021 as filed with the Securities and Exchange Commission on November 9, 2021 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paresh Patel

Paresh Patel

Chief Executive Officer

November 9, 2021

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.

Exhibit 32.2

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of HCI Group, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2021 as filed with the Securities and Exchange Commission on November 9, 2021 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James Mark Harmsworth

James Mark Harmsworth

Chief Financial Officer

November 9, 2021

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.