HCI Group, Inc. (Form: 10-Q, Received: 08/03/2017 17:33:13)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 June 30, 2017

☐	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.)

5300 West Cypress Street, Suite 100

Tampa, FL 33607

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

(813) 849-9500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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 and post 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.

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

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 July 27, 2017 was 9,986,330.

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets:
	June 30, 2017 (unaudited) and December 31, 2016		1
	Consolidated Statements of Income:
	Three and six months ended June 30, 2017 and 2016 (unaudited)		2
	Consolidated Statements of Comprehensive Income:
	Three and six months ended June 30, 2017 and 2016 (unaudited)		3
	Consolidated Statements of Cash Flows:
	Six months ended June 30, 2017 and 2016 (unaudited)		4-5
	Consolidated Statements of Stockholders’ Equity:
	Six months ended June 30, 2017 and 2016 (unaudited)		6-7
	Notes to Consolidated Financial Statements (unaudited)		8-40

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41-55

Item 3	Quantitative and Qualitative Disclosures about Market Risk		55-57

Item 4	Controls and Procedures		57

	PART II – OTHER INFORMATION

Item 1	Legal Proceedings		58

Item 1A	Risk Factors		58

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		59-60

Item 3	Defaults upon Senior Securities		60

Item 4	Mine Safety Disclosures		60

Item 5	Other Information		60

Item 6	Exhibits

Signatures
Certifications

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)


	June 30,		December 31,
	2017		2016
	(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $247,147 and $167,231, respectively)	$	248,646	$	166,248
Equity securities, available for sale, at fair value (cost: $52,785 and $47,750, respectively)		56,152		53,035
Limited partnership investments, at equity		19,900		29,263
Investment in unconsolidated joint venture, at equity		1,680		2,102
Real estate investments (Note 4 – Consolidated Variable Interest Entity)		49,286		48,086

Total investments		375,664		298,734
Cash and cash equivalents (Note 4 – Consolidated Variable Interest Entity)		296,520		280,531
Accrued interest and dividends receivable		2,081		1,654
Income taxes receivable		973		2,811
Premiums receivable		26,621		17,276
Prepaid reinsurance premiums		36,032		24,554
Deferred policy acquisition costs		20,251		16,639
Property and equipment, net		12,080		11,374
Intangible assets, net		4,656		4,899
Deferred income taxes, net		—		250
Other assets (Note 4 – Consolidated Variable Interest Entity)		17,840		11,342

Total assets	$	792,718	$	670,064

Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses	$	73,089	$	70,492
Unearned premiums		199,970		175,803
Advance premiums		14,967		4,651
Assumed reinsurance balances payable		181		3,294
Accrued expenses (Note 4 – Consolidated Variable Interest Entity)		10,828		6,513
Deferred income taxes, net		4,383		—
Long-term debt		234,817		138,863
Other liabilities (Note 4 – Consolidated Variable Interest Entity)		16,058		26,702

Total liabilities		554,293		426,318

Commitments and contingencies (Note 16)
Stockholders’ equity:
7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued and outstanding)		—		—
Series B junior participating preferred stock (no par value, 400,000 shares authorized, no shares issued or outstanding)		—		—
Preferred stock (no par value, 18,100,000 shares authorized, no shares issued or outstanding)		—		—
Common stock (no par value, 40,000,000 shares authorized, 9,172,802 and 9,662,761 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively)		—		—
Additional paid-in capital		—		8,139
Retained income		235,436		232,964
Accumulated other comprehensive income, net of taxes		2,989		2,643

Total stockholders’ equity		238,425		243,746

Total liabilities and stockholders’ equity	$	792,718	$	670,064

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenue
Gross premiums earned	$	90,088		$	94,912		$	181,707		$	193,731
Premiums ceded		(28,241	)		(36,384	)		(56,824	)		(76,756	)

Net premiums earned		61,847			58,528			124,883			116,975
Net investment income		2,810			1,725			5,644			3,215
Net realized investment gains		1,787			391			2,502			316
Net other-than-temporary impairment losses recognized in income:
Total other-than-temporary impairment losses		(177	)		(228	)		(390	)		(636	)
Portion of loss recognized in other comprehensive income, before taxes		—			(314	)		—			(581	)

Net other-than-temporary impairment losses		(177	)		(542	)		(390	)		(1,217	)
Policy fee income		908			988			1,816			1,995
Gain on repurchases of convertible senior notes		—			—			—			153
Other		405			430			838			830

Total revenue		67,580			61,520			135,293			122,267

Expenses
Losses and loss adjustment expenses		27,665			26,272			53,194			53,352
Policy acquisition and other underwriting expenses		10,070			10,879			19,719			21,989
Salaries and wages		5,443			5,680			10,446			11,064
Interest expense		4,378			2,611			7,920			5,440
Loss on repurchases of senior notes		743			—			743			—
Other operating expenses		4,976			4,849			9,824			9,496

Total operating expenses		53,275			50,291			101,846			101,341

Income before income taxes		14,305			11,229			33,447			20,926
Income tax expense		4,763			4,205			11,885			7,846

Net income	$	9,542		$	7,024		$	21,562		$	13,080

Basic earnings per share	$	1.05		$	0.71		$	2.32		$	1.31

Diluted earnings per share	$	0.93		$	0.71		$	2.07		$	1.31

Dividends per share	$	0.35		$	0.30		$	0.70		$	0.60

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net income	$	9,542		$	7,024		$	21,562		$	13,080

Other comprehensive income:
Change in unrealized (loss) gain on investments:
Net unrealized gain arising during the period		654			5,893			2,667			8,056
Other-than-temporary impairment loss charged to income		177			542			390			1,217
Call and repayment losses charged to investment income		8			10			9			11
Reclassification adjustment for net realized gains		(1,787	)		(391	)		(2,502	)		(316	)

Net change in unrealized (loss) gain		(948	)		6,054			564			8,968
Deferred income taxes on above change		365			(2,336	)		(218	)		(3,460	)

Total other comprehensive (loss) income, net of income taxes		(583	)		3,718			346			5,508

Comprehensive income	$	8,959		$	10,742		$	21,908		$	18,588

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	21,562		$	13,080
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		2,139			1,948
Net amortization of premiums on investments in fixed-maturity securities		535			255
Depreciation and amortization		4,380			2,656
Deferred income tax benefits		(1,430	)		(1,388	)
Net realized investment gains		(2,502	)		(316	)
Other-than-temporary impairment losses		390			1,217
Income from unconsolidated joint venture		(142	)		(228	)
Distribution received from unconsolidated joint venture		147			—
Gain on repurchases of convertible senior notes		—			(153	)
Loss on repurchases of senior notes		743			—
Net (income) loss from limited partnership interests		(1,332	)		1,065
Distributions received from limited partnership interests		426			44
Foreign currency remeasurement (gain) loss		(51	)		19
Other		116			—
Changes in operating assets and liabilities:
Accrued interest and dividends receivable		(427	)		1
Income taxes		1,838			(3,213	)
Premiums receivable		(9,345	)		(7,597	)
Prepaid reinsurance premiums		(11,478	)		4,954
Deferred policy acquisition costs		(3,612	)		(2,489	)
Other assets		(6,971	)		28,442
Losses and loss adjustment expenses		2,597			3,037
Unearned premiums		24,167			21,310
Advance premiums		10,316			8,841
Assumed reinsurance balances payable		(3,113	)		(1,084	)
Accrued expenses and other liabilities		2,411			34

Net cash provided by operating activities		31,364			70,435

Cash flows from investing activities:
Investments in limited partnership interests		(1,489	)		(2,448	)
Distributions received from limited partnership interests		11,758			—
Distribution from unconsolidated joint venture		417			—
Purchase of property and equipment		(1,295	)		(485	)
Purchase of real estate investments		(1,931	)		(878	)
Purchase of fixed-maturity securities		(91,354	)		(39,673	)
Purchase of equity securities		(22,738	)		(8,410	)
Proceeds from sales of fixed-maturity securities		6,873			33,524
Proceeds from calls, repayments and maturities of fixed-maturity securities		3,937			1,074
Proceeds from sales of equity securities		20,902			9,155

Net cash used in investing activities		(74,920	)		(8,141	)

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)


	Six Months Ended
	June 30,
	2017			2016
Cash flows from financing activities:
Cash dividends paid		(7,026	)		(6,310	)
Cash dividends received under share repurchase forward contract		503			374
Proceeds from exercise of common stock options		75			—
Proceeds from issuance of long-term debt		143,859			9,200
Repurchases of convertible senior notes		—			(11,347	)
Repurchases of senior notes		(40,250	)		—
Repayment of debt		(465	)		(150	)
Repurchases of common stock		(30,636	)		(447	)
Repurchases of common stock under share repurchase plan		(1,590	)		(12,015	)
Debt issuance costs		(4,975	)		(177	)
Tax benefits on stock-based compensation		—			131

Net cash provided by (used in) financing activities		59,495			(20,741	)

Effect of exchange rate changes on cash		50			(17	)

Net increase in cash and cash equivalents		15,989			41,536
Cash and cash equivalents at beginning of period		280,531			267,738

Cash and cash equivalents at end of period	$	296,520		$	309,274

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	11,476		$	12,315

Cash paid for interest	$	3,620		$	3,746

Non-cash investing and financing activities:

Unrealized gain on investments in available-for-sale securities, net of tax	$	346		$	5,508

Conversion of revolving credit facility to long-term debt	$	9,441		$	—

Receivable from sales of available-for-sale securities	$	—		$	95

Payable on purchases of available-for-sale securities	$	694		$	127

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2017

(Unaudited)

(Dollar amounts in thousands)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income,		Total Stockholders’
	Shares			Amount		Capital			Income			Net of Tax		Equity
Balance at December 31, 2016		9,662,761		$	—	$	8,139		$	232,964		$	2,643	$	243,746
Net income		—			—		—			21,562			—		21,562
Total other comprehensive income, net of income taxes		—			—		—			—			346		346
Exercise of common stock options		30,000			—		75			—			—		75
Issuance of restricted stock		154,936			—		—			—			—		—
Forfeiture of restricted stock		(10,874	)		—		—			—			—		—
Repurchase and retirement of common stock		(434,505	)		—		(21,236	)		—			—		(21,236	)
Repurchase and retirement of common stock under share repurchase plan		(38,416	)		—		(1,590	)		—			—		(1,590	)
Repurchase of common stock under prepaid forward contract		(191,100	)		—		(9,400	)		—			—		(9,400	)
Equity component on 4.25% convertible senior notes (net of offering costs of $543)		—			—		15,151			—			—		15,151
Deferred taxes on debt discount		—			—		(5,845	)		—			—		(5,845	)
Common stock dividends		—			—		—			(6,523	)		—		(6,523	)
Stock-based compensation		—			—		2,139			—			—		2,139
Additional paid-in capital shortfall allocated to retained income		—			—		12,567			(12,567	)		—		—

Balance at June 30, 2017		9,172,802		$	—	$	—		$	235,436		$	2,989	$	238,425

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity - continued

Six Months Ended June 30, 2016

(Unaudited)

(Dollar amounts in thousands)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive (Loss) Income,			Total Stockholders’
	Shares			Amount		Capital			Income			Net of Tax			Equity
Balance at December 31, 2015		10,292,256		$	—	$	23,879		$	215,634		$	(1,791	)	$	237,722
Net income		—			—		—			13,080			—			13,080
Total other comprehensive income, net of income taxes		—			—		—			—			5,508			5,508
Issuance of restricted stock		102,440			—		—			—			—			—
Forfeiture of restricted stock		(5,897	)		—		—			—			—			—
Cancellation of restricted stock		(160,000	)		—		—			—			—			—
Repurchase and retirement of common stock		(14,400	)		—		(447	)		—			—			(447	)
Repurchase and retirement of common stock under share repurchase plan		(376,796	)		—		(12,015	)		—			—			(12,015	)
Common stock dividends		—			—		—			(5,936	)		—			(5,936	)
Tax benefits on stock-based compensation		—			—		131			—			—			131
Tax shortfalls on stock-based compensation		—			—		(234	)		—			—			(234	)
Stock-based compensation		—			—		1,948			—			—			1,948

Balance at June 30, 2016		9,837,603		$	—	$	13,262		$	222,778		$	3,717		$	239,757

See accompanying Notes to Consolidated Financial Statements.

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 majority-owned and controlled subsidiaries (collectively, the “Company”), is primarily engaged in the property and casualty insurance business through Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), its principal operating subsidiary. HCPCI is authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsed and wind-only policies to new and pre-existing Florida customers. HCPCI’s operations are supported by HCI Group, Inc. and certain HCI subsidiaries. During the second quarter of 2017, HCPCI received regulatory approval to write residential property and casualty insurance in the states of Arkansas and Pennsylvania.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements for 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 June 30, 2017 and the results of operations and cash flows for the 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, 2017. 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, 2016 included in the Company’s Form 10-K, which was filed with the SEC on February 22, 2017.

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 for reinsurance contracts with retrospective provisions, deferred income taxes, 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Adoption of New Accounting Standards

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

Long-Term Debt

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

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

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

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Common Share Repurchases

The Company primarily repurchases its common stock in the open market through share repurchase programs and from institutional investors in private transactions such as prepaid share repurchase forward contracts and share repurchase agreements.

A prepaid share repurchase forward contract is generally a contract that allows a party to buy from the counterparty a specified number of common shares at a specific time at a given forward price. The Company entered into such a contract and evaluated the characteristics of the forward contract to determine whether it met the definition of a derivative financial instrument pursuant to U.S. GAAP. The Company determined the forward contract is an equity contract on the Company’s common shares requiring physical settlement in common shares of the Company. As such, the transaction is recognized as a component of stockholders’ equity and there will be no recognition in earnings for changes in fair value in subsequent periods.

In general, the Company first allocates the purchase price or the prepayment amount to additional paid-in capital to the extent available and the remaining balance is allocated to retained income. Due to past and recent share repurchases, the Company’s additional paid-in capital has been exhausted and shall remain so until the Company fully recoups the total amount allocated to retained income.

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

Note 3 — Recent Accounting Pronouncements

Accounting Standards Update No. 2017-09. In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-09 (“ASU 2017-09”), Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an application of modification accounting. ASU 2017-09 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

Accounting Standards Update No. 2017-08. In March 2017, the FASB issued Accounting Standards Update No. 2017-08 (“ASU 2017-08”), Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, this update shortens the amortization period of certain purchased callable debt securities to the earliest call date. ASU 2017-08 is effective for the Company beginning with the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Accounting Standards Update No. 2017-05. In February 2017, the FASB issued Accounting Standards Update No. 2017-05 (“ASU 2017-05”), Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. In addition, ASU 2017-15 eliminates the exception in the financial asset guidance for transfers of investments including equity method investments in real estate entities and supersedes the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest subsection (Topic 845). ASU 2017-05 is effective for the Company beginning with the first quarter of 2018. The Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.

Accounting Standards Update No. 2017-03. In January 2017, the FASB issued Accounting Standards Update No. 2017-03 (“ASU 2017-03”), Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323), which adds and amends SEC paragraphs pursuant to the SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force meetings. The announcement made at the September 22, 2016 meeting provides the SEC staff view on the disclosure of the impact that recently issued accounting standards will have on a public entity’s financial statements when the standards are adopted in a future period. This announcement applies to ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) and any subsequent amendments to guidance in the ASUs that are issued prior to the adoption of the aforementioned ASUs.

Accounting Standards Update No. 2017-01. In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (“ASU 2017-01”), Business Combination (Topic 805), which clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. If the screen is not met, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. ASU 2017-01 is effective for the Company beginning with the first quarter of 2018. Early adoption is permitted under certain circumstances. When adopted, this guidance will impact how the Company determines whether a transaction should be accounted for as a business acquisition or disposal in a future period.

Accounting Standards to be Adopted in Fiscal Year 2018

In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (“ASU 2016-01”), Financial Instruments – Overall (Subtopic 825-10), primarily requiring all equity investments other than those accounted for under the equity method of accounting or those that result in consolidation of the investee to be measured at fair value with changes in the fair value recognized through net income. The application of ASU 2016-01 could cause the Company to experience significant volatility in earnings. Under current accounting policy, the Company recognizes unrealized holding gains and losses on available-for-sale equity securities in stockholders’ equity as a component of accumulated other comprehensive income. In the year of adoption, available-for-sale equity securities’ unrealized holding gains and losses reported in accumulated other comprehensive income at December 31, 2017 will be reclassified to beginning retained income. Any subsequent changes in fair value will be recognized in the consolidated statement of income. In addition, the classification of the Company’s equity securities with readily determinable fair values as “available-for-sale” in the consolidated balance sheet and related disclosures will be eliminated.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 also amends the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer to be consistent with the guidance in this ASU. ASU 2014-09 permits two methods of adoption: a full retrospective method or a modified retrospective method. This standard could impact the timing and amounts of revenue recognized. The Company has identified and reviewed impacted revenue generating activities in accordance with the five-step revenue recognition model specified by this standard. The Company elects to use a modified retrospective method for transition to the new revenue recognition standard. Based on the Company’s assessment, the impact will be limited to the related disclosures of certain revenue generating activities as its primary source of revenue from insurance premiums is not within the scope of this new standard.

Note 4 — Investments

Available-for-Sale Securities

The Company holds investments in fixed-maturity securities and equity securities that are classified as available-for-sale. At June 30, 2017 and December 31, 2016, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:


	Cost or Amortized		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gain		Loss			Value
*As of June 30, 2017*
Fixed-maturity securities
U.S. Treasury and U.S. government agencies	$	47,134	$	7	$	(95	)	$	47,046
Corporate bonds		112,603		969		(1,176	)		112,396
State, municipalities, and political subdivisions		77,429		1,760		(197	)		78,992
Exchange-traded debt		9,744		254		(39	)		9,959
Redeemable preferred stock		237		16		—			253

Total		247,147		3,006		(1,507	)		248,646
Equity securities		52,785		4,292		(925	)		56,152

Total available-for-sale securities	$	299,932	$	7,298	$	(2,432	)	$	304,798

*As of December 31, 2016*
Fixed-maturity securities
U.S. Treasury and U.S. government agencies	$	1,975	$	—	$	(36	)	$	1,939
Corporate bonds		75,538		607		(1,641	)		74,504
State, municipalities, and political subdivisions		78,018		776		(488	)		78,306
Exchange-traded debt		11,463		36		(237	)		11,262
Redeemable preferred stock		237		3		(3	)		237

Total		167,231		1,422		(2,405	)		166,248
Equity securities		47,750		5,769		(484	)		53,035

Total available-for-sale securities	$	214,981	$	7,191	$	(2,889	)	$	219,283

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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 June 30, 2017 and December 31, 2016 are as follows:


	Amortized		Estimated
	Cost		Fair Value
*As of June 30, 2017*
Available-for-sale
Due in one year or less	$	30,824	$	30,820
Due after one year through five years		122,542		122,184
Due after five years through ten years		70,671		71,860
Due after ten years		23,110		23,782

	$	247,147	$	248,646


	Amortized		Estimated
	Cost		Fair Value
*As of December 31, 2016*
Available-for-sale
Due in one year or less	$	2,656	$	2,662
Due after one year through five years		49,915		50,023
Due after five years through ten years		90,360		89,332
Due after ten years		24,300		24,231

	$	167,231	$	166,248

Sales of Available-for-Sale Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and six months ended June 30, 2017 and 2016 were as follows:


			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended June 30, 2017
Fixed-maturity securities	$	2,434	$	6	$	(18	)

Equity securities	$	13,631	$	2,090	$	(291	)

Three months ended June 30, 2016
Fixed-maturity securities	$	32,424	$	376	$	—

Equity securities	$	4,801	$	220	$	(205	)

Six months ended June 30, 2017
Fixed-maturity securities	$	6,873	$	29	$	(22	)

Equity securities	$	20,902	$	2,835	$	(340	)

Six months ended June 30, 2016
Fixed-maturity securities	$	33,524	$	383	$	—

Equity securities	$	9,155	$	359	$	(426	)

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Other-than-temporary Impairment

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

•

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

•

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

•

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

•

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

•

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

Fixed-maturity Securities

Prior to the sale of one intent-to-sell fixed-maturity security, the Company recognized $38 of impairment loss for this security for the three months ended June 30, 2017. For the six months ended June 30, 2017, the Company recognized $100 of impairment losses related to the sale of two intent-to-sell fixed-maturity securities. At June 30, 2017, two fixed-maturity securities were considered other-than-temporarily impaired due to their credit risk. The Company intends to hold these two fixed-maturity securities until maturity, but does not expect a full recovery of their carrying value.

In June 2016, the Company sold one impaired fixed-maturity security that was previously intended to hold until maturity due to uncertainties surrounding the issuer’s announced restructuring plan. Prior to the sale of this security, the remaining $202 of unrealized impairment loss was reclassified from comprehensive income and recognized in total other-than-temporary impairment losses in the Company’s consolidated statement of income for the three months ended June 30, 2016. For the six months ended June 30, 2016, the Company recognized $495 of additional impairment loss in the consolidated statement of income, representing $26 of additional loss recorded during the period and the reclassification of $469 previously recorded in other comprehensive income. At June 30, 2016, there was no fixed-maturity security with credit risk issue.

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


	2017		2016
Balance at January 1	$	475	$	111
Additional credit impairments on previously impaired securities		—		293

Balance at March 31		475		404
Credit impaired security fully disposed of for which there was no prior intent or requirement to sell		—		(385	)
Reduction due to increase in expected cash flows recognized over the remaining life of the previously impaired security		—		(19	)

Balance at June 30	$	475	$	—

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Equity Securities

In determining whether equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of time sufficient to allow for the recovery of cost, the length of time each security has been in an unrealized loss position, the extent of the decline and the near term prospect for recovery. The Company recognized impairment losses of $139 and $340 in the consolidated statement of income for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the Company recognized impairment losses of $290 and $722, respectively. At June 30, 2017 and 2016, the Company had three and 15 equity securities, respectively, that were other-than-temporarily impaired.

Securities with gross unrealized loss positions at June 30, 2017 and December 31, 2016, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:


	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross			Estimated		Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
As of June 30, 2017	Loss			Value		Loss			Value		Loss			Value
Fixed-maturity securities
U.S. Treasury and U.S. government agencies	$	(95	)	$	45,148	$	—		$	—	$	(95	)	$	45,148
Corporate bonds		(1,169	)		76,604		(7	)		993		(1,176	)		77,597
State, municipalities, and political subdivisions		(165	)		10,715		(32	)		2,635		(197	)		13,350
Exchange-traded debt		(39	)		3,428		—			—		(39	)		3,428

Total fixed-maturity securities		(1,468	)		135,895		(39	)		3,628		(1,507	)		139,523
Equity securities		(869	)		15,837		(56	)		1,295		(925	)		17,132

Total available-for-sale securities	$	(2,337	)	$	151,732	$	(95	)	$	4,923	$	(2,432	)	$	156,655

At June 30, 2017, there were 140 securities in an unrealized loss position. Of these securities, ten securities had been in an unrealized loss position for 12 months or longer. The gross unrealized loss of corporate bonds in an unrealized loss position for less than twelve months included $236 of other-than-temporary impairment losses related to non-credit factors.


	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, 2016	Loss			Value		Loss			Value		Loss			Value
Fixed-maturity securities
U.S. Treasury and U.S. government agencies	$	(36	)	$	1,939	$	—		$	—	$	(36	)	$	1,939
Corporate bonds		(1,546	)		43,859		(95	)		2,814		(1,641	)		46,673
State, municipalities, and political subdivisions		(441	)		26,029		(47	)		3,036		(488	)		29,065
Exchange-traded debt		(191	)		4,980		(46	)		1,954		(237	)		6,934
Redeemable preferred stock		(3	)		47		—			—		(3	)		47

Total fixed-maturity securities		(2,217	)		76,854		(188	)		7,804		(2,405	)		84,658
Equity securities		(293	)		10,042		(191	)		3,209		(484	)		13,251

Total available-for-sale securities	$	(2,510	)	$	86,896	$	(379	)	$	11,013	$	(2,889	)	$	97,909

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

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 all 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.


	June 30, 2017						December 31, 2016
	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)	$	7,203	$	5,505		15.37	$	6,246	$	6,428		16.50
Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e)		6,942		2,217		1.76		7,358		1,360		1.76
Maximum long-term capital appreciation through long and short positions in equity and/or debt securities of publicly traded U.S. and non-U.S. issuers, derivative instruments and certain other financial instruments. (f)		—		—		—		11,333		—		66.58
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(g)(h)		5,755		4,343		0.18		4,326		5,766		0.18

Total	$	19,900	$	12,065			$	29,263	$	13,554

(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 10-year term and the capital commitment is expected to expire on September 3, 2019.

(d)

Expected to have a three-year term from the end of the capital commitment period, which is March 31, 2018.

(e)

At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.

(f)

The withdrawal was effective on February 15, 2017. As a result, the Company’s investment in this limited partnership was terminated.

(g)

Expected to have a 10-year term and the capital commitment is expected to expire on June 30, 2020.

(h)

With the consent of a super majority of partners, the term of the fund may be extended for up to three additional one-year periods.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Operating results:
Total income	$	157,433		$	(6,987	)	$	229,750		$	(23,069	)
Total expenses		(26,177	)		(27,401	)		(53,819	)		(130,022	)

Net income (loss)	$	131,256		$	(34,388	)	$	175,931		$	(153,091	)


	June 30,		December 31,
	2017		2016
Balance Sheet:
Total assets	$	3,891,172	$	2,956,327
Total liabilities	$	180,945	$	63,813

For the three and six months ended June 30, 2017, the Company recognized net investment income of $560 and $1,332, respectively, for these investments. During the second quarter of 2017, the Company received in cash a return on investment totaling $154. During the first half of 2017, the Company received total cash distributions of $12,184, representing $11,758 of returned capital and $426 of return on investment. Included in the return of capital was $11,626 from one limited partnership the Company withdrew from in February 2017.

For the three and six months ended June 30, 2016, the Company recognized net investment losses of $196 and $1,065, respectively. During the three and six months ended June 30, 2016, the Company received one cash distribution of $44 of return on investment. At June 30, 2017 and December 31, 2016, the Company’s cumulative contributed capital to the partnerships existing at each respective balance sheet date totaled $18,435 and $31,946, respectively, and the Company’s maximum exposure to loss aggregated $19,900 and $29,263, respectively.

Investment in Unconsolidated Joint Venture

The Company has an equity investment in FMKT Mel JV, which is a limited liability company treated as a joint venture under U.S. GAAP. In March 2017, FMKT Mel JV sold a portion of its outparcel land for gross proceeds of $825 and recognized a $331 gain on sale of which $199 was allocated to the Company in accordance with the profit allocation specified in the operating agreement.

At June 30, 2017 and December 31, 2016, the Company’s maximum exposure to loss relating to this variable interest entity was $1,680 and $2,102, respectively, representing the carrying value of the investment. At June 30, 2017, there was an undistributed gain of $30 from this equity method investment as compared with an undistributed loss, after an equity distribution, of $25 at December 31, 2016, the amounts of which were included in the Company’s consolidated retained income.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The limited liability company members received no cash distributions during the three months ended June 30, 2017 and 2016. During the six months ended June 30, 2017, the Company received a cash distribution of $564, representing a combined distribution of $147 in earnings and $417 in capital as compared with no cash distribution during the six months ended June 30, 2016. The following tables provide FMKT Mel JV’s summarized unaudited financial results and the unaudited financial positions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Operating results:
Total revenues and gain	$	—		$	181		$	331		$	714
Total expenses		(33	)		(247	)		(65	)		(483	)

Net (loss) income	$	(33	)	$	(66	)	$	266		$	231

The Company’s share of net (loss) income*	$	(30	)	$	(59	)	$	142		$	228

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


	June 30,		December 31,
	2017		2016
Balance Sheet:
Construction in progress—real estate	$	328	$	334
Property and equipment, net		1,226		1,654
Cash		144		179
Other		180		180

Total assets	$	1,878	$	2,347

Accounts payable	$	2	$	11
Other liabilities		10		—
Members’ capital		1,866		2,336

Total liabilities and members’ capital	$	1,878	$	2,347

Investment in unconsolidated joint venture, at equity*	$	1,680	$	2,102

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Real Estate Investments

Real estate investments include office and retail space that is leased to tenants, wet and dry boat storage, one restaurant, and two marinas. Real estate investments consist of the following as of June 30, 2017 and December 31, 2016.


	June 30,			December 31,
	2017			2016
Land	$	17,592		$	17,592
Land improvements		9,370			9,336
Buildings		16,601			16,154
Tenant and leasehold improvements		940			872
Construction in progress*		4,481			3,404
Other		2,945			2,683

Total, at cost		51,929			50,041
Less: accumulated depreciation and amortization		(2,643	)		(1,955	)

Real estate investments	$	49,286		$	48,086

*	This project, which was developed by the Company’s consolidated variable interest entity, was near completion at June 30, 2017.

Depreciation and amortization expense related to real estate investments was $351 and $95 for the three months ended June 30, 2017 and 2016, respectively, and $688 and $188 for the six months ended June 30, 2017 and 2016, respectively.

Consolidated Variable Interest Entity

At June 30, 2017, the Company had a development project near completion in Riverview, Florida through a limited liability company treated under U.S. GAAP as a joint venture in which the Company’s subsidiary has a controlling financial interest and, as a result, it is the primary beneficiary. In addition, the Company is the sole source of funding for the development project. The following table summarizes the assets and liabilities related to this variable interest entity which are included in the accompanying consolidated balance sheets.


	June 30,		December 31,
	2017		2016
Cash and cash equivalents	$	69	$	65
Construction in progress included in real estate investments	$	4,481	$	3,404
Other assets	$	49	$	—
Accrued expenses	$	117	$	68
Other liabilities	$	17	$	11

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Net Investment Income

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Available-for-sale securities:
Fixed-maturity securities	$	1,403		$	1,131		$	2,640		$	2,230
Equity securities		797			784			1,671			1,735
Investment expense		(191	)		(161	)		(350	)		(323	)
Limited partnership investments		560			(196	)		1,332			(1,065	)
Real estate investments		(168	)		(53	)		(564	)		(83	)
(Loss) income from unconsolidated joint venture		(30	)		(59	)		142			228
Cash and cash equivalents		439			268			767			470
Other		—			11			6			23

Net investment income	$	2,810		$	1,725		$	5,644		$	3,215

Note 5 — 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 unrealized other-than-temporary impairment 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
	June 30, 2017									June 30, 2016
				Income Tax									Income Tax
	Before			Expense			Net of			Before			Expense			Net of
	Tax			(Benefit)			Tax			Tax			(Benefit)			Tax
Unrealized gain arising during the period	$	654		$	252		$	402		$	5,893		$	2,274		$	3,619
Other-than-temporary impairment loss		177			69			108			542			209			333
Call and repayment losses charged to investment income		8			3			5			10			4			6
Reclassification adjustment for realized gains		(1,787	)		(689	)		(1,098	)		(391	)		(151	)		(240	)

Total other comprehensive (loss) income	$	(948	)	$	(365	)	$	(583	)	$	6,054		$	2,336		$	3,718

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	Six Months Ended									Six Months Ended
	June 30, 2017									June 30, 2016
				Income Tax									Income Tax
	Before			Expense			Net of			Before			Expense			Net of
	Tax			(Benefit)			Tax			Tax			(Benefit)			Tax
Unrealized gain arising during the period	$	2,667		$	1,029		$	1,638		$	8,056		$	3,108		$	4,948
Other-than-temporary impairment loss		390			150			240			1,217			470			747
Call and repayment losses charged to investment income		9			4			5			11			4			7
Reclassification adjustment for realized gains		(2,502	)		(965	)		(1,537	)		(316	)		(122	)		(194	)

Total other comprehensive income	$	564		$	218		$	346		$	8,968		$	3,460		$	5,508

Note 6 — Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Valuation Methodology

Cash and cash equivalents

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

Available-for-sale securities

Estimated fair values of the Company’s available-for-sale securities are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not available, fair values are measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values.

Limited Partnership Investments

As described in Note 4 — “Investments” under Limited Partnership Investments, the Company has interests in limited partnerships which are private equity funds. Pursuant to U.S. GAAP, these funds are required to use fair value accounting; therefore, the estimated fair value approximates the carrying value of these funds.

Revolving Credit Facility

The interest rate on the Company’s revolving credit facility was periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, its carrying value at December 31, 2016 approximated fair value. In February 2017, this credit facility was converted into a 3.95% three-year promissory note. See Note 8 — “Long-Term Debt” under 3.95% Promissory Note.

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
8% Senior Notes	*	Closing price listed on the New York Stock Exchange
3.875% Convertible Senior Notes	2019	Quoted price at June 30, 2017; Discounted cash flow method/Level 3 inputs at December 31, 2016
4.25% Convertible Senior Notes	2037	Discounted cash flow method/Level 3 inputs
3.95% Promissory Note	2020	Discounted cash flow method/Level 3 inputs
4% Promissory Note	2031	Discounted cash flow method/Level 3 inputs
3.75% Promissory Note	2036	Discounted cash flow method/Level 3 inputs

*	Redeemed on April 3, 2017.

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 June 30, 2017 and December 31, 2016:


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
*As of June 30, 2017*
Financial Assets:
Cash and cash equivalents	$	296,520	$	—	$	—	$	296,520

Fixed-maturity securities:
U.S. Treasury and U.S. government agencies		45,543		1,503		—		47,046
Corporate bonds		111,402		994		—		112,396
State, municipalities, and political subdivisions		—		78,992		—		78,992
Exchange-traded debt		9,959		—		—		9,959
Redeemable preferred stock		253		—		—		253

Total fixed-maturity securities		167,157		81,489		—		248,646
Equity securities		56,152		—		—		56,152

Total available-for-sale securities		223,309		81,489		—		304,798

Total	$	519,829	$	81,489	$	—	$	601,318


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
*As of December 31, 2016*
Financial Assets:
Cash and cash equivalents	$	280,531	$	—	$	—	$	280,531

Fixed-maturity securities:
U.S. Treasury and U.S. government agencies		1,939		—		—		1,939
Corporate bonds		73,519		985		—		74,504
State, municipalities, and political subdivisions		—		78,306		—		78,306
Exchange-traded debt		11,262		—		—		11,262
Redeemable preferred stock		237		—		—		237

Total fixed-maturity securities		86,957		79,291		—		166,248
Equity securities		53,035		—		—		53,035

Total available-for-sale securities		139,992		79,291		—		219,283

Total	$	420,523	$	79,291	$	—	$	499,814

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Assets and Liabilities Carried at Other Than Fair Value

The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of June 30, 2017 and December 31, 2016.


	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
*As of June 30, 2017*
Financial Assets:
Limited partnership investments	$	19,900	$	—	$	—	$	19,900	$	19,900
Financial Liabilities:
Long-term debt:
3.875% Convertible senior notes	$	83,676	$	—	$	88,625	$	—	$	88,625
4.25% Convertible senior notes		124,723		—		—		123,302		123,302
3.95% Promissory note		9,363		—		—		9,442		9,442
4% Promissory note		8,436		—		—		8,200		8,200
3.75% Promissory note		8,619		—		—		8,065		8,065

Total long-term debt	$	234,817	$	—	$	88,625	$	237,634	$	237,634


	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
*As of December 31, 2016*
Financial Assets:
Limited partnership investments	$	29,263	$	—	$	—	$	29,263	$	29,263
Financial Liabilities:
Revolving credit facility	$	9,463	$	—	$	—	$	9,463	$	9,463
Long-term debt:
8% Senior notes	$	39,448	$	—	$	41,618	$	—	$	41,618
3.875% Convertible senior notes		81,988		—		—		84,696		84,696
4% Promissory note		8,660		—		—		8,664		8,664
3.75% Promissory note		8,767		—		—		8,506		8,506

Total long-term debt	$	138,863	$	—	$	41,618	$	101,866	$	143,484

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 7 — Other Assets

The following table summarizes the Company’s other assets:


	June 30,		December 31,
	2017		2016
Benefits receivable related to retrospective reinsurance contracts	$	11,269	$	5,810
Prepaid expenses		2,404		1,581
Lease acquisition costs, net		597		615
Restricted cash		709		600
Other		2,861		2,736

Total other assets	$	17,840	$	11,342

Note 8 — Long-Term Debt

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


	June 30,			December 31,
	2017			2016
8% Senior Notes, redeemed in April 2017	$	—		$	40,250
3.875% Convertible Senior Notes, due March 15, 2019		89,990			89,990
4.25% Convertible Senior Notes, due March 1, 2037		143,750			—
3.95% Promissory note, due through February 17, 2020		9,473			—
4% Promissory note, due through February 1, 2031		8,587			8,821
3.75% Promissory note, due through September 1, 2036		8,770			8,924

Total principal amount		260,570			147,985
Less: unamortized discount and issuance costs		(25,753	)		(9,122	)

Total long-term debt	$	234,817		$	138,863

The following table summarizes future maturities of long-term debt as of June 30, 2017, 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 June 30,
2017	$	1,029
2018		91,060
2019		9,867
2020		898
2021		144,683
Thereafter		13,033

Total	$	260,570

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2017			2016		2017			2016
Interest Expense:
Contractual interest	$	2,680		$	1,767	$	5,104		$	3,656
Non-cash expense (a)		1,718			844		2,877			1,784
Capitalized interest (b)		(20	)		—		(61	)		—

Total	$	4,378		$	2,611	$	7,920		$	5,440

(a)	Represents amortization of debt discount and issuance costs.

(b)	Interest was capitalized for a construction project in Riverview, Florida which is intended for lease.

Convertible Senior Notes

The Company’s Convertible Senior Notes consist of 3.875% Convertible Senior Notes due 2019 (“3.875% Convertible Notes”) and 4.25% Convertible Senior Notes due 2037 (“4.25% Convertible Notes”). The 3.875% Convertible Notes were issued in late 2013 in a private offering for an aggregate principal amount of $103,000. During the first quarter of 2016, the Company repurchased an aggregate of $13,010 in principal, thereby decreasing the aggregate principal balance of its 3.875% Convertible Notes to $89,990. On March 3, 2017, the Company issued 4.25% Convertible Notes in a private offering for an aggregate principal amount of $143,750. The net proceeds of the 4.25% Convertible Notes were $138,775 after $4,975 in related issuance and transaction costs. The following table summarizes the principal and interest payment terms of these Convertible Senior Notes:


Convertible Senior Notes		Interest Payment Terms
3.875% Convertible Notes, due March 15, 2019		Semiannually in arrears: March 15 and September 15
4.25% Convertible Notes, due March 1, 2037		Semiannually in arrears: March 1 and September 1

The Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. These Convertible Senior Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Convertible Senior Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in each respective indenture. These Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. In conjunction with the issuances of the Convertible Senior Notes, the Company entered into prepaid share repurchase forward contracts and share repurchase agreements providing for the repurchase of shares of the Company’s common stock. See Note 14 — “Stockholders’ Equity” under Share Repurchase Agreements and Prepaid Share Repurchase Forward Contracts for additional information.

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 information regarding the equity and liability components of the Convertible Senior Notes:


	June 30,			December 31
	2017			2016
Principal amount	$	233,740		$	89,990
Unamortized discount		(20,198	)		(6,795	)

Liability component – net carrying value before issuance costs	$	213,542		$	83,195

Equity component – conversion, net of offering costs	$	31,051		$	15,900

Embedded Conversion Feature

The conversion feature of these Convertible Senior Notes is subject to conversion rate adjustments upon the occurrence of specified events (including payment of dividends above a specified amount) but will not be adjusted for any accrued and unpaid interest.

3.875% Convertible Notes . Since January 2015, the Company’s cash dividends on common stock have exceeded $0.275 per share, resulting in adjustments to the conversion rate of the 3.875% Convertible Notes. Accordingly, as of June 30, 2017, the conversion rate of the Company’s 3.875% Convertible Notes was 16.1514 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.91 per share.

4.25% Convertible Notes . The conversion rate of the 4.25% Convertible Notes is currently 16.2635 shares of common stock for each $1 in principal amount, which is the equivalent of approximately $61.49 per share.

The holders of the Convertible Senior Notes may convert all or a portion of their Convertible Senior Notes during specified periods as follows: (1) during any calendar quarter commencing after the calendar quarter ending on the dates specified in each respective indenture, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten consecutive trading-day period in which the trading price per $1 principal amount of the Convertible Senior Notes is less than 98% of the product of the last reported sale price and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; or (4) at any time on or after the dates specified in each respective indenture.

The note holders who elect to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of June 30, 2017, none of the conditions allowing the holders of either class of the Convertible Senior Notes to convert had been met.

The Company determined that the Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument but rather is required to be separately accounted for in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance, the Company accounted for the equity component of the embedded conversion feature as a reduction in the carrying amount of the debt and an increase in additional paid-in capital.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Embedded Redemption Feature – Fundamental Change

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

Embedded Redemption Feature – Put Option of the Note Holder

At the option of the holders of the 4.25% Convertible Notes, the Company is required to repurchase for cash all or any portion of the 4.25% Convertible Notes at par on March 1, 2022, March 1, 2027 or March 1, 2032. The Company concluded that this embedded feature is not a derivative financial instrument. In addition, based on economic factors at the time when the 4.25% Convertible Notes were issued, the Company determined it is probable that the note holders will exercise this option. Thus, the Company amortizes the liability component and related issuance costs associated with the 4.25% Convertible Notes over the period from March 3, 2017 to March 1, 2022.

The effective interest rates for the 3.875% Convertible Notes and the 4.25% Convertible Notes, taking into account both cash and non-cash components, approximate 8.3% and 7.6%, respectively. Had a 20-year term been used for the amortization of the liability component and issuance costs of the 4.25% Convertible Notes, the annual effective interest rate charged to earnings would have been decreased to approximately 5.4%. As of June 30, 2017, the remaining amortization periods of the debt discounts were expected to be 1.7 years for the 3.875% Convertible Notes and 4.7 years for the 4.25% Convertible Notes.

8% Senior Notes

On April 3, 2017, the Company redeemed its 8% publicly traded, unsecured senior notes which had unamortized debt issuance costs of $743 at par for $40,805, including accrued and unpaid interest of $555. For the three and six months ended June 30, 2017, the Company recognized a loss of $743 associated with the early extinguishment of this debt. The redemption was funded by the net proceeds from the issuance of the 4.25% Convertible Senior Notes.

3.95% Promissory Note

On February 27, 2017, the Company converted its outstanding revolving credit facility of $9,441 into a three-year mortgage loan primarily collateralized by a retail shopping center in Melbourne, Florida. Shortly after the loan conversion, the Company withdrew an additional amount of $109, thereby increasing the loan amount to $9,550. The loan bears a fixed annual interest rate of 3.95%. Approximately $50 of principal and interest is payable in 35 monthly installments beginning March 17, 2017 plus a final balloon payment of $8,891 including principal and unpaid interest payable on February 17, 2020. The promissory note may be repaid in part or in full at any time without penalty.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 9 — Reinsurance

The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance treaties and one quota share reinsurance agreement. Under the terms of the quota share reinsurance agreement effective January 1, 2017, the Company is entitled to a 30% ceding commission on ceded premiums written. 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 each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.

The impact of the reinsurance treaties on premiums written and earned is as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Premiums Written:
Direct	$	134,609		$	139,761		$	206,995		$	215,400
Assumed		(160	)		(280	)		(1,121	)		(359	)

Gross written		134,449			139,481			205,874			215,041
Ceded		(28,241	)		(36,384	)		(56,824	)		(76,756	)

Net premiums written	$	106,208		$	103,097		$	149,050		$	138,285

Premiums Earned:
Direct	$	86,308		$	94,046		$	172,580		$	190,899
Assumed		3,780			866			9,127			2,832

Gross earned		90,088			94,912			181,707			193,731
Ceded		(28,241	)		(36,384	)		(56,824	)		(76,756	)

Net premiums earned	$	61,847		$	58,528		$	124,883		$	116,975

During the three and six months ended June 30, 2017, reinsurance recoveries of $5 were deducted from losses incurred. During the three and six months ended June 30, 2016, there were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred. At June 30, 2017 and December 31, 2016, there were 37 and 35 reinsurers, respectively, participating in the Company’s reinsurance program. At June 30, 2017, there was $5 of reinsurance receivable included in other assets of the consolidated balance sheet compared with $0 at December 31, 2016. Thus, the concentration of credit risk associated with reinsurance receivable as of June 30, 2017 was insignificant compared with none at December 31, 2016. In addition, based on the insurance ratings and the financial strength of the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract as of June 30, 2017 and December 31, 2016.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Certain of the reinsurance contracts include retrospective provisions that adjust premiums, increase the amount of future coverage, or result in a profit commission in the event losses are minimal or zero. These adjustments are reflected in the consolidated statements of income as net reductions in ceded premiums of $3,634 and $3,001 for the three months ended June 30, 2017 and 2016, respectively, of which $936 and $413 related to the Company’s contract with Oxbridge Reinsurance Limited, a related party. For the six months ended June 30, 2017 and 2016, these adjustments were $6,956 and $5,822, respectively, of which $1,512 and $740 related to the Company’s contract with Oxbridge. In June 2016, the Company received a total of $37,800 in cash benefits related to two retrospective reinsurance contracts that terminated May 31, 2016 of which $7,560 was received from Oxbridge.

In addition, these adjustments are reflected in other assets and prepaid reinsurance premiums. At June 30, 2017 and December 31, 2016, other assets included $11,269 and $5,810, respectively, of which $2,253 and $1,043 related to the contract with Oxbridge and prepaid reinsurance premiums included $3,648 and $2,152, respectively, of which $639 and $338 related to the contract with Oxbridge. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial position.

Note 10 — Losses and Loss Adjustment Expenses

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

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Gross balance, beginning of period	$	69,911		$	53,271		$	70,492		$	51,690
Incurred, net of reinsurance, related to:
Current period		22,165			20,803			45,373			47,420
Prior period		5,500			5,469			7,821			5,932

Total incurred, net of reinsurance		27,665			26,272			53,194			53,352

Paid, net of reinsurance, related to:
Current period		(12,859	)		(14,239	)		(19,504	)		(22,596	)
Prior period		(11,633	)		(10,577	)		(31,098	)		(27,719	)

Total paid, net of reinsurance		(24,492	)		(24,816	)		(50,602	)		(50,315	)

Net balance, end of period		73,084			54,727			73,084			54,727
Add: reinsurance recoverable		5			—			5			—

Gross balance, end of period	$	73,089		$	54,727		$	73,089		$	54,727

The establishment of loss reserves is an inherently uncertain process and changes in loss 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 six months ended June 30, 2017, the Company experienced unfavorable development of $5,500 and $7,821, respectively, of which $3,249 and $5,740, respectively, pertain to claims in the 2016 loss year.

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

Note 11 — Segment Information

The Company’s businesses consist of four operating divisions: property and casualty insurance, reinsurance, investment real estate and information technology. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performances based on revenue and operating income. The Company aggregates its operating divisions into segments based on organizational structure and revenue source.

Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance division are grouped together into one reportable segment under insurance operations. For the three months ended June 30, 2017 and 2016, revenues from the Company’s insurance operations before intracompany elimination represented 96.7% and 97.4%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2017 and 2016, revenues from the Company’s insurance operations before intracompany elimination represented 96.6% and 97.3%, respectively, of total revenues of all operating segments. At June 30, 2017 and December 31, 2016, insurance operations’ total assets represented 87.4% and 87.9%, respectively, of the combined assets of all operating segments. There was no other operating division representing ten percent or more of the Company’s total revenues or combined assets. In addition, there was no other operating division representing ten percent or more of the greater, in absolute amount, of the combined profits of all operating divisions reporting a profit or the combined losses of all operating divisions reporting a loss. The following tables present segment information reconciled to the Company’s consolidated statements of income. Other non-reportable divisions are combined and disclosed in Corporate and Other. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	Insurance			Corporate/			Reclassification/
Three Months Ended June 30, 2017	Operations			Other(a)			Elimination			Consolidated
Revenue:
Net premiums earned	$	61,847		$	—		$	—		$	61,847
Net investment income		2,217			790			(197	)		2,810
Net realized investment gains (losses)		1,813			(26	)		—			1,787
Net other-than-temporary impairment losses		(177	)		—			—			(177	)
Policy fee income		908			—			—			908
Other		138			2,896			(2,629	)		405

Total revenue		66,746			3,660			(2,826	)		67,580

Expenses:
Losses and loss adjustment expenses		27,665			—			—			27,665
Amortization of deferred policy acquisition costs		8,785			—			—			8,785
Interest expense		—			4,378			—			4,378
Loss on repurchases of senior notes		—			743			—			743
Depreciation and amortization		33			728			(472	)		289
Other		8,077			5,692			(2,354	)		11,415

Total expenses		44,560			11,541			(2,826	)		53,275

Income before income taxes	$	22,186		$	(7,881	)	$	—		$	14,305


	Insurance			Corporate/			Reclassification/
Three Months Ended June 30, 2016	Operations			Other(a)			Elimination			Consolidated
Revenue:
Net premiums earned	$	58,528		$	—		$	—		$	58,528
Net investment income		1,736			250			(261	)		1,725
Net realized investment gains		382			9			—			391
Net other-than-temporary impairment losses		(540	)		(2	)		—			(542	)
Policy fee income		988			—			—			988
Other		211			2,156			(1,937	)		430

Total revenue		61,305			2,413			(2,198	)		61,520

Expenses:
Losses and loss adjustment expenses		26,272			—			—			26,272
Amortization of deferred policy acquisition costs		9,528			—			—			9,528
Interest expense		—			2,611			—			2,611
Depreciation and amortization		50			386			(95	)		341
Other		8,545			5,097			(2,103	)		11,539

Total expenses		44,395			8,094			(2,198	)		50,291

Income before income taxes	$	16,910		$	(5,681	)	$	—		$	11,229

(a)	Other revenue under corporate and other primarily consisted of rental income from investment properties and revenue from restaurant and marina businesses.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	Insurance			Corporate/			Reclassification/
Six Months Ended June 30, 2017	Operations			Other(a)			Elimination			Consolidated
Revenue:
Net premiums earned	$	124,883		$	—		$	—		$	124,883
Net investment income		4,590			1,476			(422	)		5,644
Net realized investment gains		2,419			83			—			2,502
Net other-than-temporary impairment losses		(390	)		—			—			(390	)
Policy fee income		1,816			—			—			1,816
Other		343			5,357			(4,862	)		838

Total revenue		133,661			6,916			(5,284	)		135,293

Expenses:
Losses and loss adjustment expenses		53,194			—			—			53,194
Amortization of deferred policy acquisition costs		17,637			—			—			17,637
Interest expense		—			7,920			—			7,920
Loss on repurchases of senior notes		—			743			—			743
Depreciation and amortization		61			1,442			(931	)		572
Other		15,446			10,687			(4,353	)		21,780

Total expenses		86,338			20,792			(5,284	)		101,846

Income before income taxes	$	47,323		$	(13,876	)	$	—		$	33,447


	Insurance			Corporate/			Reclassification/
Six Months Ended June 30, 2016	Operations			Other(a)			Elimination			Consolidated
Revenue:
Net premiums earned	$	116,975		$	—		$	—		$	116,975
Net investment income (loss)		3,486			(113	)		(158	)		3,215
Net realized investment gains (losses)		324			(8	)		—			316
Net other-than-temporary impairment losses		(1,201	)		(16	)		—			(1,217	)
Policy fee income		1,995			—			—			1,995
Gain on repurchases of convertible senior notes		—			153			—			153
Other		437			3,807			(3,414	)		830

Total revenue		122,016			3,823			(3,572	)		122,267

Expenses:
Losses and loss adjustment expenses		53,352			—			—			53,352
Amortization of deferred policy acquisition costs		19,339			—			—			19,339
Interest expense		—			5,440			—			5,440
Depreciation and amortization		100			772			(188	)		684
Other		16,733			9,177			(3,384	)		22,526

Total expenses		89,524			15,389			(3,572	)		101,341

Income before income taxes	$	32,492		$	(11,566	)	$	—		$	20,926

(a)	Other revenue under corporate and other primarily consisted of rental income from investment properties and revenue from restaurant and marina businesses.

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 presents segment assets reconciled to the Company’s total assets in the consolidated balance sheets.


	June 30,			December 31,
	2017			2016
Segment:
Insurance Operations	$	602,474		$	651,927
Corporate and Other		211,473			116,849
Consolidation and Elimination		(21,229	)		(98,712	)

Total assets	$	792,718		$	670,064

Note 12 — Income Taxes

During the three months ended June 30, 2017 and 2016, the Company recorded approximately $4,763 and $4,205, respectively, of income taxes, which resulted in effective tax rates of 33.3% and 37.4%, respectively. During the six months ended June 30, 2017 and 2016, the Company recorded approximately $11,885 and $7,846, respectively, of income taxes, which resulted in effective tax rates of 35.5% and 37.5%, respectively. The decrease in the 2017 effective tax rate was primarily attributable to tax benefits recognized from the exercise of common stock options during the second quarter of 2017. 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.

In July 2017, the Company received notice from the Internal Revenue Service stating the Company’s 2015 federal income tax return will be examined. The examination is expected to begin during the third quarter of 2017.

Note 13 — 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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
	June 30, 2017							June 30, 2016
	Income			Shares		Per Share		Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Net income	$	9,542						$	7,024
Less: Income attributable to participating securities		(572	)						(306	)

Basic Earnings Per Share:
Income allocated to common stockholders		8,970			8,503	$	1.05		6,718			9,399	$	0.71

Effect of Dilutive Securities:
Stock options		—			41				—			62
Convertible senior notes		2,514			3,790				1,018			1,446

Diluted Earnings Per Share:
Income available to common stockholders and assumed conversions	$	11,484			12,334	$	0.93	$	7,736			10,907	$	0.71


	Six Months Ended							Six Months Ended
	June 30, 2017							June 30, 2016
	Income			Shares		Per Share		Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Net income	$	21,562						$	13,080
Less: Income attributable to participating securities		(1,281	)						(608	)

Basic Earnings Per Share:
Income allocated to common stockholders		20,281			8,727	$	2.32		12,472			9,489	$	1.31

Effect of Dilutive Securities:
Stock options		—			43				—			62
Convertible senior notes*		4,013			2,988				—			—

Diluted Earnings Per Share:
Income available to common stockholders and assumed conversions	$	24,294			11,758	$	2.07	$	12,472			9,551	$	1.31

*	Excluded in 2016 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)

Note 14 — Stockholders’ Equity

Common Stock

In December 2016, the Company’s Board of Directors authorized a one-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2017, the Company repurchased and retired a total of 900 shares at a weighted average price per share of $44.26 under this repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2017 was $40, or $44.30 per share. During the six months ended June 30, 2017, the Company repurchased and retired a total of 38,416 shares at a weighted average price per share of $41.36 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2017 was $1,590, or $41.40 per share.

In December 2015, the Company’s Board of Directors authorized a one-year plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2016, the Company repurchased and retired a total of 189,938 shares at a weighted average price per share of $31.59 under this repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2016 was $6,008, or $31.63 per share. During the six months ended June 30, 2016, the Company repurchased and retired a total of 376,796 shares at a weighted average price per share of $31.85. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2016 was $12,015, or $31.89 per share.

On July 6, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.35 per common share. The dividends are payable on September 15, 2017 to shareholders of record on August 18, 2017.

Share Repurchase Agreements

In conjunction with the issuance of the 4.25% Convertible Notes as described in Note 8 — “Long-Term Debt” under Convertible Senior Notes , the Company used $20,345 of the net proceeds to repurchase and retire an aggregate of 413,600 shares of its common stock at a price of $49.19 per share from institutional investors.

Prepaid Share Repurchase Forward Contracts

The Company has two outstanding prepaid share repurchase forward contracts, one of which was entered into with Deutsche Bank AG, London Branch in conjunction with the issuance of the 3.875% Convertible Notes. The other was entered into with Societe Generale in conjunction with the issuance of the 4.25% Convertible Notes as described in Note 8 — “Long-Term Debt” under Convertible Senior Notes . Both Deutsche Bank AG, London Branch and Societe Generale are considered forward counterparties. Under these forward contracts, the Company made initial upfront payments in exchange for the future deliveries of the Company’s common stock from the forward counterparties. Pursuant to the forward contract entered into in December 2013 with Deutsche Bank AG, London Branch, the Company prepaid $29,923 to repurchase 622,751 shares of the Company’s

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

common stock, which shares will be delivered over a settlement period in 2019. Pursuant to the forward contract entered into in March 2017 with Societe Generale, the Company prepaid $9,400 of the net proceeds of the offering to repurchase 191,100 shares of the Company’s common stock, which shares will be delivered over a settlement period in 2022.

Each forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of each forward counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company pays any cash dividends on its common shares, each forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contracts will be treated as retired for financial statement purposes as of the effective date of each forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders votes.

The Company determined that each forward contract does not meet the characteristics of a derivative instrument and, as such, the transaction resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted earnings per share.

Note 15 — Stock-Based Compensation

Incentive Plans

The Company currently has outstanding stock-based awards granted under the 2007 Stock Option and Incentive Plan and the 2012 Omnibus Incentive Plan. Only the 2012 Plan is active and available for future grants. On March 17, 2017, the Company’s board of directors amended the 2012 Omnibus Incentive Plan and reduced the number of shares reserved under the plan from 5,000,000 shares to 3,000,000 shares. At June 30, 2017, there were 1,982,763 shares available for grant.

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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

A summary of the stock option activity for the three and six months ended June 30, 2017 and 2016 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, 2017		50,000		$	4.02		2.3 years	$	1,773
Granted		110,000		$	40.00

Outstanding at March 31, 2017		160,000		$	28.76		7.4 years	$	2,591
Exercised		(30,000	)	$	2.50

Outstanding at June 30, 2017		130,000		$	34.82		8.7 years	$	1,675

Exercisable at June 30, 2017		20,000		$	6.30		4.2 years	$	828

Outstanding at January 1, 2016		110,000		$	3.19		2.3 years	$	3,482
Outstanding at March 31, 2016		110,000		$	3.19		2.1 years	$	3,312

Outstanding at June 30, 2016		110,000		$	3.19		1.8 years	$	2,650

Exercisable at June 30, 2016		110,000		$	3.19		1.8 years	$	2,650

The aggregate intrinsic value and realized tax benefits of the options exercised during the three and six months ended June 30, 2017 were $1,319 and $509. There were no options exercised during the three and six months ended June 30, 2016. For the three months ended June 30, 2017 and 2016, the Company recognized $53 and $0, respectively, of compensation expense. For the six months ended June 30, 2017 and 2016, the Company recognized $149 and $0, respectively, of compensation expense which was included in other operating expenses. Deferred tax benefits related to stock options were $21 and $0 for the three months ended June 30, 2017 and 2016, respectively, and $58 and $0 for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017 and December 31, 2016, there was $1,098 and $0, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 3.5 years.

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 six months ended June 30, 2017:


Expected dividend yield	3.53	%
Expected volatility	42.86	%
Risk-free interest rate	1.92	%
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 fair value of the awards with market-based conditions is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect to the awards concerning only performance or service-based conditions is based on the market value of the Company’s common stock on the grant date.

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 six months ended June 30, 2017 and 2016 is as follows:


	Number of			Weighted
	Restricted			Average
	Stock			Grant Date
	Awards			Fair Value
Nonvested at January 1, 2017		542,503		$	30.81
Granted		45,000		$	40.15
Vested		(20,109	)	$	48.42
Forfeited		(926	)	$	35.52

Nonvested at March 31, 2017		566,468		$	30.92

Granted		109,936		$	44.05
Vested		(45,874	)	$	34.51
Forfeited		(9,948	)	$	40.90

Nonvested at June 30, 2017		620,582		$	32.82

Nonvested at January 1, 2016		620,513		$	30.33
Vested		(20,917	)	$	48.42
Cancelled		(160,000	)	$	26.27
Forfeited		(750	)	$	45.25

Nonvested at March 31, 2016		438,846		$	30.93

Granted		102,440		$	32.21
Vested		(24,235	)	$	37.34
Forfeited		(5,147	)	$	42.20

Nonvested at June 30, 2016		511,904		$	30.77

The Company recognized compensation expense related to restricted stock, which is included in other operating expenses, of $984 and $967 for the three months ended June 30, 2017 and 2016, respectively, and $1,990 and $1,948 for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017 and December 31, 2016, there was approximately $11,751 and $7,531, 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 26 months. 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 six months ended June 30, 2017 and 2016.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Deferred tax benefits recognized	$	341	$	372	$	694	$	751
Tax benefits realized for restricted stock and paid dividends	$	816	$	338	$	1,183	$	637
Fair value of vested restricted stock	$	1,583	$	905	$	2,557	$	1,918

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 16 — Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contracts

As of June 30, 2017, the Company has contractual obligations related to multi-year reinsurance contracts. These contracts have effective dates of June 1, 2016 and may be cancelled only with the other party’s consent. The future minimum aggregate premiums amount payable to the reinsurers due in June 2018 is $19,400.

Capital Commitment

As described in Note 4 — “Investments” under Limited Partnership Investments , the Company is contractually committed to capital contributions for three limited partnership interests. At June 30, 2017, there was an aggregate unfunded balance of $12,065.

Note 17 — Related Party Transactions

Claddaugh Casualty Insurance Company, Ltd., the Company’s Bermuda domiciled reinsurance subsidiary, has a reinsurance agreement with Oxbridge Reinsurance Limited whereby a portion of the business assumed from the Company’s insurance subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc., is ceded by Claddaugh to Oxbridge. With respect to the period from June 1, 2016 through May 31, 2017, Oxbridge assumed $6,000 of the total covered exposure for approximately $3,400 in premiums. With respect to the period from June 1, 2017 through May 31, 2018, Oxbridge assumed $7,400 of the total covered exposure for approximately $3,400 in premiums. See Note 9 — Reinsurance – which includes the amounts due from and paid by Oxbridge during the six months ended June 30, 2017 and 2016 with respect to benefits accrued in connection with the Oxbridge agreements. The premiums charged by Oxbridge are at rates which management believes to be competitive with market rates available to Claddaugh. Oxbridge has deposited funds into a trust account to satisfy certain collateral requirements under its reinsurance contract with Claddaugh. Trust assets may be withdrawn by Claddaugh, the trust beneficiary, in the event amounts are due under the Oxbridge reinsurance agreements. Among the Oxbridge shareholders are Paresh Patel, the Company’s chief executive officer, who is also chairman of the board of directors for Oxbridge, and members of his immediate family and three of the Company’s non-employee directors including Sanjay Madhu who serves as Oxbridge’s president and chief executive officer.

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 February 22, 2017. 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; 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 company that, through its subsidiaries, is engaged in a variety of business activities, including property and casualty insurance, reinsurance, real estate and information technology. Based on our organizational structure, revenue sources, and evaluation of financial and operating performances by management, we manage four operating divisions, which includes the following operations:

Insurance Operations

•

Property and casualty insurance

•

Reinsurance

Other Operations

•

Real estate

•

Information technology

For the three months ended June 30, 2017 and 2016, revenues from insurance operations before intracompany elimination represented 96.7% and 97.4%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2017 and 2016, revenues from insurance operations before intracompany elimination represented 96.6% and 97.3%, respectively, of total

revenues of all operating segments. At June 30, 2017 and December 31, 2016, insurance operations’ total assets represented 87.4% and 87.9%, respectively, of the combined assets of all operating segments. There was no other operating division representing ten percent or more of our total revenues or combined assets. See Note 11 — “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Insurance Operations

Property and Casualty Insurance

Homeowners Choice Property & Casualty Insurance Company, Inc.

Our principal operating subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), is a leading provider of property and casualty insurance in the state of Florida. HCPCI along with certain of our other subsidiaries currently provides property and casualty insurance to homeowners, condominium owners, and tenants in the state of Florida. HCPCI offers flood-endorsed and wind-only policies to eligible new and pre-existing Florida customers. In addition, HCPCI was approved by the Florida Office of Insurance Regulation to write standalone flood insurance policies for Florida homeowners. HCPCI strives to offer insurance products at competitive rates, while pursuing profitability using selective underwriting criteria.

HCPCI began operations in 2007 by participating in a “take-out program,” which is a legislatively mandated program designed to encourage private insurance companies to assume policies from Citizens Property Insurance Corporation, a Florida state-supported insurer. Our growth since inception has resulted primarily from a series of policy assumptions. This growth track has been beneficial to us although there are fewer policies available for assumption today as a result of increased competition in the Florida market. Thus, we plan to seek other opportunities to expand by providing new or additional product offerings in and outside the state of Florida. Recently, HCPCI received regulatory approval to write residential property and casualty insurance in the states of Arkansas, Pennsylvania and South Carolina. HCPCI expects to begin writing flood policies in those states during 2017.

TypTap Insurance Company

TypTap Insurance Company was organized by HCI Group, Inc. and approved by the Florida Office of Insurance Regulation in January 2016 to transact insurance business in the state of Florida. TypTap began writing standalone flood coverage to Florida homeowners in March 2016.

We expect the flood insurance products offered by TypTap and HCPCI to become significant contributors to future financial results.

Reinsurance

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, displacing the need for HCPCI to pay premiums to third party reinsurers. Claddaugh fully collateralizes its exposure to HCPCI by depositing funds into a trust account. Claddaugh also from time to time mitigates a portion of its risk through retrocession contracts.

Other Operations

Real Estate

Our real estate operations consist of multiple properties we own and operate. Properties used in operations consist of our Tampa headquarters building and a secondary insurance operations site in Ocala, Florida. Properties held as investments include two retail shopping centers and a combined 24 acres of waterfront property where two marinas and one restaurant are located.

In July 2017, we completed one real estate development and construction project described as a joint venture arrangement under U.S. GAAP, which we consolidate with our operations. See Note 4 — “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

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 devices. 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 Proplet ^TM , TypTap ^TM , SAMS ^TM , Exzeo ^® , Atlas Viewer ^TM , and CasaClue ^TM .

Recent Events

On July 6, 2017, our Board of Directors declared a quarterly dividend of $0.35 per common share. The dividends are payable on September 15, 2017 to stockholders of record on August 18, 2017.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six months ended June 30, 2017 and 2016 (dollar amounts in thousands, except per share amounts):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenue
Gross premiums earned	$	90,088		$	94,912		$	181,707		$	193,731
Premiums ceded		(28,241	)		(36,384	)		(56,824	)		(76,756	)

Net premiums earned		61,847			58,528			124,883			116,975
Net investment income		2,810			1,725			5,644			3,215
Net realized investment gains		1,787			391			2,502			316
Net other-than-temporary impairment losses recognized in income:
Total other-than-temporary impairment losses		(177	)		(228	)		(390	)		(636	)
Portion of loss recognized in other comprehensive income, before taxes		—			(314	)		—			(581	)

Net other-than-temporary impairment losses		(177	)		(542	)		(390	)		(1,217	)
Policy fee income		908			988			1,816			1,995
Gain on repurchases of convertible senior notes		—			—			—			153
Other income		405			430			838			830

Total revenue		67,580			61,520			135,293			122,267

Expenses
Losses and loss adjustment expenses		27,665			26,272			53,194			53,352
Policy acquisition and other underwriting expenses		10,070			10,879			19,719			21,989
Salaries and wages		5,443			5,680			10,446			11,064
Interest expense		4,378			2,611			7,920			5,440
Loss on repurchases of senior notes		743			—			743			—
Other operating expenses		4,976			4,849			9,824			9,496

Total operating expenses		53,275			50,291			101,846			101,341

Income before income taxes		14,305			11,229			33,447			20,926
Income tax expense		4,763			4,205			11,885			7,846

Net income	$	9,542		$	7,024		$	21,562		$	13,080

Ratios to Net Premiums Earned:
Loss Ratio		44.73	%		44.89	%		42.60	%		45.61	%
Expense Ratio		41.41	%		41.04	%		38.95	%		41.02	%

Combined Ratio		86.14	%		85.93	%		81.55	%		86.63	%

Ratios to Gross Premiums Earned:
Loss Ratio		30.71	%		27.68	%		29.27	%		27.54	%
Expense Ratio		28.43	%		25.31	%		26.78	%		24.77	%

Combined Ratio		59.14	%		52.99	%		56.05	%		52.31	%

Earnings Per Share Data:
Basic	$	1.05		$	0.71		$	2.32		$	1.31

Diluted	$	0.93		$	0.71		$	2.07		$	1.31

Comparison of the Three Months ended June 30, 2017 with the Three Months ended June 30, 2016

Our results of operations for the three months ended June 30, 2017 reflect income available to common stockholders of approximately $9,542,000, or $0.93 earnings per diluted share, compared with approximately $7,024,000, or $0.71 earnings per diluted share, for the three months ended June 30, 2016. The quarter-over-quarter increase was primarily due to a $3,319,000 increase in net premiums earned which was driven by decreased reinsurance costs. In addition, our 2017 results were positively impacted by increased investment-related income of $2,481,000 offset by a $1,393,000 increase in losses and loss adjustment expenses.

Revenue

Gross Premiums Earned for the three months ended June 30, 2017 and 2016 were approximately $90,088,000 and $94,912,000, respectively. The decrease in 2017 was attributable to policy attrition as well as a rate decrease effective on new and renewal policies beginning in January 2016.

Premiums Ceded for the three months ended June 30, 2017 and 2016 were approximately $28,241,000 and $36,384,000, respectively, representing 31.3% and 38.3%, respectively, of gross premiums earned. The $8,143,000 decrease was primarily attributable to lower costs of our 2016/2017 reinsurance program, which began June 1, 2016 as compared with the costs of the 2015/2016 program that began June 1, 2015. In addition, the reduction to our ceded premiums attributable to retrospective provisions under certain reinsurance contracts was higher as compared with the corresponding period in 2016.

Our premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance treaties or to assume a proportional share of losses as defined by a quota share arrangement. For the three months ended June 30, 2017 and 2016, premiums ceded reflect net reductions of approximately $3,634,000 and $3,001,000, respectively, related to the provisions under certain reinsurance contracts. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.” The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.

Net Premiums Written during the three months ended June 30, 2017 and 2016 totaled approximately $106,208,000 and $103,097,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The $3,111,000 increase in 2017 resulted from the decrease in premiums ceded during the period described above offset by a decrease of $5,032,000 in gross premiums written. We had approximately 143,000 policies in force at June 30, 2017 as compared with approximately 150,000 policies in force at June 30, 2016.

Net Premiums Earned for the three months ended June 30, 2017 and 2016 were approximately $61,847,000 and $58,528,000, 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 June 30, 2017 and 2016 (amounts in thousands):


	Three Months Ended
	June 30,
	2017			2016
Net Premiums Written	$	106,208		$	103,097
Increase in Unearned Premiums		(44,361	)		(44,569	)

Net Premiums Earned	$	61,847		$	58,528

Net Investment Income for the three months ended June 30, 2017 and 2016 was approximately $2,810,000 and $1,725,000, respectively. The increase in 2017 was primarily due to $560,000 of income from limited partnership investments compared with a $196,000 loss during the second quarter of 2016. See Note 4 — “Investments” under Net Investment Income to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Other-Than-Temporary Impairment Losses for the three months ended June 30, 2017 and 2016 were approximately $177,000 and $542,000, respectively. During the second quarter of 2017, we recognized impairment losses specific to one fixed-maturity security and three equity securities. The fixed-maturity security was subject to impairment resulting from our intention to sell this security before its recovery. Three equity securities were impaired because each security had been in an unrealized loss position for a length of time with no near term prospect of recovery. During the quarter ended June 30, 2016, we recognized impairment losses specific to one fixed-maturity security and seven equity securities.

Expenses

Our Losses and Loss Adjustment Expenses amounted to approximately $27,665,000 and $26,272,000 for the three months ended June 30, 2017 and 2016, respectively. During the second quarter of 2017, we continued to strengthen our loss reserves in response to trends involving assignment of insurance benefits and related litigation. 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 June 30, 2017 and 2016 of approximately $10,070,000 and $10,879,000, respectively, primarily reflect commissions and premium taxes related to the policies that have renewed. The $809,000 decrease from the corresponding period in 2016 was primarily attributable to a decrease in commissions and premium taxes resulting from policy attrition and the effect of the rate decrease.

Salaries and Wages for the three months ended June 30, 2017 and 2016 were approximately $5,443,000 and $5,680,000, respectively. The $237,000 decrease from the corresponding period in 2016 despite an increase in employee headcount was primarily attributable to the capitalization of payroll costs related to a software development project for internal use. As of June 30, 2017, we had approximately 260 employees located at our offices in Florida compared with 242 employees as of June 30, 2016. We also had 78 employees located in Noida, India at June 30, 2017 versus 85 at June 30, 2016.

Interest Expense for the three months ended June 30, 2017 and 2016 was approximately $4,378,0000 and $2,611,000, respectively. The increase was primarily attributable to the net increase in long-term debt resulting from the issuance of 4.25% Convertible Senior Notes in March 2017 and the redemption of 8% Senior Notes in April 2017.

Loss on repurchases of Senior Notes for the three months ended June 30, 2017 was approximately $743,000, resulting from the early extinguishment of our 8% Senior Notes. See Note 8 — “Long-Term Debt” under 8% Senior Notes to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Income Tax Expense for the three months ended June 30, 2017 and 2016 was approximately $4,763,000 and $4,205,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 33.3% for 2017 and 37.4% for 2016. The decrease in the effective tax rate was primarily attributable to tax benefits recognized for the exercise of common stock options during the second quarter of 2017.

Ratios:

The loss ratio applicable to the three months ended June 30, 2017 (losses and loss adjustment expenses incurred related to net premiums earned) was 44.7% compared with 44.9% for the three months ended June 30, 2016.

The expense ratio applicable to the three months ended June 30, 2017 (defined as underwriting expenses, salaries and wages, interest and other operating expenses related to net premiums earned) was 41.4% compared with 41.0% for the three months ended June 30, 2016.

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 June 30, 2017 was 86.1% compared with 85.9% for the three months ended June 30, 2016.

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 June 30, 2017 was 59.1% compared with 53.0% for the three months ended June 30, 2016. The increase was primarily attributable to the combined impact of decreased gross premiums earned and increased operating expenses.

Comparison of the Six Months ended June 30, 2017 with the Six Months ended June 30, 2016

Our results of operations for the six months ended June 30, 2017 reflect income available to common stockholders of approximately $21,562,000, or $2.07 earnings per diluted share, compared with approximately $13,080,000, or $1.31 earnings per diluted share, for the six months ended June 30, 2016. The period-over-period increase was primarily due to a $19,932,000 decrease in premiums ceded as well as a $12,024,000 decrease in gross premiums earned, resulting in an increase in net premiums earned of $7,908,000. In addition, our investment-related income during 2017 compared with the corresponding period in 2016 increased approximately $4,615,000.

Revenue

Gross Premiums Earned for the six months ended June 30, 2017 and 2016 were approximately $181,707,000 and $193,731,000, respectively. The decrease in 2017 was attributable to policy attrition as well as a rate decrease effective on new and renewal policies beginning in January 2016.

Premiums Ceded for the six months ended June 30, 2017 and 2016 were approximately $56,824,000 and $76,756,000, respectively, representing 31.3% and 39.6%, respectively, of gross premiums earned. The decrease from the corresponding period in 2016 was primarily attributable to

lower reinsurance costs as described earlier. In addition, the reduction to our ceded premiums attributable to retrospective provisions under certain reinsurance contracts was higher as compared with the corresponding period in 2016. For the six months ended June 30, 2017 and 2016, premiums ceded reflected net reductions of approximately $6,956,000 and $5,822,000, respectively, related to these provisions. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the six months ended June 30, 2017 and 2016 totaled approximately $149,050,000 and $138,285,000, respectively. The increase in 2017 resulted from a decrease of approximately $19,932,000 in premiums ceded combined with a decrease of approximately $9,167,000 in gross premiums written during the year.

Net Premiums Earned for the six months ended June 30, 2017 and 2016 were approximately $124,883,000 and $116,975,000, respectively, and reflected 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 six months ended June 30, 2017 and 2016 (amounts in thousands):


	Six Months Ended
	June 30,
	2017			2016
Net Premiums Written	$	149,050		$	138,285
Increase in Unearned Premiums		(24,167	)		(21,310	)

Net Premiums Earned	$	124,883		$	116,975

Net Investment Income for the six months ended June 30, 2017 and 2016 was approximately $5,644,000 and $3,215,000, respectively. The increase in 2017 was primarily due to $1,332,000 of income from limited partnership investments compared with a 1,065,000 loss during the corresponding period in 2016. See Note 4 — “Investments” under Net Investment Income to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Other-Than-Temporary Impairment Losses for the six months ended June 30, 2017 and 2016 were approximately $390,000 and $1,217,000, respectively. During the six months ended June 30, 2017, we recognized impairment losses specific to two fixed-maturity securities and three equity securities. The fixed-maturity securities were subject to impairment resulting from our intention to sell these securities before their recovery. Three equity securities were impaired as a result of the length of time each security had been in an unrealized loss position with no near term prospect of recovery. During the six months ended June 30, 2016, we recognized impairment losses specific to one fixed-maturity security and 15 equity securities.

Gain on Repurchases of Convertible Senior Notes for the six months ended June 30, 2016 was approximately $153,000. The gain was attributable to the repurchase of $13,010,000 in principal of our 3.875% Convertible Senior Notes during the first quarter of 2016.

Expenses

Our Losses and Loss Adjustment Expenses amounted to approximately $53,194,000 and $53,352,000, respectively, for the six months ended June 30, 2017 and 2016. Our 2017 losses and loss adjustment expenses reflected the continuation of reserve strengthening in response to trends involving assignment of insurance benefits and related litigation. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the six months ended June 30, 2017 and 2016 of approximately $19,719,000 and $21,989,000, respectively. The $2,270,000 decrease from the corresponding period in 2016 was primarily attributable to decreased commissions and premium taxes resulting from policy attrition and the effect of the rate decrease.

Salaries and Wages for the six months ended June 30, 2017 and 2016 were approximately $10,446,000 and $11,064,000, respectively. The $618,000 decrease from the corresponding period in 2016 was primarily attributable to the capitalization of payroll costs related to a software development project for internal use.

Loss on repurchases of Senior Notes for the six months ended June 30, 2017 was approximately $743,000, resulting from the early extinguishment of our 8% Senior Notes.

Income Tax Expense for the six months ended June 30, 2017 and 2016 were $11,885,000 and $7,846,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 35.5% for 2017 and 37.5% for 2016. The decrease in the effective tax rate primarily resulted from the recognition of tax benefits associated with the exercise of common stock options during the second quarter of 2017.

Ratios:

The loss ratio applicable to the six months ended June 30, 2017 was 42.6% compared with 45.6% for the six months ended June 30, 2016. The decrease was primarily due to the increase in net premiums earned which was driven in large part by decreased reinsurance costs.

The expense ratio applicable to the six months ended June 30, 2017 was 39.0% compared with 41.0% for the six months ended June 30, 2016. The decrease in our expense ratio is primarily attributable to the increase net premiums earned.

The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the six months ended June 30, 2017 was 81.6% compared with 86.6% for the six months ended June 30, 2016.

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 six months ended June 30, 2017 was 56.1% compared with 52.3% for the six months ended June 30, 2016.

Seasonality of Our Business

Our insurance business is seasonal as hurricanes and tropical storms affecting Florida typically occur during the period from June 1 through November 30 each year. Also, with our reinsurance treaty year typically effective June 1 each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1 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 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 subsidiary requires liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. Substantially all of our losses and loss adjustment expenses 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. In addition, we intend to continue investing in real estate to maximize returns and diversify our sources of income, pursue acquisition opportunities, or consider other strategic opportunities.

Senior Notes and Promissory Note

The following table summarizes our long-term debt’s principal and interest payment obligations at June 30, 2017:


	Maturity Date	Interest Payment Due Date
3.875% Convertible Senior Notes	March 2019	March 15 and September 15
4.25% Convertible Senior Notes	March 2037	March 1 and September 1
4% Promissory Note	Through February 2031	1 ^st day of each month
3.75% Callable Promissory Note	Through September 2036	1 ^st day of each month
3.95% Promissory Note	Through February 2020	17 ^th of each month

See Note 8 — “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Limited Partnership Investments

Our limited partnership investments consist of three private equity funds managed by their general partners. 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. At June 30, 2017, there was an aggregate unfunded capital balance of $12,065,000. See Limited Partnership Investments under Note 4 — “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Share Repurchase Plan

In December 2016, our Board of Directors approved a one-year plan to repurchase up to $20,000,000 of common shares under which we may purchase shares of common stock in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. At June 30, 2017, there was approximately $18,411,000 available under the plan. See Note 14 — “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Real Estate Development and Acquisition

We may contemplate the acquisition of land for future development through one of our existing joint ventures. Although we have no outstanding commitment to fund any future project and we expect to finance future development projects with cash from real estate operations and through property financings, we may be required to make additional capital contributions when warranted. In addition, we completed our development project in Riverview, Florida in July 2017. We have the option to acquire the joint venture partner’s interest in this project.

Sources and Uses of Cash

Cash Flows for the Six months ended June 30, 2017

Net cash provided by operating activities for the six months ended June 30, 2017 was approximately $31,364,000, which consisted primarily of cash received from net premiums written less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $74,920,000 was primarily due to the purchases of available-for-sale securities of $114,092,000, the limited partnership investments of $1,489,000, and the real estate investments of $1,931,000, offset by the proceeds from sales of available-for-sale securities of $27,775,000, the distributions of $11,758,000 from limited partnership investments and the redemptions and repayments of fixed-maturity securities of $3,937,000. Net cash provided by financing activities totaled $59,495,000, which was primarily due to the proceeds from issuance of 4.25% Convertible Senior Notes of $143,750,000, offset by $40,250,000 used in the repurchases of our 8% senior notes, $4,975,000 of related underwriting and issuance costs, $32,226,000 used in our share repurchases and $6,523,000 of net cash dividend payments.

Cash Flows for the Six months ended June 30, 2016

Net cash provided by operating activities for the six months ended June 30, 2016 was approximately $70,435,000, which consisted primarily of cash received from net premiums written less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $8,141,000 was primarily due to the purchases of available-for-sale securities of $48,083,000, and the limited partnership investments of $2,448,000, offset by the proceeds from sales of available-for-sale securities of $42,679,000. Net cash used in financing activities totaled $20,741,000, which was primarily due to $11,347,000 used in the repurchases of our convertible senior notes, $12,015,000 used in our share repurchase plan and $5,936,000 of net cash dividend payments, offset by the proceeds from issuance of a 4% promissory note of $9,200,000.

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 and available-for-sale investments.

At June 30, 2017, we had $304,798,000 of available-for-sale investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

With the exception of large national banks, it is our current policy not to maintain cash deposits of more than an aggregate of $10,000,000 in any one bank at any time. From time to time, we may have in excess of $10,000,000 of cash designated for investment and on deposit at a single national brokerage firm. In the future, we may alter our investment policy 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 June 30, 2017, we had unexpired capital commitments for three 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 16 — “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.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of June 30, 2017 (amounts in thousands):


	Payment Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating lease (1)	$	672		165		280		227		—
Service agreement (1)		114		23		50		41		—
Reinsurance contracts (2)		19,400		19,400		—		—		—
Unfunded capital commitments (3)		12,065		12,065		—		—		—
Long-term debt obligations (4)		306,177		12,129		118,963		158,883		16,202

Total	$	338,428		43,782		119,293		159,151		16,202

(1)

Represents the lease for office space in Miami, Florida and the lease and maintenance service agreement for office space in Noida, India. Liabilities related to our India operations were converted from Indian rupees to U.S. dollars using the June 30, 2017 exchange rate.

(2)

Represents the minimum payment of reinsurance premiums under multi-year reinsurance contracts.

(3)

Represents the unfunded balance of capital commitments under the subscription agreements related to three limited partnerships in which we hold an interest.

(4)

Amounts represent principal and interest payments over the lives of various long-term debt obligations. See Note 8 — “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have prepared our consolidated financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements and related disclosures requires us to make judgments, assumptions and estimates to develop amounts reflected and disclosed in our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. Actual results may differ from these estimates and such differences may be material.

We believe our critical accounting policies and estimates are those related to losses and loss adjustment expenses, reinsurance with retrospective provisions, deferred income taxes, and stock-based compensation expense. These policies are critical to the portrayal of our financial condition and operating results. They require management to make judgments and estimates about inherently uncertain matters. Material estimates that are particularly susceptible to significant change in the near term are related to our losses and loss adjustment expense reserves, which include amounts estimated for claims incurred but not yet reported and reinsurance contracts with retrospective provisions.

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 June 30, 2017, $49,850,000 of the total $73,089,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $23,239,000 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 June 30, 2017, $17,397,000 of the $23,239,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $70,492,000 at December 31, 2016 to $73,089,000 at June 30, 2017. The $2,597,000 increase in our Reserves is comprised of $25,874,000 in reserves related to claims occurring in the 2017 loss year offset by reductions in our Reserves of $14,908,000 for 2016 and $3,590,000 for 2015 and prior loss years. The $25,874,000 in Reserves established for 2017 claims is primarily driven by an allowance for subsequent development of claims reported for the accident year and an allowance for those claims that have been incurred but not reported to the company as of June 30, 2017. The decrease of $23,277,000 specific to our 2016 and prior loss-year reserves is primarily due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at June 30, 2017 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

Certain of our reinsurance contracts include retrospective provisions that adjust premiums, increase the amount of future coverage, or result in a profit commission 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 gives rise to an increase in future coverage or obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

For the three months ended June 30, 2017 and 2016, we accrued benefits of $2,968,000 and $3,947,000, respectively. For the three months ended June 30, 2017, we deferred recognition of $665,000 of reinsurance costs. For the three months ended June 30, 2016, we recognized net ceded premiums of $946,000, representing amortization of $1,223,000 of previously deferred reinsurance costs for increased coverage offset by $277,000 of ceded premiums deferred for the period. For the three months ended June 30, 2017 and 2016, net reductions in ceded premiums totaled $3,634,000 and $3,001,000, respectively.

For the six months ended June 30, 2017 and 2016, we accrued benefits of $5,459,000 and $8,630,000, respectively. For the six months ended June 30, 2017, we deferred recognition of $1,496,000 of reinsurance costs. For the six months ended June 30, 2016, we recognized net ceded premiums of $2,808,000, representing amortization of $3,085,000 of previously deferred reinsurance costs for increased coverage offset by $277,000 of ceded premiums deferred for the period. For the six months ended June 30, 2017 and 2016, net reductions in ceded premiums totaled $6,956,000 and $5,822,000, respectively. In June 2016, we received cash totaling $37,800,000 in connection with the benefits accrued for two retrospective reinsurance contracts that were terminated effective May 31, 2016.

As of June 30, 2017, we had $11,269,000 of accrued benefits and $3,648,000 of ceded premiums deferred, amounts that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limits provided under such agreements and in the period that the increased coverage is applicable. At December 31, 2016, we had $5,810,000 of accrued benefits and $2,152,000 of ceded premiums deferred related to these agreements.

We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the individual reinsurer’s financial position.

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 February 22, 2017. For the six months ended June 30, 2017, there have been no 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 Consolidated Financial Statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolio at June 30, 2017 included fixed-maturity and equity securities, the purposes of which are not for trading or 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.

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 and equity 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.

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 June 30, 2017 (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	$	224,753	$	(23,893	)		(9.61	)%
200 basis point increase		232,713		(15,933	)		(6.41	)%
100 basis point increase		240,677		(7,969	)		(3.21	)%
100 basis point decrease		256,620		7,974			3.21	%
200 basis point decrease		263,917		15,271			6.14	%
300 basis point decrease		268,397		19,751			7.94	%

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 June 30, 2017 (amounts in thousands):


			% of				% of
			Total				Total
	Amortized		Amortized		Estimated		Estimated
Comparable Rating	Cost		Cost		Fair Value		Fair Value
AAA	$	1,703		1	$	1,709		1
AA+, AA, AA-		70,220		28		70,532		28
A+, A, A-		92,951		38		93,123		37
BBB+, BBB, BBB-		60,160		24		61,465		25
BB+, BB, BB-		7,537		3		7,422		3
B+, B, B-		8,033		3		7,794		3
CCC+, CC and Not rated		6,543		3		6,601		3

Total	$	247,147		100	$	248,646		100

Equity Price Risk

Our equity investment portfolio at June 30, 2017 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 June 30, 2017 (amounts in thousands):


			% of
			Total
	Estimated		Estimated
	Fair Value		Fair Value
Stocks by sector:
Financial	$	28,001		50
Industrial		4,685		8
Consumer		3,891		7
Energy		3,920		7
Other (1)		4,918		9

		45,415		81

Mutual funds and Exchange traded funds by type:
Debt		9,336		17
Equity		1,401		2

		10,737		19

Total	$	56,152		100

(1)

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At June 30, 2017, 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 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 June 30, 2017 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

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 February 22, 2017.

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

(a)

Sales of Unregistered Securities and Use of Proceeds

All information related to sales of unregistered securities had been reported in a current report on Form 8-K.

(b)

Repurchases of Securities

The table below summarizes the number of common shares repurchased during the three months ended June 30, 2017 under a share repurchase plan and also the number of shares of common stock surrendered by employees to satisfy their minimum federal income tax liability associated with the vesting of restricted shares in May 2017 (dollar amounts in thousands, except share and per share amounts):


	Total Number of Shares		Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans		Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plans
For the Month Ended	Purchased		Per Share		or Programs (a)		or Programs (b)
April 30, 2017		—	$	—		—	$	18,451
May 31, 2017		15,188	$	44.17		900	$	18,411
June 30, 2017		—	$	—		—	$	18,411

		15,188	$	44.17		900

(a)

The share repurchase plan approved by our Board of Directors on December 15, 2016 commenced in January 2017.

(b)

Represents the balances before commissions and fees at the end of each month.

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 subsidiary, however, is subject to restrictions on the dividends it 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 six months ended June 30, 2017, HCPCI paid a $18,000,000 dividend 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. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.

		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		Supplement No. 1, dated as of January 17, 2013, to the Indenture, dated as of January 17, 2013, between HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) and The Bank of New York Mellon Trust Company, N.A., as Trustee. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed January 17, 2013.

		4.3		Form of 8.00% Senior Note due 2020 (included in Exhibit 4.2). Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed January 17, 2013.

		4.4		Indenture, dated as of January 17, 2013, between HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.4 to Amendment No. 1 to our Registration Statement on Form S-3 (File No. 333-185228 ) filed December 10, 2012.

		4.6		Form of Subordinated Indenture. Incorporated by reference to the correspondingly numbered exhibit to Amendment No. 1 to our Registration Statement on Form S-3 (File No. 333-185228 ) filed December 10, 2012.

		4.7		Rights Agreement, dated as of October 18, 2013, between HCI Group, Inc. and American Stock Transfer & Trust Company, LLC, which includes as Exhibit A thereto a summary of the terms of the Series B Junior Participating Preferred Stock, as Exhibit B thereto the Form of Right Certificate, and as Exhibit C thereto the Summary of Rights to Purchase Preferred Shares. Incorporated by reference to Exhibit 4.1 to our Form 8-K filed October 18, 2013.


		4.7.1		Amendment, dated as of April 18, 2017, to the Rights Agreement, by and between the Company and American Stock Transfer & Trust Company, LLC, dated as of October 18, 2013. Incorporated by reference to Exhibit 4.1 to our Form 8-K filed April 24, 2017.

		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 4.2 of our Form 8-K filed March 3, 2017.

		10.1		Excess of Loss Retrocession Contract (flood), effective June 1, 2014, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 6, 2014.

		10.2**		Executive Agreement dated May 1, 2007 between HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) and Richard R. Allen. Incorporated by reference to the correspondingly numbered exhibit to our Registration Statement on Form S-1 (File No. 333-150513 ), originally filed April 30, 2008, effective July 24, 2008, as amended.

		10.3		Reimbursement Contract effective June 1, 2016 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.4		Reimbursement Contract effective June 1, 2017 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund.

		10.5**		Restated HCI Group, Inc. 2012 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.1 of our Form 10-Q 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.

		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		Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2016, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers (Claddaugh). Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.10		Working Layer Catastrophe Excess of Loss Specific Retrocession Contract effective June 1, 2016 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.11		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2016, issued to, Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.12		Property Catastrophe First Excess of Loss Specific Retrocession Contract effective June 1, 2016 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.


		10.13		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2016 by Homeowners Choice Property & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.14		Property Catastrophe Third Excess of Loss Reinsurance Contract effective June 1, 2016 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.15		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2016 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016.

		10.16		Working Layer Catastrophe Excess of Loss Specific Retrocession Contract effective June 1, 2017 issued to Claddaugh Casualty Insurance Company Ltd. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

		10.17		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2017 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.

		10.18		Property Catastrophe Second Event Excess of Loss Reinsurance Contract effective June 1, 2017 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.

		10.19		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2017 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.

		10.23		Assumption Agreement effective October 15, 2014 by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and Citizens Property Insurance Corporation. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed January 28, 2015.

		10.28**		Restricted Stock Agreement dated May 8, 2012 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 30,000 shares of restricted common stock to Richard R. Allen. Incorporated by reference to Exhibit 10.28 of our Form 8-K filed May 10, 2012.


		10.30**		Restricted Stock Agreement dated May 8, 2012 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 20,000 shares of restricted common stock to Andrew L. Graham. Incorporated by reference to Exhibit 10.30 of our Form 8-K filed May 10, 2012.

		10.34**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 400,000 shares of restricted common stock to Paresh Patel. Incorporated by reference to Exhibit 10.34 of our Form 8-K filed May 21, 2013. See Exhibit 10.90

		10.35**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Sanjay Madhu. Incorporated by reference to Exhibit 10.35 of our Form 8-K filed May 21, 2013. See Exhibit 10.91

		10.36**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to George Apostolou. Incorporated by reference to Exhibit 10.36 of our Form 8-K filed May 21, 2013. See Exhibit 10.92

		10.37**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Harish Patel. Incorporated by reference to Exhibit 10.37 of our Form 8-K filed May 21, 2013. See Exhibit 10.93

		10.38**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Gregory Politis. Incorporated by reference to Exhibit 10.38 of our Form 8-K filed May 21, 2013. See Exhibit 10.94

		10.39**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Anthony Saravanos. Incorporated by reference to Exhibit 10.39 of our Form 8-K filed May 21, 2013. See Exhibit 10.95

		10.40**		Restricted Stock Agreement dated May 16, 2013 whereby HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) issued 24,000 shares of restricted common stock to Martin Traber. Incorporated by reference to Exhibit 10.40 of our Form 8-K filed May 21, 2013. See Exhibit 10.96


		10.52**		Restricted Stock Agreement dated August 29, 2013 whereby HCI Group, Inc. issued 10,000 shares of restricted common stock to Anthony Saravanos. Incorporated by reference to Exhibit 10.52 of our Form 8-K filed August 29, 2013.

		10.53**		Restricted Stock Agreement dated November 12, 2013 whereby HCI Group, Inc. issued 24,000 shares of restricted common stock to Wayne Burks. Incorporated by reference to Exhibit 10.11 of our Form 8-K filed November 13, 2013. See Exhibit 10.97

		10.54**		Restricted Stock Agreement dated November 12, 2013 whereby HCI Group, Inc. issued 24,000 shares of restricted common stock to James J. Macchiarola. Incorporated by reference to Exhibit 10.12 of our Form 8-K filed November 13, 2013. See Exhibit 10.98

		10.56		Prepaid Forward Contract, dated December 5, 2013 and effective as of December 11, 2013, between HCI Group, Inc. and Deutsche Bank AG, London Branch. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed December 12, 2013.

		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.

		10.88**		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.

		10.90**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.


		10.91**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Sanjay Madhu and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.92**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between George Apostolou and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.93**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Harish Patel and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.94**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Gregory Politis and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.95**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Anthony Saravanos and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.96**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Martin Traber and HCI Group, Inc. dated May 16, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.97**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Wayne Burks and HCI Group, Inc. dated November 12, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

		10.98**		Amendment dated March 2, 2016 to Restricted Stock Award Contract between Jim Macchiarola and HCI Group, Inc. dated November 12, 2013. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 4, 2016.

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

		10.100 **		Restricted Stock Award Contract Restricted Stock Award Contract between Mark Harmsworth and HCI Group, Inc. dated December 5, 2016.

		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		XBRL Instance Document.

		101.SCH		XBRL Taxonomy Extension Schema.

		101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

		101.DEF		XBRL Definition Linkbase.

		101.LAB		XBRL Taxonomy Extension Label Linkbase.

		101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

**	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.

August 3, 2017	By:	/s/ Paresh Patel
		Paresh Patel
		Chief Executive Officer
		(Principal Executive Officer)

August 3, 2017	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 10.4

LOGO

Florida Hurricane Catastrophe Fund

RICK SCOTT

GOVERNOR

CHAIR

JEFF ATWATER

CHIEF FINANCIAL OFFICER

PAM BONDI

ATTORNEY GENERAL

ASH WILLIAMS

EXECUTIVE DIRECTOR & CIO

May 1, 2017

Mr. Richard Allen

CFO

Homeowners Choice Property and Casualty Insurance Company

5300 W. Cypress St. # 100

Tampa, FL 33622

Florida Hurricane Catastrophe Fund

Reimbursement Contract

Effective: June 1, 2017

Dear Mr. Allen:

We are pleased to enclose a fully executed copy of the Reimbursement Contract for your company’s participation in the Florida Hurricane Catastrophe Fund for the 2017/2018 contract year. Please retain this document in a secure location for your permanent reference.

Should you have any questions, please call me at the number below. We appreciate your assistance in completing this documentation.

Cordially,

Holly Bertagnolli

FHCF Contracts Coordinator

Enclosure

ADMINISTERED FOR

THE STATE BOARD OF ADMINISTRATION BY

PARAGON STRATEGIC SOLUTIONS INC.

8200 TOWER • 5600 W. 83 ^RD STREET, SUITE 1100 • MINNEAPOLIS, MN 55437

PHONE: 800-689-FUND (3863) • FACSIMILIE: 800-264-0492

STATE BOARD OF ADMINISTRATION

OF FLORIDA

1801 HERMITAGE BOULEVARD TALLAHASSEE, FLORIDA 32308

(850) 488-4406

POST OFFICE BOX 13300

32317-3300

RICK SCOTT

GOVERNOR

CHAIR

JEFF ATWATER

CHIEF FINANCIAL OFFICER

PAM BONDI

ATTORNEY GENERAL

ASH WILLIAMS

EXECUTIVE DIRECTOR & CIO

REIMBURSEMENT CONTRACT

Effective: June 1, 2017

(Contract)

between

HOMEOWNERS CHOICE PROPERTY AND CASUALTY INSURANCE COMPANY

(Company)

NAIC # 12944

and

THE STATE BOARD OF ADMINISTRATION OF THE STATE OF FLORIDA (SBA)

WHICH ADMINISTERS THE FLORIDA HURRICANE CATASTROPHE FUND (FHCF)

PREAMBLE

The Legislature of the State of Florida has enacted Section 215.555, Florida Statutes (Statute), which directs the SBA to administer the FHCF. This Contract, consisting of the principal document entitled Reimbursement Contract, addressing the mandatory FHCF coverage, and Addenda, is subject to the Statute and to any administrative rule adopted pursuant thereto, and is not intended to be in conflict therewith. All provisions in the principal document are equally applicable to each Addendum unless specifically superseded by one of the Addenda.

In consideration of the promises set forth in this Contract, the parties agree as follows:

ARTICLE I - SCOPE OF AGREEMENT

As a condition precedent to the SBA’s obligations under this Contract, the Company, an Authorized Insurer or an entity writing Covered Policies under Section 627.351, Florida Statutes, in the State of Florida, shall report to the SBA in a specified format the business it writes which is described in this Contract as Covered Policies.

The terms of this Contract shall determine the rights and obligations of the parties. This Contract provides reimbursement to the Company under certain circumstances, as described herein, and does not provide or extend insurance or reinsurance coverage to any person, firm, corporation or other entity. The SBA shall reimburse the Company for its Ultimate Net Loss on Covered Policies, which were in force and in effect at the time of the Covered Event(s) causing the Loss, in excess of the Company’s Retention as a result of each Covered Event commencing during the Contract Year, to the extent funds are available, all as hereinafter defined.

ARTICLE II - PARTIES TO THE CONTRACT

This Contract is solely between the Company and the SBA which administers the FHCF. In no instance shall any insured of the Company or any claimant against an insured of the Company, or any other third party, have any rights under this Contract, except as provided in Article XV. The SBA will only disburse funds to the Company, except as provided for in Article XV. The Company shall not, without the prior approval of the Office of Insurance Regulation, sell, assign, or transfer to any third party, in return for a fee or other consideration any sums the FHCF pays under this Contract or the right to receive such sums.

ARTICLE III - TERM

(1)

The term of this Contract shall apply to Losses from Covered Events which commence during the period from 12:00:01 a.m., Eastern Time, June 1, 2017, to 12:00 midnight, Eastern Time, May 31, 2018 (Contract Year). Pursuant to the terms of this Contract, the SBA shall not be liable for Losses from Covered Events which commence after the effective time and date of expiration or termination. Should this Contract expire or terminate while a Covered Event is in progress, the SBA shall be responsible for such Covered Event in progress in the same manner and to the same extent it would have been responsible had the Contract expired the day following the conclusion of the Covered Event in progress.

(2)

The Company is required to designate a coverage level, make the required selections, and return this fully executed Contract to the FHCF Administrator so that the Contract is received by the FHCF Administrator no later than 5 p.m., Central Time, March 1, 2017. Failure to do so shall result in the Company’s coverage level under this Contract being deemed as follows:

(a)

For Companies that are a member of a National Association of Insurance Commissioners (NAIC) group, the same coverage level selected by the other Companies of the same NAIC group shall be deemed. If executed Contracts for none of the members of an NAIC group have been received by the FHCF Administrator, the coverage level from the prior Contract Year shall be deemed.

(b)

For Companies that are not a member of an NAIC group under which other Companies are active participants in the FHCF, the coverage level from the prior Contract Year shall be deemed.

(c)

For New Participants, as that term is defined in Article V(21), that are a member of an NAIC group, the same coverage level selected by the other Companies of the same NAIC group shall be deemed.

(d)

For New Participants that are not a member of an NAIC group under which other Companies are active participants in the FHCF, the 45%, 75% or 90% coverage levels may be selected providing that the FHCF Administrator receives executed Contracts within 30 calendar days of the effective date of the first Covered Policy, otherwise, the 45% coverage level shall be deemed.

(3)	Failure by the Company to meet the requirements of this Article may result in referral to the Office of Insurance Regulation.

ARTICLE IV - LIABILITY OF THE FHCF

(1)

The SBA shall reimburse the Company, with respect to each Covered Event commencing during the Contract Year for the “Reimbursement Percentage” elected, this percentage times the amount of Ultimate Net Loss paid by the Company in excess of the Company’s Retention, as adjusted pursuant to Article V(28), plus 5% of the reimbursed Losses for Loss Adjustment Expense Reimbursement.

(2)	The Reimbursement Percentage will be 45% or 75% or 90%, at the Company’s option as elected under Article XIX.

(3)	The aggregate liability of the FHCF with respect to all Reimbursement Contracts covering this Contract Year shall not exceed the limit set forth under Section 215.555(4)(c)l., Florida Statutes. For specifics regarding reimbursement calculations, see section (3)(c) of Article X.

(4)

Upon the occurrence of a Covered Event, the SBA shall evaluate the potential Losses to the FHCF and the FHCF’s capacity at the time of the event. The initial Projected Payout Multiple used to reimburse the Company for its Losses shall not exceed the Projected Payout Multiple as calculated based on the capacity needed to provide the FHCF’s coverage. If it appears that the Estimated Claims-Paying Capacity may be exceeded, the SBA shall reduce the projected payout factors or multiples for determining each participating insurer’s projected payout uniformly among all insurers to reflect the Estimated Claims-Paying Capacity.

(5)	Reimbursement amounts shall not be reduced by reinsurance paid or payable to the Company from other sources. Once the Company’s limit of coverage has been exhausted, the Company will not be entitled to further reimbursements.

(6)

After the end of the calendar year, the SBA shall notify insurers of the estimated Borrowing Capacity and the Balance of the Fund as of December 31. In May and October of each year, the SBA shall publish in the Florida Administrative Register a statement of the FHCF’s estimated Borrowing Capacity, Estimated Claims-Paying Capacity, and the projected Balance of the Fund as of December 31.

(7)

The obligation of the SBA with respect to all Contracts covering a particular Contract Year shall not exceed the Balance of the Fund as of December 31 of that Contract Year, together with the maximum amount the SBA is able to raise through the issuance of revenue bonds or through other means available to the SBA under Section 215.555, Florida Statutes, up to the limit in accordance with Section 215.555(4)(c)l. and (6), Florida Statutes. The obligations and the liability of the SBA are more fully described in Rule 19-8.013, Florida Administrative Code (F.A.C.).

ARTICLE V - DEFINITIONS

(1)	Actual Claims-Paying Capacity of the FHCF

This term means the sum of the Balance of the Fund as of December 31 of a Contract Year, plus any reinsurance purchased by the FHCF, plus the amount the SBA is able to raise through the issuance of revenue bonds, or through other means available by law to the SBA, up to the limit in accordance with Section 215.555(4)(c)l. and (6), Florida Statutes.

(2)	Actuarially Indicated

This term means, with respect to Premiums paid by Companies for reimbursement provided by the FHCF, an amount determined in accordance with the definition provided in Section 215.555(2)(a), Florida Statutes.

(3)	Additional Living Expense (ALE)

ALE Losses covered by the FHCF are not to exceed 40 percent of the insured value of a Residential Structure or its contents based on the coverage provided in the policy. Fair rental value, loss of rents, or business interruption losses are not covered by the FHCF.

(4)	Administrator

This term means the entity with which the SBA contracts to perform administrative tasks associated with the operations of the FHCF. The Administrator is Paragon Strategic Solutions Inc., 8200 Tower, 5600 West 83 ^rd Street, Suite 1100, Minneapolis, Minnesota 55437. The telephone number is (800) 689-3863, and the facsimile number is (800) 264-0492.

(5)	Authorized Insurer

This term is defined in Section 624.09(1), Florida Statutes.

(6)	Borrowing Capacity

This term means the amount of funds which are able to be raised by the issuance of revenue bonds or through other financing mechanisms, less bond issuance expenses and reserves.

(7)	Citizens Property Insurance Corporation (Citizens)

This term means Citizens Property Insurance Corporation as created under Section 627.351(6), Florida Statutes. For the purposes of the FHCF, Citizens Property Insurance Corporation incorporates two accounts, (a) the coastal account and (b) the personal lines and commercial lines accounts. Each account is treated by the FHCF as if it were a separate participating insurer with its own reportable exposures, Reimbursement Premium, Retention, and Ultimate Net Loss.

(8)	Contract

This term means this Reimbursement Contract for the current Contract Year.

(9)	Covered Event

This term means any one storm declared to be a hurricane by the National Hurricane Center which causes insured losses in Florida. A Covered Event begins when a hurricane causes damage in Florida while it is a hurricane and continues throughout any subsequent downgrades in storm status by the National Hurricane Center regardless of whether the hurricane makes landfall. Any storm, including a tropical storm, which does not become a hurricane is not a Covered Event.

(10)	Covered Policy or Covered Policies

(a)

Covered Policy, as defined in Section 215.555(2)(c), Florida Statutes, is further clarified to mean only that portion of a binder, policy or contract of insurance that insures real or personal property located in the State of Florida to the extent such policy insures a Residential Structure or the contents of a Residential Structure, located in the State of Florida.

(b)

Due to the specialized nature of the definition of Covered Policies, Covered Policies are not limited to only one line of business in the Company’s annual statement required to be filed by Section 624.424, Florida Statutes. Instead, Covered Policies are found in several lines of business on the Company’s annual statement. Covered Policies will at a minimum be reported in the Company’s statutory annual statement as:

Fire

Allied Lines

Farmowners Multiple Peril

Homeowners Multiple Peril

Commercial Multiple Peril (non liability portion, covering condominiums and apartments)

Inland Marine

Note that where particular insurance exposures, e.g., mobile homes, are reported on an annual statement is not dispositive of whether or not the exposure is a Covered Policy.

(c)

This definition applies only to the first-party property section of a policy pertaining strictly to the structure, its contents, appurtenant structures, or ALE coverage.

(d)

Covered Policy also includes any collateral protection insurance policy covering personal residences which protects both the borrower’s and the lender’s financial interest, in an amount at least equal to the coverage for the dwelling in place under the lapsed homeowner’s policy, if such policy can be accurately reported as required in Section 215.555(5), Florida Statutes. A Company will be deemed to be able to accurately report data if the required data, as specified in the Premium Formula adopted in Section 215.555(5), Florida Statutes, is available.

(e)

See Article VI for specific exclusions.

(11)	Deductible Buy-Back Policy

This term means a specific policy that provides coverage to a policyholder for some portion of the policyholder’s deductible under a policy issued by another insurer.

(12)	Estimated Claims-Paying Capacity of the FHCF

This term means the sum of the projected Balance of the Fund as of December 31 of a Contract Year, plus any reinsurance purchased by the FHCF, plus the most recent estimate of the Borrowing Capacity of the FHCF, determined pursuant to Section 215.555(4)(c), Florida Statutes.

(13)	Excess Policy

This term, for the purposes of this Contract, means a policy that provides insurance protection for large commercial property risks and that provides a layer of coverage above a primary layer (which is insured by a different insurer) that acts much the same as a very large deductible.

(14)	Florida Department of Financial Services

This term means the Florida regulatory agency, created pursuant to Section 20.121, Florida Statutes, which is charged with regulating the Florida insurance market and administering the Florida Insurance Code.

(15)	Florida Insurance Code

This term means those chapters identified in Section 624.01, Florida Statutes, which are designated as the Florida Insurance Code.

(16)	Formula or the Premium Formula

This term means the Formula approved by the SBA for the purpose of determining the Actuarially Indicated Premium to be paid to the FHCF. The Premium Formula is defined as an approach or methodology which leads to the creation of premium rates. The Formula shall, pursuant to Section 215.555(5)(b), Florida Statutes, include a cash build-up factor in the amount specified therein.

(17)	Fund Balance or Balance of the Fund as of December 31

These terms mean the amount of assets available to pay claims, not including any bonding proceeds, resulting from Covered Events which occurred during the Contract Year.

(18)	Insurer Group

For purposes of the coverage option election in Section 215.555(4)(b), Florida Statutes, Insurer Group means the group designation assigned by the National Association of Insurance Commissioners (NAIC) for purposes of filing consolidated financial statements. A Company is a member of a group as designated by the NAIC until such Company is assigned another group designation or is no longer a member of a group recognized by the NAIC.

(19)

Loss

“Loss” or “Losses” means incurred losses under a Covered Policy from a Covered Event, including Additional Living Expenses not to exceed 40 percent of the insured value of a Residential Structure or its contents and amounts paid as fees on behalf of or inuring to the benefit of a policyholder. “Loss” excludes allocated or unallocated loss adjustment expenses and also excludes any item for which this Contract does not provide reimbursement pursuant to the exclusions in Article VI.

(20)	Loss Adjustment Expense Reimbursement

(a)

Loss Adjustment Expense Reimbursement shall be 5% of the reimbursed Losses under this Contract as provided in Article IV, pursuant to Section 215.555(4)(b) 1., Florida Statutes.

(b)

The 5% Loss Adjustment Expense Reimbursement is included in the total Payout Multiple applied to each Company.

(21)	New Participant(s)

This term means all Companies which begin writing Covered Policies on or after the beginning of the Contract Year. A Company that removes exposure from Citizens pursuant to an assumption agreement effective on or after June 1 and had written no other Covered Policies before June 1 is also considered a New Participant.

(22)	Office of Insurance Regulation

This term means that office within the Department of Financial Services and which was created in Section 20.121(3), Florida Statutes.

(23)	Payout Multiple

This term means the multiple as calculated in accordance with Section 215.555(4)(c), Florida Statutes, which is derived by dividing the single season Claims-Paying Capacity of the FHCF by the total aggregate industry Reimbursement Premium for the FHCF for the Contract Year billed as of December 31 of the Contract Year. The final Payout Multiple is determined once Reimbursement Premiums have been billed as of December 31 and the amount of bond proceeds has been determined.

(24)	Premium

This term means the same as Reimbursement Premium.

(25)	Projected Payout Multiple

The Projected Payout Multiple is used to calculate a Company’s projected payout pursuant to Section 215.555(4)(d)2., Florida Statutes. The Projected Payout Multiple is derived by dividing the estimated single season Claims-Paying Capacity of the FHCF by the estimated total aggregate industry Reimbursement Premium for the FHCF for the Contract Year. The Company’s Reimbursement Premium as paid to the SBA for the Contract Year is multiplied by the Projected Payout Multiple to estimate the Company’s coverage from the FHCF for the Contract Year.

(26)	Reimbursement Premium

This term means the Premium determined by multiplying each $1,000 of insured value reported by the Company in accordance with Section 215.555(5)(b), Florida Statutes, by the rate as derived from the Premium Formula, as described in Rule 19-8.028, F.A.C.

(27)	Residential Structures

This term means units or buildings used exclusively or predominantly for dwelling or habitational occupancies, including the primary structure and appurtenant structures insured under the same policy and any other structures covered under endorsements associated with a policy covering a residential structure. For the purpose of this Contract, a single structure which includes a mix of commercial habitational and commercial non-habitational occupancies, and which is insured under a commercial policy, is considered a Residential Structure if 50% or more of the total insured value of the structure is used for habitational occupancies. Covered Residential Structures do not include any structures listed under Article VI.

(28)	Retention

This term means the amount of Losses from a Covered Event which must be incurred by the Company before it is eligible for reimbursement from the FHCF.

(a)

When the Company incurs Losses from one or two Covered Events during the Contract Year, the Company’s full Retention shall be applied to each of the Covered Events.

(b)

When the Company incurs Losses from more than two Covered Events during the Contract Year, the Company’s full Retention shall be applied to each of the two Covered Events causing the largest Losses for the Company. For each other Covered Event resulting in Losses, the Company’s Retention shall be reduced to one-third of its full Retention.

All reimbursement of Losses for each Covered Event shall be based on the Company’s full Retention until December 31 of the Contract Year. Adjustments to reflect a reduction to one-third of the full Retention shall be made on or after January 1 of the Contract Year provided the Company reports its Losses as specified in this Contract.

Adjustments to the Company’s Retention shall be based upon its paid and outstanding Losses as reported on the Company’s Proof of Loss Reports, but shall not include incurred but not reported Losses. The Company’s Proof of Loss Reports shall be used to determine

which Covered Events constitute the Company’s two largest Covered Events. After this initial determination, any subsequent adjustments shall be made quarterly by the SBA only if the Proof of Loss Reports reveal that loss development patterns have resulted in a change in the order of Covered Events entitled to the reduction to one-third of the full Retention.

(c)

The Company’s full Retention is established in accordance with the provisions of Section 215.555(2)(e), Florida Statutes, and shall be determined by multiplying the Retention Multiple by the Company’s Reimbursement Premium for the Contract Year.

(29)	Retention Multiple

(a)

The Retention Multiple is applied to the Company’s Reimbursement Premium to determine the Company’s Retention. The Retention Multiple for the 2017/2018 Contract Year shall be equal to $4.5 billion, adjusted based upon the reported exposure for the 2015/2016 Contract Year to reflect the percentage growth in exposure to the FHCF since 2004, divided by the estimated total industry Reimbursement Premium at the 90% reimbursement percentage level for the Contract Year as determined by the SBA.

(b)

The Retention Multiple shall be adjusted to reflect the reimbursement percentage elected by the Company under this Contract as follows:

If the Company elects a 90% reimbursement percentage, the adjusted Retention Multiple is 100% of the amount determined under (29)(a) above;

If the Company elects a 75% reimbursement percentage, the adjusted Retention Multiple is 120% of the amount determined under (29)(a) above; or

If the Company elects a 45% reimbursement percentage, the adjusted Retention Multiple is 200% of the amount determined under (29)(a) above.

(30)	Ultimate Net Loss

(a)

This term means all Losses under Covered Policies in force at the time of a Covered Event prior to the application of the Company’s Retention and reimbursement percentage, and excluding loss adjustment expense and any exclusions under Article VI.

(b)

The Company’s Ultimate Net Loss shall be determined in accordance with the deductible level as specified under the policy sustaining the Loss without taking into consideration any deductible discounts or deductible waivers.

(c)

Salvages and all other recoveries, excluding reinsurance recoveries, shall be first deducted from such Loss to arrive at the amount of liability attaching hereunder.

(d)

All salvages, recoveries or payments recovered or received subsequent to a Loss settlement under this Contract shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto.

(e)

Nothing in this clause shall be construed to mean that Losses under this Contract are not recoverable until the Company’s Ultimate Net Loss has been ascertained.

(f)

The SBA shall be subrogated to the rights of the Company to the extent of its reimbursement of the Company. The Company agrees to assist and cooperate with the SBA in all respects as regards such subrogation. The Company further agrees to undertake such actions as may be necessary to enforce its rights of salvage and subrogation, and its rights, if any, against other insurers as respects any claim, loss, or payment arising out of a Covered Event.

ARTICLE VI – EXCLUSIONS

This Contract does not provide reimbursement for:

(1)	Any losses not defined as being within the scope of a Covered Policy.

(2)	Any policy which excludes wind or hurricane coverage.

(3)	Any Excess Policy or Deductible Buy-Back Policy that requires individual ratemaking, as determined by the FHCF.

(4)	(a) Any policy for Residential Structures that provides a layer of coverage underneath an Excess Policy issued by a different insurer;

(b)

Any policy providing a layer of windstorm or hurricane coverage for a particular structure above or below a layer of windstorm or hurricane coverage under a separate policy issued by a different insurer, or any other circumstance in which two or more insurers provide primary windstorm or hurricane coverage for a single structure using separate policy forms;

(c)

Any other policy providing a layer of windstorm or hurricane coverage for a particular structure below a layer of self-insured windstorm or hurricane coverage for the same structure; or

(d)

The exclusions in this subsection do not apply to primary quota share policies written by Citizens Property Insurance Corporation under Section 627.35l(6)(c)2., Florida Statutes.

(5)	Any liability of the Company attributable to losses for fair rental value, loss of rent or rental income, or business interruption.

(6)	Any collateral protection policy that does not meet the definition of Covered Policy as defined in Article V(10)(d).

(7)	Any reinsurance assumed by the Company.

(8)	Any exposure for hotels, motels, timeshares, shelters, camps, retreats, and any other rental property used solely for commercial purposes.

(9)	Any exposure for homeowner associations if no habitational structures are insured under the policy.

(10)	Any exposure for homes and condominium structures or units that are non-owner occupied and rented for 6 or more rental periods by different parties during the course of a 12-month period.

(11)	Commercial healthcare facilities and nursing homes; however, a nursing home which is an integral part of a retirement community consisting primarily of habitational structures that are not nursing homes will not be subject to this exclusion.

(12)	Any exposure under commercial policies covering only appurtenant structures or structures that do not function as a habitational structure (e.g., a policy covering only the pool of an apartment complex).

(13)	Policies covering only Additional Living Expense.

(14)	Any exposure for barns or barns with apartments or living quarters.

(15)	Any exposure for builders risk coverage or new Residential Structures still under construction.

(16)	Any exposure for recreational vehicles, golf carts, or boats (including boat related equipment) requiring licensing and written on a separate policy or endorsement.

(17)

Any liability of the Company for extra contractual obligations or liabilities in excess of original policy limits. This exclusion includes, but is not limited to, amounts paid as bad faith awards, punitive damages awards, or other court-imposed fines, sanctions, or penalties; or other amounts in excess of the coverage limits under the Covered Policy.

(18)

Any losses paid in excess of a policy’s hurricane limit in force at the time of each Covered Event, including individual coverage limits (i.e., building, appurtenant structures, contents, and additional living expense), or other amounts paid as the result of a voluntary expansion of coverage by the insurer, including, but not limited to, a discount on or waiver of an applicable deductible. This exclusion includes overpayments of a specific individual coverage limit even if total payments under the policy are within the aggregate policy limit.

(19)

Any losses paid under a policy for Additional Living Expense, written as a time element coverage, in excess of the Additional Living Expense exposure reported for that policy under the Data Call for the applicable Contract Year (unless policy limits have changed effective after June 30 of the Contract Year).

(20)	Any losses which the Company’s claims files do not adequately support. Claim file support shall be deemed adequate if in compliance with the Records Retention Requirements outlined on the Form FHCF-L1B (Proof of Loss Report) applicable to the Contract Year.

(21)	Any exposure for, or amounts paid to reimburse a policyholder for, condominium association loss assessments or under similar coverages for contractual liabilities.

(22)	Losses in excess of the sum of the Balance of the Fund as of December 31 of the Contract Year and the amount the SBA is able to raise through the issuance of revenue bonds or by the use of other financing mechanisms, up to the limit pursuant to Section 215.555(4)(c), Florida Statutes.

(23)	Any liability assumed by the Company from Pools, Associations, and Syndicates. Exception: Covered Policies assumed from Citizens under the terms and conditions of an executed assumption agreement between the Authorized Insurer and Citizens are covered by this Contract.

(24)

All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

(25)

Property losses that are proximately caused by any peril other than a Covered Event, including, but not limited to, fire, theft, flood or rising water, or windstorm that does not constitute a Covered Event, or any liability of the Company for loss or damage caused by or resulting from nuclear reaction, nuclear radiation, or radioactive contamination from any cause, whether direct or indirect, proximate or remote, and regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

(26)	The FHCF does not provide coverage for water damage which is generally excluded under property insurance contracts and has been defined to mean flood, surface water, waves, tidal water, overflow of a body of water, storm surge, or spray from any of these, whether or not driven by wind.

(27)	Policies and endorsements predominantly covering Specialized Fine Arts Risks or collectible types of property meeting the following requirements:

(a)

A policy or endorsement predominantly covering Specialized Fine Arts Risks and not covering any Residential Structure if it meets the description in subparagraph 1 and if the conditions in subparagraph 2 are met.

For purposes of this exemption, a Specialized Fine Arts Risk policy or endorsement is a policy or endorsement that:

Insures works of art, of rarity, or of historic value, such as paintings, works on paper, etchings, art glass windows, pictures, statuary, sculptures, tapestries, antique furniture, antique silver, antique rugs, rare books or manuscripts, jewelry, or other similar items;

Charges a minimum premium of $500; and

Insures scheduled items valued, in the aggregate, at no less than $100,000.

The insurer offers specialized loss prevention services or other collector services designed to prevent or minimize loss, or to value or inventory the Specialized Fine Arts for insurance purposes, such as:

Collection risk assessments;

Fire and security loss prevention;

Warehouse inspections to protect items stored off-site;

Assistance with collection inventory management; or

Collection valuation reviews.

(b)

A policy form or endorsement generally used by the Company to cover personal property which could include property of a collectible nature, including fine arts, as further described in this paragraph, either on a scheduled basis or written under a blanket limit, and not covering anything other than personal property. All such policy forms or endorsements are subject to the exclusion provided in this paragraph when the policy or endorsement limit equals or exceeds $500,000. Generally such collectible property has unusually high values due to its investible, artistic, or unique intrinsic nature. The class of property covered under such a policy or endorsement represents an unusually high exposure value and such policy is intended to provide coverage for a class or classes of property that is not typical for the contents coverage under residential property insurance policies. In many cases property may be located at various locations either in or outside the state of Florida or the location of the property may change from time to time. The investment nature of such property distinguishes this type of exposure from the typical contents associated with a Covered Policy.

(28)	Any losses under liability coverages.

(29)	Any exposure for a condominium structure insured on a commercial policy in which more than 50% of the individual units are non-owner occupied and rented for 6 or more rental periods by different parties during the course of a 12-month period.

(30)	Any structure used exclusively or predominantly for non-dwelling or non-habitational occupancies.

ARTICLE VII - MANAGEMENT OF CLAIMS AND LOSSES

The Company shall investigate and settle or defend all claims and Losses. All payments of claims or Losses by the Company within the terms and limits of the appropriate coverage parts of Covered Policies shall be binding on the SBA, subject to the terms of this Contract, including the provisions in Article XIII relating to inspection of records and examinations.

ARTICLE VIII - REIMBURSEMENT ADJUSTMENTS

Section 215.555(4)(d) and (e), Florida Statutes, provides the SBA with the right to seek the return of excess reimbursements which have been paid to the Company along with interest thereon. Excess reimbursements are those payments made to the Company by the SBA that are in excess of the Company’s coverage under the Contract Year. Excess reimbursements may result from adjustments to the Projected Payout Multiple or the Payout Multiple, incorrect exposure (Data Call) submissions or resubmissions, incorrect calculations of Reimbursement Premiums or Retentions, incorrect Proof of Loss Reports, incorrect calculation of reinsurance recoveries, or subsequent readjustment of policyholder claims, including subrogation and salvage, or any combination of the foregoing. The Company will be sent an invoice showing the due date for adjustments along with the interest due thereon through the due date. The applicable interest rate for interest credits, and for interest charges for adjustments beyond the Company’s control, will be the average rate earned by the SBA for the FHCF for the first four months of the Contract Year. The applicable interest rate for interest charges on excess reimbursements due to adjustments resulting from incorrect exposure submissions or Proof of Loss Reports will accrue at this rate plus 5%. All interest will continue to accrue if not paid by the due date.

ARTICLE IX - REIMBURSEMENT PREMIUM

(1)	The Company shall, in a timely manner, pay the SBA its Reimbursement Premium for the Contract Year. The Reimbursement Premium for the Contract Year shall be calculated in accordance with Section 215.555, Florida Statutes, with any rules promulgated thereunder, and with Article X(2).

(2)	The Company’s Reimbursement Premium is based on its June 30 exposure in accordance with Article X, except as provided for New Participants under Article X, and is not adjusted to reflect an

increase or decrease in exposure for Covered Policies effective after June 30 nor is the Reimbursement Premium adjusted when the Company cancels policies or is liquidated or otherwise changes its business status (merger, acquisition, or termination) or stops writing new business (continues in business with its policies in a runoff mode). Similarly, new business written after June 30 will not increase or decrease the Company’s FHCF Reimbursement Premium or impact its FHCF coverage. FHCF Reimbursement Premiums are required of all Companies based on their writing Covered Policies in Florida as of June 30, and each Company’s FHCF coverage as based on the definition in Section 215.555(2)(m), Florida Statutes, shall exist for the entirety of the Contract Year regardless of exposure changes, except as provided for New Participants under Article X.

(3)

Since the calculation of the Actuarially Indicated Premium assumes that the Companies will pay their Reimbursement Premiums timely, interest charges will accrue under the following circumstances. A Company may choose to estimate its own Premium installments. However, if the Company’s estimation is less than the provisional Premium billed, an interest charge will accrue on the difference between the estimated Premium and the final Premium. If a Company estimates its first installment, the Administrator shall bill that estimated Premium as the second installment as well, which will be considered as an estimate by the Company. No interest will accrue regarding any provisional Premium if paid as billed by the FHCF’s Administrator, except in the case of an estimated second installment as set forth in this Article. Also, if a Company makes an estimation that is higher than the provisional Premium billed but is less than the final Premium, interest will not accrue. If the Premium payment is not received from a Company when it is due, an interest charge will accrue on a daily basis until the payment is received. Interest will also accrue on Premiums resulting from submissions or resubmissions finalized after December 1 of the Contract Year. An interest credit will be applied for any Premium which is overpaid as either an estimate or as a provisional Premium. Interest shall not be credited past December 1 of the Contract Year. The applicable interest rate for interest credits will be the average rate earned by the SBA for the FHCF for the first four months of the Contract Year. The applicable interest rate for interest charges will accrue at this rate plus 5%.

ARTICLE X - REPORTS AND REMITTANCES

(1)	Exposures

(a)

If the Company writes Covered Policies before June 1 of the Contract Year, the Company shall report to the SBA, unless otherwise provided in Rule 19-8.029, F.A.C., no later than the statutorily required date of September 1 of the Contract Year, by ZIP Code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of June 30 of the Contract Year as outlined in the annual reporting of insured values form, FHCF-DlA (Data Call) adopted for the Contract Year under Rule 19-8.029, F.A.C., and other data or information in the format specified by the SBA.

(b)

If the Company first begins writing Covered Policies on or after June 1 but prior to December 1 of the Contract Year, the Company shall report to the SBA, no later than February 1 of the Contract Year, by ZIP Code or other limited geographical area as specified by the SBA, its insured values under Covered Policies as of November 30 of the Contract Year as outlined in the Supplemental Instructions for New Participants section of the Data Call adopted for the Contract Year under Rule 19-8.029, F.A.C., and other data or information in the format specified by the SBA.

(c)

If the Company first begins writing Covered Policies on December 1 through and including May 31 of the Contract Year, the Company shall not report its exposure data for the Contract Year to the SBA.

(d)

The requirement that a report is due on a certain date means that the report shall be received by the SBA no later than 4 p.m. Eastern Time on the due date. If the applicable due date is a

Saturday, Sunday or legal holiday, then the actual due date will be the day immediately following the applicable due date which is not a Saturday, Sunday or legal holiday. For purposes of the timeliness of the submission, neither the United States Postal Service postmark nor a postage meter date is in any way determinative. Reports sent to the FHCF Administrator in Minneapolis, Minnesota, will be returned to the sender. Reports not in the physical possession of the SBA by 4 p.m., Eastern Time, on the applicable due date are late.

(2)	Reimbursement Premium

(a)

If the Company writes Covered Policies before June 1 of the Contract Year, the Company shall pay the FHCF its Reimbursement Premium in installments due on or before August 1, October 1, and December 1 of the Contract Year in amounts to be determined by the FHCF. However, if the Company’s Reimbursement Premium for the prior Contract Year was less than $5,000, the Company’s full provisional Reimbursement Premium, in an amount equal to the Reimbursement Premium paid in the prior year, shall be due in full on or before August 1 of the Contract Year. The Company will be invoiced for amounts due, if any, beyond the provisional Reimbursement Premium payment, on or before December 1 of the Contract Year.

(b)

If the Company is under administrative supervision, or if any control or oversight of the Company has been transferred through any legal or regulatory action to a state regulator or court appointed receiver or rehabilitator (referred to in the aggregate as “state action”):

The full annual provisional Reimbursement Premium as billed and any outstanding balances will be due and payable on August 1, or the date that such State action occurs after August 1 of the Contract Year.

Failure by such Company to pay the full annual provisional Reimbursement Premium as specified in 1. above by the applicable due date(s) shall result in the 45% coverage level being deemed for the complete Contract Year regardless of the level selected for the Company through the execution of this Contract and regardless of whether a hurricane event occurred or triggered coverage.

The provisions required in 1. and 2. above will not apply when the state regulator, receiver, or rehabilitator provides a letter of assurance to the FHCF that the Company will have the resources and will pay the full Reimbursement Premium for the coverage level selected through the execution of this Contract.

When control or oversight has been transferred, in whole or in part, through a legal or regulatory action, the controlling management of the Company shall specify by August 1 or as soon thereafter as possible (but not to exceed two weeks after any regulatory or legal action) in a letter to the FHCF as to the Company’s intentions to either pay the full FHCF Reimbursement Premium as specified in 1. above, to default to the 45% coverage being deemed as specified in 2. above, or to provide the assurances as specified in 3. above.

(c)

A New Participants that first begins writing Covered Policies on or after June 1 but prior to December 1 of the Contract Year shall pay the FHCF a provisional Reimbursement Premium of $1,000 upon execution of this Contract. The Administrator shall calculate the Company’s actual Reimbursement Premium for the period based on its actual exposure as of November 30 of the Contract Year, as reported on or before February 1 of the Contract Year. To recognize that New Participants have limited exposure during this period, the actual Premium as determined by processing the Company’s exposure data shall then be divided in half, the provisional Premium shall be credited, and the resulting amount shall be the total Premium due for the Company for the remainder of the Contract Year. However, if that amount is less than $1,000, then the Company shall pay $1,000. The Premium payment is due no later than April 1 of the Contract Year. The Company’s Retention and coverage will be determined based on the total Premium due as calculated above.

(d)

A New Participant that first begins writing Covered Policies on or after December 1 through and including May 31 of the Contract Year shall pay the FHCF a Reimbursement Premium of $1,000 upon execution of this Contract.

(e)

The requirement that the Reimbursement Premium is due on a certain date means that the Premium shall be remitted by wire transfer or ACH and shall have been credited to the FHCF’s account at its bank in Tampa, Florida, as set out on the invoice sent to the Company, on the due date applicable to the particular installment. If the applicable due date is a Saturday, Sunday or legal holiday, then the actual due date will be the day immediately following the applicable due date which is not a Saturday, Sunday or legal holiday. Reimbursement Premiums not credited to the FHCF’s account on the applicable due date are late.

(f)

Except as required by Section 215.555(7)(c), Florida Statutes, or as described in the following sentence, Reimbursement Premiums, together with earnings thereon, received in a given Contract Year will be used only to pay for Losses attributable to Covered Events occurring in that Contract Year or for Losses attributable to Covered Events in subsequent Contract Years and will not be used to pay for past Losses or for debt service on post-event revenue bonds issued pursuant to Section 215.555(6)(a)l., Florida Statutes. Reimbursement Premiums and earnings thereon may be used for payments relating to such revenue bonds in the event emergency assessments are insufficient. If Reimbursement Premiums or earnings thereon are used for debt service on post-event revenue bonds, then the amount of the Reimbursement Premiums or earnings thereon so used shall be returned, without interest, to the Fund when emergency assessments or other legally available funds remain available after making payment relating to the post-event revenue bonds and any other purposes for which emergency assessments were levied.

(3)

Losses

(a)

In General

Losses resulting from a Covered Event commencing during the Contract Year shall be reported by the Company and reimbursed by the FHCF as provided herein and in accordance with the Statute, this Contract, and any rules adopted pursuant to the Statute. For a Company participating in a quota share primary insurance agreement(s) with Citizens Property Insurance Corporation Coastal Account, Citizens and the Company shall report only their respective portion of Losses under the quota share primary insurance agreement(s). Pursuant to Section 215.555(4)(c), Florida Statutes, the SBA is obligated to pay for Losses not to exceed the Actual Claims-Paying Capacity of the FHCF, up to the limit in accordance with Section 215.5 55(4)(c)1., Florida Statutes, for any one Contract Year.

(b)

Loss Reports

At the direction of the SBA, the Company shall report its projected Ultimate Net Loss from each Covered Event to provide information to the SBA in determining any potential liability for possible reimbursable Losses under the Contract on the Interim Loss Report, Form FHCF-L1A, adopted for the Contract Year under Rule 19-8.029, F.A.C. Interim Loss Reports (including subsequent Interitm Loss Reports if required by the SBA) will be due in no less than fourteen days from the date of the notice from the SBA that such a report is required.

FHCF reimbursements will be issued based on Ultimate Net Loss information reported by the Company on the Proof of Loss Report, Form FHCF-L1B, adopted for the Contract Year under Rule 19-8.029, F.A.C.

To qualify for reimbursement, the Proof of Loss Report must have the electronic signatures of two executive officers authorized by the Company to sign or submit the report.

The Company must also submit a Detailed Claims Listing, Form FHCF-DCL, adopted for the Contract Year under Rule 19-8.029, F.A.C., at the same time it submits its first Proof of Loss Report for a specific Covered Event that qualifies the Company for reimbursement under that Covered Event, and should be prepared to supply a Detailed Claims Listing for any subsequent Proof of Loss Report upon request.

While the Company may submit a Proof of Loss Report requesting reimbursement at any time following a Covered Event, the Company shall submit a mandatory Proof of Loss Report for each Covered Event no earlier than December 1 and no later than December 31 of the Contract Year during which the Covered Event occurs using the most current data available, regardless of the amount of Ultimate Net Loss or the amount of reimbursements or advances already received.

For the Proof of Loss Reports due by December 31 of the Contract Year, and the required subsequent quarterly and annual reports required under subparagraphs 3. and 4. below, the Company shall submit its Proof of Loss Reports by each quarter-end or year-end using the most current data available. However, the date of such data shall not be more than sixty days prior to the applicable quarter-end or year-end date.

Updated Proof of Loss Reports for each Covered Event are due quarterly thereafter until all Losses resulting from a Covered Event are fully discharged including any adjustments to such Losses due to salvage or other recoveries, or the Company has received its full coverage under the Contract Year in which the Covered Event occurred. Guidelines follow:

Quarterly Proof of Loss Reports are due by March 31 from a Company whose Losses exceed, or are expected to exceed, 50% of its FHCF Retention for a specific Covered Event.

Quarterly Proof of Loss Reports are due by June 30 from a Company whose Losses exceed, or are expected to exceed, 75% of its FHCF Retention for a specific Covered Event.

Quarterly Proof of Loss Reports are due by September 30 and quarterly thereafter from a Company whose Losses exceed, or are expected to exceed, its FHCF Retention for a specific Covered Event.

If the Company’s Retention must be recalculated as the result of an exposure resubmission, and if the recalculated Retention changes the FHCF’s reimbursement obligations, then the Company shall submit additional Proof of Loss Reports for recalculation of the FHCF’s obligations.

Annually after December 31 of the Contract Year, all Companies shall submit a mandatory year-end Proof of Loss Report for each Covered Event, as applicable, using the most current data available, accompanied by a Detailed Claims Listing. This Proof of Loss Report shall be filed no earlier than December 1 and no later than December 31 of each year and shall continue until the earlier of the commutation process described in (3)(d) below or until all Losses resulting from the Covered Event are fully discharged including any adjustments to such Losses due to salvage or other recoveries.

The SBA, except as noted below, will determine and pay, within 30 days or as soon as practicable after receiving Proof of Loss Reports, the reimbursement amount due based on Losses paid by the Company to date and adjustments to this amount based on subsequent quarterly information. The adjustments to reimburesment amounts shall require the SBA to pay, or the Company to return, amounts reflecting the most recent determination of Losses.

The SBA shall have the right to consult with all relevant regulatory agencies to seek all relevant information, and shall consider any other factors deemed relevant, prior to the issuance of reimbursements.

The SBA shall require commercial self-insurance funds established under Section 624.462, Florida Statutes, to submit contractor receipts to support paid Losses reported on a Proof of Loss Report, and the SBA may hire an independent consultant to confirm Losses, prior to the issuance of reimbursements.

The SBA shall have the right to conduct a loss examination prior to the issuance of any advances or reimbursements requested by Companies that have been placed under regulatory supervision by a State or where control has been transferred through any legal or regulatory proceeding to a state regulator or court appointed receiver or rehabilitator.

All Proof of Loss Reports received will be compared with the FHCF’s exposure data to establish the facial reasonableness of the reports. The SBA may also review the results of current and prior Contract Year exposure and loss examinations to determine the reasonableness of the reported Losses. Except as noted in paragraph 4. above, Companies meeting these tests for reasonableness will be scheduled for reimbursement. Companies not meeting these tests for reasonableness will be handled on a case-by-case basis and will be contacted to provide specific information regarding their individual book of business. The discovery of errors in a Company’s reported exposure under the Data Call may require a resubmission of the current Contract Year Data Call which, as the Data Call impacts the Company’s Premium, Retention, and coverage for the Contract Year, will be required before the Company’s request for reimbursement or an advance will be fully processed by the Administrator.

(c)

Loss Reimbursement Calculations

In general, the Company’s paid Ultimate Net Losses must exceed its full FHCF Retention for a specific Covered Event before any reimbursement is payable from the FHCF for that Covered Event. As described in Article V(28)(b), Retention adjustments will be made on or after January 1 of the Contract Year. No interest is payable on additional payments to the Company due to this type of Retention adjustment. Each Company, including entities created pursuant to Section 627.351(6), Florida Statutes, incurring reimbursable Losses will receive the amount of reimbursement due under the individual Company’s Contract up to the amount of the Company’s payout. If more than one Covered Event occurs in any one Contract Year, any reimbursements due from the FHCF shall take into account the Company’s Retention for each Covered Event. However, the Company’s reimbursements from the FHCF for all Covered Events occurring during the Contract Year shall not exceed, in aggregate, the Projected Payout Multiple or Payout Multiple, as applicable, times the individual Company’s Reimbursement Premium for the Contract Year.

Reserve established. When a Covered Event occurs in a subsequent Contract Year when reimbursable Losses are still being paid for a Covered Event in a previous Contract Year, the SBA will establish a reserve for the outstanding reimbursable Losses for the previous Contract Year, based on the length of time the Losses have been outstanding, the amount of Losses already paid, the percentage of incurred Losses still unpaid, and any other factors specific to the loss development of the Covered Events involved.

(d)

Commutation

Not less than 36 months or more than 60 months after the end of the Contract Year, the Company shall file a final Proof of Loss Report(s), with the exception of Companies having no reportable Losses as described in paragraph (3)(d)1.a. below. Otherwise, the final Proof of Loss Report(s) is required as specified in paragraph (3)(d)l.b. below. The Company and SBA may mutually agree to initiate commutation after 36 months and prior to 60 months after the end of the Contract Year. The commutation negotiations shall begin at the later of 60 months after the end of the Contract Year or upon completion of the FHCF loss examination for the Company and the resolution of all outstanding examination issues.

If the Company’s most recently submitted Proof of Loss Report(s) indicates that it has no Losses resulting from Covered Events during the Contract Year, the SBA shall after 36 months request that the Company execute a final commutation agreement. The final commutation agreement shall constitute a complete and final release of all obligations of the SBA with respect to Losses. If the Company chooses not to execute a final commutation agreement, the SBA shall be released from all obligations 60 months following the end of the Contract Year if no Proof of Loss Report indicating reimbursable Losses had been filed and the commutation shall be deemed concluded. However during this time, if the Company determines that it does have Losses to report for FHCF reimbursement, the Company must submit an updated Proof of Loss Report prior to the end of 60 months after the Contract Year and the Company shall be required to follow the commutation provisions and time frames otherwise specified in this section.

If the Company has submitted a Proof of Loss Report indicating that it does have Losses resulting from a Covered Event during the Contract Year, the SBA may require the Company to submit within 30 days an updated, current Proof of Loss Report for each Covered Event during the Contract Year. The Proof of Loss Report must include all paid Losses as well as all outstanding Losses and incurred but not reported Losses, which are not finally settled and which may be reimbursable Losses under this Contract, and must be accompanied by supporting documentation (at a minimum an adjuster’s summary report or equivalent details) and a copy of a written opinion on the present value of the outstanding Losses and incurred but not reported Losses by the Company’s certifying actuary. Failure of the Company to provide an updated current Proof of Loss Report, supporting documentation, and an opinion by the date requested by the SBA may result in referral to the Office of Insurance Regulation for a violation of the Contract. Increases in reported paid, outstanding, or incurred but not reported Losses on original or corrected Proof of Loss Report filings received later than 60 months after the end of the Contract Year shall not be eligible for reimbursement or commutation.

Determining the present value of outstanding Losses.

If the Company exceeds or expects to exceed its Retention, the Company and the SBA or their respective representatives shall attempt, by mutual agreement, to agree upon the present value of all outstanding Losses, both reported and incurred but not reported, resulting from Covered Events during the Contract Year. Payment by the SBA of its portion of any amount or amounts so mutually agreed and certified by the Company’s certifying actuary shall constitute a complete and final release of the SBA in respect of all Losses, both reported and unreported, under this Contract.

If agreement on present value cannot be reached within 90 days of the FHCF’s receipt of the final Proof of Loss Report and supporting documentation, the Company and the SBA may mutually appoint an actuary, adjuster, or appraiser to investigate and determine such Losses. If both parties then agree, the SBA shall pay its portion of the amount so determined to be the present value of such Losses.

If the parties fail to agree, then any difference shall be settled by a panel of three actuaries, as provided in this paragraph.

One actuary shall be chosen by each party, and the third actuary shall be chosen by those two actuaries. If either party does not appoint an actuary within 30 days, the other party may appoint two actuaries. If the two actuaries fail to agree on the selection of an independent third actuary within 30 days of their appointment, each of them shall name two, of whom the other shall decline one and the decision shall be made by drawing lots.

ii.

All of the actuaries shall be regularly engaged in the valuation of property claims and losses and shall be members of the Casualty Actuarial Society and of the American Academy of Actuaries.

iii.

None of the actuaries shall be under the control of either party to this Contract.

iv.

Each party shall submit its case to the panel in writing on the 30 ^th day after the appointment of the third actuary. Following the submission of the case to the panel, the parties are prohibited from providing any further information or other communication except at the request of the panel. Such responses to requests from the panel must be in writing and simultaneously provided to the other party and all members of the panel, except that the panel may require the response to be provided in a meeting or teleconference attended by both parties and all members of the panel.

The decision in writing of any two actuaries, when filed with the parties hereto, shall be final and binding on both parties.

The reasonable and customary expense of the actuaries and of the commutation (as a result of b. and c. above) shall be equally divided between the two parties. Said commutation shall take place in Tallahassee, Florida, unless some other place is mutually agreed upon by the Company and the SBA.

(4)	Advances

(a)

The SBA may make advances for loss reimbursements as defined herein, at market interest rates, to the Company in accordance with Section 215.555(4)(e), Florida Statutes. An advance is an early reimbursement which allows the Company to continue to pay claims in a timely manner. Advances will be made based on the Company’s paid and reported outstanding Losses for Covered Policies (excluding all incurred but not reported Losses) as reported on a Proof of Loss Report, and shall include Loss Adjustment Expense Reimbursement as calculated by the FHCF. In order to be eligible for an advance, the Company must submit its exposure data for the Contract Year as required under paragraph (1) of this Article. Except as noted below, advances, if approved, will be made as soon as practicable after the SBA receives a written request, signed by two officers of the Company, for an advance of a specific amount and any other information required for the specific type of advance under subparagraphs (c) and (e) below. All reimbursements due to the Company shall be offset against any amount of outstanding advances plus the interest due thereon.

(b)

For advances or excess advances, which are advances that are in excess of the amount to which the Company is entitled, the market interest rate shall be the prime rate as published in the Wall Street Journal on the first business day of the Contract Year. This rate will be adjusted annually on the first business day of each subsequent Contract Year, regardless of whether the Company executes subsequent Contracts. In addition to the prime rate, an additional 5% interest charge will apply on excess advances. All interest charged will commence on the date the SBA issues a check for an advance and will cease on the date upon which the FHCF has received the Company’s Proof of Loss Report for the Covered Event for which the Company qualifies for reimbursement. If such reimbursement is less than the amount of outstanding advances issued to the Company, interest will continue to accrue on the outstanding balance of the advances until subsequent Proof of Loss Reports qualify the Company for reimbursement under any Covered Event equal to or exceeding the amount of any outstanding advances. Interest shall be billed on a periodic basis. If it is determined that the Company received funds in excess of those to which it was entitled, the interest as to those sums will not cease on the date of the receipt of the Proof of Loss Report but will continue until the Company reimburses the FHCF for the overpayment.

(c)

If the Company has an outstanding advance balance as of December 31 of this or any other Contract Year, the Company is required to have an actuary certify outstanding and incurred but not reported Losses as reported on the applicable December Proof of Loss Report.

(d)

The specific type of advances enumerated in Section 215.555, Florida Statutes, follow.

Advances to Companies to prevent insolvency, as defined under Article XIV.

Section 215.555(4)(e)1., Florida Statutes, provides that the SBA shall advance to the Company amounts necessary to maintain the solvency of the Company, up to 50 percent of the SBA’s estimate of the reimbursement due to the Company.

In addition to the requirements outlined in subparagraph (4)(a) above, the requirements for an advance to a Company to prevent insolvency are that the Company demonstrates it is likely to qualify for reimbursement and that the immediate receipt of moneys from the SBA is likely to prevent the Company from becoming insolvent, and the Company provides the following information:

Current assets;

ii.

Current liabilities other than liabilities due to the Covered Event;

iii.

Current surplus as to policyholders;

iv.

Estimate of other expected liabilities not due to the Covered Event; and

Amount of reinsurance available to pay claims for the Covered Event under other reinsurance treaties.

The SBA’s final decision regarding an application for an advance to prevent insolvency shall be based on whether or not, considering the totality of the circumstances, including the SBA’s obligations to provide reimbursement for all Covered Events occurring during the Contract Year, granting an advance is essential to allowing the entity to continue to pay additional claims for a Covered Event in a timely manner.

Advances to entities created pursuant to Section 627.351(6), Florida Statutes.

Section 215.555(4)(e)2., Florida Statutes, provides that the SBA may advance to an entity created pursuant to Section 627.351(6), Florida Statutes, up to 90% of the lesser of the SBA’s estimate of the reimbursement due or the entity’s share of the actual aggregate Reimbursement Premium for that Contract Year, multiplied by the current available liquid assets of the FHCF.

In addition to the requirements outlined in subparagraph (4)(a) above, the requirements for an advance to entities created pursuant to Section 627.351(6), Florida Statutes, are that the entity must demonstrate to the SBA that the advance is essential to allow the entity to pay claims for a Covered Event.

Advances to limited apportionment companies.

Section 215.555(4)(e)3., Florida Statutes, provides that the SBA may advance the amount of estimated reimbursement payable to limited apportionment companies.

(e)

In determining whether or not to grant an advance and the amount of an advance, the SBA:

Shall determine whether its assets available for the payment of obligations are sufficient and sufficiently liquid to fulfill its obligations to other Companies prior to granting an advance;

Shall review and consider all the information submitted by such Companies;

Shall review such Companies’ compliance with all requirements of Section 215.555, Florida Statutes;

Shall consult with all relevant regulatory agencies to seek all relevant information;

Shall review the damage caused by the Covered Event and when that Covered Event occurred;

Shall consider whether the Company has substantially exhausted amounts previously advanced;

Shall consider any other factors deemed relevant; and

Shall require commercial self-insurance funds established under section 624.462, Florida Statutes, to submit a copy of written estimates of expenses in support of the amount of advance requested.

(f)

Any amount advanced by the SBA shall be used by the Company only to pay claims of its policyholders for the Covered Event which has precipitated the immediate need to continue to pay additional claims as they become due.

(5)	Inadequate Data Submissions

If exposure data or other information required to be reported by the Company under the terms of this Contract is not received by the FHCF in the format specified by the FHCF or is inadequate to the extent that the FHCF requires resubmission of data, the Company will be required to pay the FHCF a resubmission fee of $1,000 for resubmissions that are not a result of an examination by the SBA. If a resubmission is necessary as a result of an examination report issued by the SBA, the first resubmission fee will be $2,000. If the Company’s examination-required resubmission is inadequate and the SBA requires an additional resubmission(s), the resubmission fee for each subsequent resubmission shall be $2,000. A resubmission of exposure data may delay the processing of the Company’s request for reimbursement or an advance.

(6)	Confidential Information/Trade Secret Information

Pursuant to the provisions of Section 215.557, Florida Statutes, the reports of insured values under Covered Policies by ZIP Code submitted to the SBA pursuant to Section 215.555, Florida Statutes, are confidential and exempt from the provisions of Section 119.07(1), Florida Statutes, and Section 24(a), Art. I of the State Constitution. If other information submitted by the Company to the FHCF could reasonably be ruled a “trade secret” as defined in Section 812.081, Florida Statutes, such information must be clearly marked “Trade Secret Information.”

ARTICLE XI - TAXES

In consideration of the terms under which this Contract is issued, the Company agrees to make no deduction in respect of the Premium herein when making premium tax returns to the appropriate authorities. Should any taxes be levied on the Company in respect of the Premium herein, the Company agrees to make no claim upon the SBA for reimbursement in respect of such taxes.

ARTICLE XII - ERRORS AND OMISSIONS

Any inadvertent delay, omission, or error on the part of the SBA shall not be held to relieve the Company from any liability which would attach to it hereunder if such delay, omission, or error had not been made.

ARTICLE XIII - INSPECTION OF RECORDS

The Company shall allow the SBA to inspect, examine, and verify, at reasonable times, all records of the Company relating to the Covered Policies under this Contract, including Company files concerning claims, Losses, or legal proceedings regarding subrogation or claims recoveries which involve this Contract, including premium, loss records and reports involving exposure data or Losses under Covered Policies. This right by the SBA to inspect, examine, and verify shall survive the completion and closure of an exposure examination or loss examination file and the termination of the Contract. The Company shall have no right to re-open an exposure or loss examination once closed and the findings have been

accepted by the Company; any re-opening shall be at the sole discretion of the SBA. If the State Board of Administration Finance Corporation has issued revenue bonds and relied upon the exposure and Loss data submitted and certified by the Company as accurate to determine the amount of bonding needed, the SBA may choose not to require, or accept, a resubmission if the resubmission will result in additional reimbursements to the Company. The SBA may require any discovered errors, inadvertent omissions, and typographical errors associated with the data reporting of insured values, discovered prior to the closing of the file and acceptance of the examination findings by the Company, to be corrected to reflect the proper values. The Company shall retain its records in accordance with the requirements for records retention regarding exposure reports and claims reports outlined herein, and in any administrative rules adopted pursuant to Section 215.555, Florida Statutes. Companies writing covered collateral protection policies, as defined in definition (l0)(d) of Article V, must be able to provide documentation that the policy covers personal residences, protects both the borrower’s and lender’s interest, and that the coverage is in an amount at least equal to the coverage for the dwelling in place under the lapsed homeowner’s policy.

(1)	Purpose of FHCF Examination

The purpose of the examinations conducted by the SBA is to evaluate the accuracy of the FHCF exposure or Loss data reported by the Company. However, due to the limited nature of the examination, it cannot be relied upon as an assurance that a Company’s data is reported accurately or in its entirety. The Company should not rely on the FHCF to identify every type of reporting error in its data. In addition, the reporting requirements are subject to change each Contract Year so it is the Company’s responsibility to be familiar with the applicable Contract Year requirements and to incorporate any changes into its data for that Contract Year. It is also the Company’s responsibility to ensure that its data is reported accurately and to comply with Florida Statutes and any applicable rules when reporting exposure data. The examination report is not intended to provide a legal determination of the Company’s compliance.

(2)	Examination Requirements for Exposure Verification

The Company shall retain complete and accurate records, in policy level detail, of all exposure data submitted to the SBA in any Contract Year until the SBA has completed its examination of the Company’s exposure submissions. The Company shall also retain complete and accurate records of any completed exposure examination for any Contract Year in which the Company incurred Losses until the completion of the loss reimbursement examination and commutation for that Contract Year. The records to be retained are outlined in the Data Call adopted for the Contract Year under Rule 19-8.029, F.A.C. A complete list of records to be retained for the exposure examination is set forth in Form FHCF-EAP1, adopted for the Contract Year under Rule 19-8.030, F.A.C.

(3)	Examination Requirements for Loss Reports

The Company shall retain complete and accurate records of all reported Losses and/or advances submitted to the SBA until the SBA has completed its examination of the Company’s reimbursable Losses and commutation for the Contract Year (if applicable) has been concluded. The records to be retained are set forth as part of the Proof of Loss Report, Form FHCF-L1B, adopted for the Contract Year under Rule 19-8.029, F.A.C., and Form FHCF-LAP1, adopted for the Contract Year under Rule 19-8.030, F.A.C.

(4)	Examination Procedures

(a)

The FHCF will send an examination notice to the Company providing the commencement date of the examination, the site of the examination, any accommodation requirements of the examiner, and the reports and data which must be assembled by the Company and forwarded to the FHCF upon request. The Company shall be prepared to choose one location in which to be examined, unless otherwise specified by the SBA.

(b)

The reports and data are required to be forwarded to the FHCF as set forth in an examination notice letter. The information is then forwarded to the examiner. If the FHCF receives accurate and complete records as requested, the examiner will contact the Company to inform the Company as to what policies or other documentation will be required once the examiner is on site. Any records not required to be provided to the examiner in advance shall be made available at the time the examiner arrives on site. Any records to support reported exposure or Losses which are provided after the examiner has left the work-site will, at the SBA’s discretion, result in an additional examination of exposure and/or Loss records or an extension or expansion of the examination already in progress. All costs associated with such additional examination or with the extension or expansion of the original examination shall be borne by the Company.

(c)

At the conclusion of the examiner’s work and the management review of the examiner’s report, findings, recommendations, and work papers, the FHCF will forward an examination report to the Company and require a response from the Company by a date certain as to the examination findings and recommendations, if any.

(d)

If the Company accepts the examination findings and recommendations, and there is no recommendation for additional information, the examination report will be finalized and the exam file closed.

(e)

If the Company disputes the examiner’s findings, the areas in dispute will be resolved by a meeting or a conference call between the Company and FHCF management.

(f)

If the recommendation of the examiner is to resubmit the Company’s exposure data for the Contract Year in question, then the FHCF will send the Company a letter outlining the process for resubmission and including a deadline to resubmit. Once the resubmission is received, the FHCF’s Administrator calculates a revised Reimbursement Premium for the Contract Year which has been examined. The SBA shall then review the resubmission with respect to the examiner’s findings, and accept the resubmission or contact the Company with any questions regarding the resubmission. Once the SBA has accepted the resubmission as a sufficient response to the examiner’s findings, the exam is closed.

If the recommendation of the examiner is to give the Company the option to either resubmit the exposure data or to pay the estimated Premium difference, then the FHCF will send the Company a letter outlining the process for resubmission or for paying the estimated Premium difference and including a deadline for the resubmission or the payment to be received by the FHCF’s Administrator. If the Company chooses to resubmit, the same procedures outlined in Article XIII(4) apply.

(g)

If the recommendation of the examiner is to update the Company’s Proof of Loss Report(s) for the Contract Year under review, the FHCF will send the Company a letter outlining the process for submitting the Proof of Loss Report(s) and including a deadline to file. Once the Proof of Loss Report(s) is received by the FHCF Administrator, the FHCF’s Administrator will calculate a revised reimbursement. The SBA shall then review the submitted Proof of Loss Report(s) with respect to the examiner’s findings, and accept the Proof of Loss Report(s) as filed or contact the Company with any questions. Once the SBA has accepted the corrected Proof of Loss Report(s) as a sufficient response to the examiner’s findings, the exam is closed.

(h)

The examiner’s list of errors is made available in the examination report sent to the Company. Given that the examination was based on a sample of the Company’s policies or claims rather than the whole universe of the Company’s Covered Policies or reported claims, the error list is not intended to provide a complete list of errors but is intended to indicate what information needs to be reviewed and corrected throughout the Company’s book of Covered Policy business or claims information to ensure more complete and accurate reporting to the FHCF.

(5)	Costs of the Examinations

The costs of the examinations shall be borne by the SBA. However, in order to remove any incentive for a Company to delay preparations for an examination, the SBA shall be reimbursed by the Company for any examination expenses incurred in addition to the usual and customary costs, which additional expenses were incurred as a result of the Company’s failure, despite proper notice, to be prepared for the examination or as a result of a Company’s failure to provide requested information. All requested information must be complete and accurate.

ARTICLE XIV – OFFSETS

The SBA reserves the right to offset amounts payable to the SBA from the Company, including amounts payable under the Reimbursement Contract for any Contract Year and also including the Company’s full Premium for the current Contract Year (regardless of installment due dates), against any (1) premium refunds under any Contract Year, (2) reimbursement or advance amounts, or (3) amounts agreed to in a commutation agreement, which are due and payable to the Company from the SBA as a result of the liability of the SBA.

ARTICLE XV – INSOLVENCY OF THE COMPANY

Company shall notify the FHCF immediately upon becoming insolvent. Except as otherwise provided below, no reimbursements will be made until the FHCF has completed and closed its examination of the insolvent Company’s Losses, unless an agreement is entered into by the court appointed receiver specifying that all data and computer systems required for FHCF exposure and loss examinations will be maintained until completion of the Company’s exposure and loss examinations. Except as otherwise provided below, in order to account for potential erroneous reporting, the SBA shall hold back 25% of requested reimbursements until the exposure and loss examinations for the Company are completed. Only those Losses supported by the examination will be reimbursed. Pursuant to Section 215.555(4)(g), Florida Statutes, the FHCF is required to pay the “net amount of all reimbursement moneys” due an insolvent insurer to the Florida Insurance Guaranty Association (FIGA) for the benefit of Florida policyholders. For the purpose of this Contract, a Company is insolvent when an order of liquidation with a finding of insolvency has been entered by a court of competent jurisdiction. In light of the need for an immediate infusion of funds to enable policyholders of insolvent companies to be paid for their claims, the SBA may enter into agreements with FIGA allowing exposure and loss examinations to take place immediately without the usual notice and response time limitations and allowing the FHCF to make reimbursements (net of any amounts payable to the SBA from the Company or FIGA) to FIGA before the examinations are completed and before the response time expires for claims filing by reinsurers and financial institutions, which have a priority interest in those funds pursuant to Section 215.555(4)(g), Florida Statutes. Such agreements must ensure the availability of the necessary records and adequate security must be provided so that if the FHCF determines that it overpaid FIGA on behalf of the Company, or if claims are filed by reinsurers or financial institutions having a priority interest in these funds, that the funds will be repaid to the FHCF by FIGA within a reasonable time.

ARTICLE XVI – TERMINATION

The FHCF and the obligations of both parties under this Contract can be terminated only as may be provided by law or applicable rules.

ARTICLE XVII – VIOLATIONS

(1)	Statutory Provisions

(a)

Section 215.555(10), Florida Statutes, provides that any violation of Section 215.555, Florida Statutes, or of rules adopted under that section, constitutes a violation of the Florida Insurance Code. This Contract has been adopted as part of Rule 19-8.010, Florida Administrative Code, under the authority of that section of Florida Statutes.

(b)

Section 215.555(11), Florida Statutes, authorizes the SBA to take any action necessary to enforce the rules and the provisions and requirements of this Contract, required by and adopted pursuant to Section 215.555, Florida Statutes.

(2)	Noncompliance

(a)

As used in this Article, the term “noncompliance” means the failure of the Company to meet any applicable requirement of Section 215.555, Florida Statutes, or of any rule adopted under the authority of that section of Florida Statutes, including, but not limited to, any failure to meet a deadline for an FHCF payment, Data Call submissions or resubmissions, Loss reporting or commutation documentation, or a deadline related to SBA examination requirements. The Company remains in a state of noncompliance as long as the Company fails to meet the applicable requirement(s).

(b)

If the Company is in a state of noncompliance, the SBA reserves the right to withhold any payments or advances due the Company until the SBA determines that the Company is no longer in a state of noncompliance.

ARTICLE XVIII – APPLICABLE LAW

This Contract shall be governed by and construed according to the laws of the State of Florida in respect of any matter relating to or arising out of this Contract.

ARTICLE XIX – REIMBURSEMENT CONTRACT ELECTIONS

(1)	Reimbursement Percentage

For purposes of determining reimbursement (if any) due the Company under this Contract and in accordance with the Statute, the Company has the option to elect a 45% or 75% or 90% reimbursement percentage under this Contract. If the Company is a member of an NAIC group, all members must elect the same reimbursement percentage, and the individual executing this Contract on behalf of the Company, by placing his or her initials in the box under (a) below, affirms that the Company has elected the same reimbursement percentage as all members of its NAIC group. If the Company is an entity created pursuant to Section 627.351, Florida Statutes, the Company must elect the 90% reimbursement percentage. The Company shall not be permitted to change its reimbursement percentage during the Contract Year. The Company shall be permitted to change its reimbursement percentage at the beginning of a new Contract Year, but may not reduce its reimbursement percentage if a Covered Event required the issuance of revenue bonds, until the bonds are no longer outstanding.

The Reimbursement Percentage elected by the Company for the prior Contract Year effective June 1, 2016 was as follows: Homeowners Choice Property and Casualty Insurance Company – 45%

(a)

NAIC Group Affirmation: Initial the following box if the Company is part of an NAIC Group:

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(b)

Reimbursement Percentage Election: The Company hereby elects the following Reimbursement Percentage for the Contract Year from 12:00:01 a.m., Eastern Time, June 1, 2017, to 12:00 a.m., Eastern Time, May 31, 2018, (the individual executing this Contract on behalf of the Company shall place his or her initials in the box to the left of the percentage elected for the Company):

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(90)	Additional Living Expense (ALE) Written as Time Element Coverage

If your Company writes Covered Policies that provide ALE coverage on a time element basis (i.e., coverage is based on a specific period of time as opposed to a stated dollar limit), you must initial the ‘Yes – Time Element ALE’ box below. If your Company does not write time element ALE coverage, initial ‘No – Time Element ALE’ box below.

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ARTICLE XX – SIGNATURES

Approved by:

Florida Hurricane Catastrophe Fund

By: State Board of Administration of the State of Florida


By:	/s/ Ashbel C. Williams	4/7/17
	Ashbel C. Williams	Date
	Executive Director & CIO

Approved as to legality:


By:	/s/ CRAIG A. MEYER	4/7/17
	CRAIG A. MEYER	Date
	ASSISTANT GENERAL COUNSEL

Authority to sign on behalf of the Company:

The person signing this Contract on behalf of the Company hereby represents that he or she is an officer of the Company, acting within his or her authority to enter into this Contract on behalf of the Company, with the requisite authority to bind the Company and make the representations on behalf of the Company as set forth in this Contract.

Homeowners Choice Property and Casualty Insurance Company


	Richard R. Allen	CFD
Printed Name and Title


By:	/s/ Richard R. Allen	2/27/2017
	Signature	Date

Exhibit 10.7

EXECUTIVE EMPLOYMENT AGREEMENT

THIS AGREEMENT, dated November 23, 2016, is by and between HCI Group, Inc. (the “Company”), a Florida corporation having its principal place of business at 5300 West Cypress Street, Suite 100, Tampa, Florida 33607, and Mark Harmsworth (the “Executive”).

BACKGROUND STATEMENT

The Company is publicly held. Its common shares trade on the New York Stock Exchange. The Company, primarily through its Affiliated Entities (as defined in this Agreement), is engaged in numerous business-related activities, including insurance, investments, real estate, software technology and reinsurance. As of the date of this Agreement the Company is principally engaged in the business of providing property and casualty insurance to Florida homeowners. The Company contemplates that it will engage in other lines of insurance business and other business activities as well. (All such business and investment activities, present and future, whether engaged in by the Company or an Affiliated Entity are referred to in this Agreement as the “ Business ”). The Company has developed and expects to develop trade secrets, methods of doing business, business plans, computer software and other items, all of which are worthy of protection. The Company considers it to be in its best interests to have the benefit of the Executive’s services as provided in this Agreement and the Executive is willing to render such services to the Company in accordance with the provisions of this Agreement.

NOW THEREFORE, in consideration of and reliance upon the foregoing background statement and the representations and warranties contained in this Agreement, the Company and the Executive agree to the following terms and conditions:

TERMS AND CONDITIONS

1. Employment and Title . The Company agrees to employ the Executive, and the Executive agrees to serve, initially as a senior vice president of finance for the Company and later as the Company’s chief financial officer, upon the terms and conditions set forth in this Agreement. He will assume the role chief financial officer within 30 days after the Company files its U.S. Securities and Exchange Commission form 10-K annual report for the year ended December 31, 2016.

2. Duties, Responsibilities and Authority . During the term of his employment under this Agreement, the Executive will have the duties, responsibilities and authorities set forth in the Company’s bylaws and as otherwise assigned to him by the Company’s board of directors and its president. The Executive agrees to devote his best efforts and substantially all his business time, energies and skills, diligently and in good faith, to perform his duties, fulfill his responsibilities, and exercise his authority

hereunder for the exclusive benefit of the Company. In promoting the interests of the Company and without additional compensation, the Executive will serve any of the Affiliated Entities, in such capacities as the Company’s board of directors may from time to time direct. The Executive will cooperate fully with the Company’s president in advancing the best interests of the Company. The Executive will read and use reasonable efforts to abide by any policy, code or practice the Company has or may hereafter adopt that is applicable to executives or executive officers in general, including policies and rules contained in the Company’s employee handbook and code of conduct.

3. Location . The Executive’s principal place of employment will 5300 West Cypress Street in Tampa, Florida or such other place to which the parties agree, but in no event more than 50 miles from Tampa, Florida.

4. Term . The initial term of the Executive’s employment hereunder will commence on or about December 5, 2016 and continue for a period of four years, unless earlier terminated pursuant to the terms of this Agreement. The Executive’s employment hereunder will continue and automatically renew for additional one-year terms unless either party delivers written notice of non-renewal at least 90 days before expiration of the initial term or any renewal term. The initial term and any renewal term are hereinafter collectively referred to as the “ Term .”

5. Compensation .

5.1. Base Salary . As compensation for the services to be rendered by the Executive hereunder, the Company will pay the Executive, during the Term, an annual base salary of $300,000 (or a higher amount as may be set from time to time by the Company’s board of directors), which base salary will accrue and be paid in accordance with the Company’s standard payroll practices.

5.2. Bonus Compensation . Solely in exchange for signing this Agreement, the Executive will be entitled to a bonus of $15,000 upon signing this Agreement and $25,000 one month after his employment commences. Provided he remains employed by the Company, the Executive will be entitled to participate in any senior executive bonus plan to the same extent as all other senior executives of the Company (other than the chief executive officer). However, notwithstanding the terms of any such senior executive bonus plan, the Executive will be entitled to a bonus for 2017 of not less than $100,000, which will be paid no later than December 31, 2017 and will reduce by an equal amount any bonus otherwise payable to the Executive under the senior executive bonus plan. The Executive will be entitled to any additional compensation provided by resolution of the Company’s board of directors or applicable committee of the board of directors or any bonus compensation plan adopted by the board of directors or applicable committee of the board of directors.

5.3. Restricted Stock . The Company will award to the Executive 40,000 shares of restricted stock under terms substantially as set forth on the restricted stock award contract appearing as Exhibit A to this Agreement.

5.4. Benefits . During the Term, the Executive will be entitled to (i) medical, dental, life, vision, disability and retirement benefits, if any, upon substantially the same terms and conditions generally applicable to all the Company’s senior executive officers; and (ii) 20 days paid time off annually, which will accrue and be paid in accordance with the Company’s standard payroll practices.

5.4. Reimbursement of Expenses . The Company will reimburse the Executive for all reasonable travel and other business expenses incurred by the Executive in the performance of the Executive’s duties hereunder, subject to, and in accordance with, any expense reimbursement policies and expense documentation requirements of the Company that may be in effect from time to time.

5.6. Withholding . Any and all amounts payable under this Agreement will be subject to any federal, state and local tax and other withholdings or deductions required by applicable law, rule or regulation.

6. Working Facilities . The Company will provide the Executive with an office at the Executive’s principal work location or at such other location as agreed to by the Executive and the Company.

7. Incapacity .

7.1 Right to Terminate . Notwithstanding anything else to the contrary contained in this Agreement, except as provided by this Section 7 the Company will have no right to terminate the Executive’s employment while the Executive suffers Incapacity (as defined below). If the Executive suffers Incapacity for a period exceeding six consecutive months, then the Company will have the right to terminate the Executive’s employment hereunder 30 days after delivery of written notice of termination. A termination of employment under this Section 7 will be deemed a termination without “ Good Cause ” as described in Section 8.4 hereof.

7.2 Right to Replace . If the Executive suffers Incapacity for 30 or more consecutive days, the Company will have the right to designate a person to temporarily perform the Executive’s duties.

7.3 Rights Prior to Termination . During a period of Incapacity, the Executive will be entitled to his full base salary under Section 5.1 hereof and full benefits under Section 5.3 hereof until employment is terminated as described in Section 8.1 . The Executive will be entitled to reasonable accommodations from the Company so that the Executive is not prevented from performing his duties by illness or injury.

7.4 Incapacity Defined . For purposes of this Section 7 , the term “ Incapacity ” means the Executive’s inability to perform his duties hereunder substantially on a full-time basis because of physical or mental illness or physical injury as determined by the Company’s board of directors, in its reasonable discretion, based upon competent medical evidence. Upon the Company’s written request, the Executive will submit to reasonable medical and other examinations to provide the evidence required hereunder.

8. Termination of Employment .

8.1 Termination by the Company . The Company may terminate the Executive’s employment under this Agreement without Good Cause anytime not fewer than 30 days nor more than 45 days after delivering written notice of termination to the Executive. The Company may terminate the Executive’s employment hereunder for Good Cause anytime by delivery of written notice of termination. Termination will be effective upon the date set forth in the notice of termination. Good Cause will be limited to the following circumstances:

(i) The Executive commits any fraud, dishonesty, misappropriation or similar act against the Company or others;

(ii) The Executive materially defaults in the performance of his obligations, services or duties hereunder;

(iii) The Executive is grossly negligent or commits willful misconduct in the performance of his duties hereunder;

(iv) The Executive has been adjudicated guilty by, or enters a plea of guilty or no contest before, a court of competent jurisdiction of illegal activities or found by a court of competent jurisdiction to have engaged in other wrongful conduct and such illegal activities or wrongful conduct, individually or in the aggregate, has (or could be reasonably expected to have) a material adverse effect on the Company, its prospects, earnings or financial condition; and

(v) Any federal or state regulatory authority determines that the Executive is not qualified to serve as the chief financial officer of the Company or an Affiliated Entity.

8.2 Effect of Termination for Good Cause . If the Executive’s employment is terminated by the Company for Good Cause —

(i) the Executive will be entitled to accrued base salary under Section 5.1 and accrued paid time off, each through the date of termination; and

(ii) the Executive will be entitled to reimbursement for expenses accrued through the date of termination in accordance with the provisions of Section 5.4 hereof; and

8.3 Effect of Termination without Good Cause . If the Company terminates the Executive’s employment without Good Cause —

(i) the Executive will be entitled to accrued base salary under Section 5.1 and accrued paid time off, each through the date of termination;

(ii) the Executive will be entitled to reimbursement for expenses accrued through the date of termination in accordance with the provisions of Section 5.4 hereof;

(iii) the Executive will be entitled to 12 months’ base salary as described at Section 5.1, which will accrue and be paid in accordance with Company’s normal payroll practices as if the Executive’s employment had not been terminated;

(iv) the Executive will be entitled to an amount equal to the bonus the Executive would have been entitled to under any senior bonus plan in effect for the year of termination had termination not occurred, which amount will be paid at the time and in the manner bonuses are paid to other senior executives (other than the chief executive officer): and

(v) The provisions of Section 12 will no longer apply to the Executive.

8.4 Deemed Termination without Good Cause . The Executive’s death will be deemed a termination without Good Cause as of the date of death. Termination by reason of the Executive’s Incapacity as set forth in Section 7.1 will be deemed a termination without Good Cause . The expiration of the Term after the Company delivers written notice of non-renewal as described in Section 5 will be deemed a termination without Good Cause . In addition, after the occurrence of any of the following events, the Executive, at his sole option, may declare by 30 days’ written notice to the Company that his employment hereunder has been terminated by the Company, and such termination will for all purposes of this Agreement be deemed a termination by the Company without Good Cause :

(i) The Company materially changes the Executive’s reporting requirements;

(iii) The Company fails to afford the Executive the power and authority generally commensurate with the position of chief financial officer (after the Executive becomes chief financial officer;

(iv) The Company moves the Executive’s principal place of employment beyond 50 miles from Tampa, Florida; or

(v) The Company breaches any material provision of this Agreement.

8.5 Termination by Executive . The Executive may terminate his employment hereunder by delivery of not less than 30 days’ written notice to the Company.

8.5 Effect of Termination by Executive . If the Executive terminates his employment pursuant to Section 8.5 hereof —

(i) the Executive will be entitled to accrued base salary under Section 5.1 and accrued paid time off, each through the date of termination; and

(ii) the Executive will be entitled to reimbursement for expenses accrued through the date of termination in accordance with the provisions of Section 5.4 hereof.

9. Board Approval . This Agreement and the obligations it contains are contingent upon and subject to approval by the Company’s board of directors. If the Board of Directors fails to approved this Agreement on or before the date the Executive commences his employment, then the Executive’s employment will be deemed terminated without Good Cause , except Section 8.3 (iii) will not apply, the Executive will be entitled to retain the $15,000 signing bonus described at Section 5.2 , and the Executive will be entitled to receive $25,000 signing bonus described at Section 5.2 .

10. Trade Secrets .

10.1. Confidential Information . For the purposes of this Agreement, “ Confidential Information ” means information or materials that, in the Company’s view, provide advantage to the Company (or an Affiliated Entity ) over others not having such information or materials and includes (i) customer information, supplier information, sales channel and distributor information, material terms of any contracts, marketing philosophies, strategies, techniques and objectives (including service roll-out dates and volume estimates), legal and regulatory positions and strategies, advertising and promotional copy, competitive advantages and disadvantages, non-published financial data, network configurations, product or service plans, designs, costs, prices and names, inventions, discoveries, improvements, technological developments, know-how, software code, business opportunities (including planned or proposed financings, mergers, acquisitions, ventures and partnerships) and methodologies and processes (including the look and feel of computer screens and reports) for customer assistance, order acceptance and tracking, repairs, and commissions; (ii) information designated in writing or conspicuously marked as “confidential” or “proprietary” or likewise designated or marked with words of similar import; (iii) information for which the Company has an obligation of confidentiality so long as such obligation is known to the Executive; and (iv) information that by its nature or the circumstances of its delivery or disclosure a reasonable person would conclude that it is confidential or proprietary. The Executive is specifically aware of the legal obligations of confidentiality afforded to customers of financial institutions, including obligations to insurance policyholders.

10.2. Confidentiality . The Executive will hold Confidential Information in confidence and trust and limit disclosure of Confidential Information strictly to persons who have a need to know such Confidential Information in connection with the Business . The Executive will not disclose, use, or permit the use or disclosure of Confidential Information , except in satisfying his obligations under this Agreement. The Executive will use reasonable care to protect Confidential Information from inappropriate disclosure, whether inadvertent or intentional. The Executive understands that the misappropriation of a trade secret is a criminal offense under state and federal laws. Notwithstanding the foregoing, the Executive may disclose Confidential Information if such disclosure is required by a court order or an order of a similar judicial or administrative body; provided , however , that the Executive notifies the Company of such requirement immediately and in writing, and cooperates reasonably with the Company in obtaining a protective or similar order with respect thereto.

10.3. Notification of Third Party Disclosure Requests . If the Executive receives any written or oral third party request, order, instruction or solicitation for the disclosure of Confidential Information not in conformance with this Agreement or if the Executive becomes aware of any attempt by a third party to improperly gain Confidential Information , the Executive will immediately notify the Company’s general counsel and the Company’s board of directors of such request, order, instruction or solicitation or of such attempt and fully disclose the details surrounding such request, order, instruction or solicitation or such attempt.

10.4. Non-Removal of Records . All documents, files, records, data, papers, materials, notes, books, correspondence, drawings and other written, graphic or electronic records of the Business and all computer software of the Company which the Executive will prepare or use, or come into contact with, will be and remain the exclusive property of the Company, in its discretion, and will not be physically, electronically, telephonically or otherwise removed from the Company’s premises without the Company’s prior written consent.

10.5. Return or Destruction of Confidential Information. Confidential Information gained, received or developed by the Executive or in which the Executive participated in developing will remain the exclusive property of the Company, in its sole discretion. The Executive will promptly return to the Company or destroy or erase all records, books, documents or any other materials whatsoever (including all copies thereof) containing such Confidential Information in his possession or control upon the earlier of (i) the receipt of a written request from the Company for return or destruction of Confidential Information or (ii) the termination of the Executive’s employment hereunder.

10.6. Trade Secrets of Others . In the course of his employment hereunder the Executive will not use any information or materials that belong to any former employer or any other person or entity and for which he has a duty of confidentiality; nor will the Executive use or allow the use of any illegally obtained confidential or secret information or materials.

11. Intellectual Property . All Confidential Information , computer software, video and sound recordings, scripts, creations, inventions, improvements, designs and discoveries conceived, created, invented, authored, developed, produced or discovered by the Executive while employed by the Company, whether alone or with others, whether during or after regular work hours, whether before or during the term of employment under this Agreement, are and will be the Company’s property exclusively, in its sole discretion. All such items were and will be produced as “work for hire.” The Executive hereby assigns to the Company all copyrights, trademarks and other rights of authorship or ownership he may have with respect to such items. Moreover, at any time, without additional consideration, the Executive will execute and deliver any documents or instruments that the Company may request in order to effectively convey and transfer good title and right to, and put the Company in possession of, such items.

12. Restrictions on Competition and Solicitation .

12.1. Noncompetition . The Executive agrees that during the course of his employment with the Company and for a period of one year after his employment ends, the Executive will not, directly or indirectly, as an executive, agent, independent contractor, consultant, partner, joint venturer or otherwise, within any state in the United States within which the Company or an Affiliated Entity has conducted the Business within the 12 months preceding the date of the termination of the Executive’s employment with the Company, enter into, engage in, be employed by or consult with (or solicit to enter into, engage in, be employed by or consult with) any business which competes with the Company or an Affiliated Entity by providing property, casualty or flood insurance to homeowners within the 12 month period preceding the termination of the Executive’s employment with the Company, including (a) participating as an officer, director, stockholder, member, employee, agent, independent contractor, consultant, representative or partner of, or having any direct or indirect financial interest (including the interest of a creditor) in, any such competitor or (b) assisting any other individual or business entity, of whatever type or description, in providing any such competing services. The provisions of this section will not apply to the ownership by the Executive of less than 5% of any publicly held corporation or other business entity solely as an investor and under circumstances in which the Executive neither provides services nor assists anyone else to provide any services to or on behalf of any such entity. The Executive further agrees that upon a violation of this section of this Agreement, the period during which the Executive’s covenants in this section apply will be extended by the number of days equal to the period of such violation.

12.2. Non-Solicitation/Non-Acceptance . The Executive agrees, during the course of his employment with the Company and for a period of one year after termination of that employment, the Executive will refrain from and will not, directly or indirectly, as employee, agent, independent contractor, consultant, partner, joint venturer or otherwise (a) solicit or counsel any third person, partnership, joint venture, company, corporation, association, or other organization that is or was a current or prospective customer of the Company or an Affiliated Entity within the 12 months preceding the termination of the Executive’s employment with the Company and with which the

Executive had a substantial relationship within such preceding 12 month period, regardless of such person’s or entity’s location, to terminate any existing or prospective business relationship with the Company or an Affiliated Entity or commence a similar business relationship with any other individual or business entity; (b) accept, with or without solicitation, any business from any third person, partnership, joint venture, company, corporation, association or other organization that is or was a current or prospective customer of the Company or an Affiliated Entity with which the Executive had a substantial relationship within the preceding 12 month period, regardless of such person’s or entity’s location; or (c) solicit any of the employees, agents, independent contractors or consultants of the Company or an Affiliated Entity , regardless of such person’s or entity’s location, to terminate any business relationship with the Company or an Affiliated Entity . The Executive further agrees that upon a violation of this section of this Agreement, the period during which the Executive’s covenants in this section apply will be extended by the number of days equal to the period of such violation.

12.3. No Circumvention . The Executive will not make any attempt, or use any artifice, scheme or device, including the use of any agent, representative, associate, advisor, relative or business entity, to circumvent the purposes of the restrictive covenants contained in Section 12.

12.4. Acknowledgements . The Executive acknowledges that the foregoing restrictive covenants are reasonable and necessary in light of the circumstances, including the Company’s interest in protecting the Confidential Information to which he has been exposed and the business relationships with the customers, partners, and others he has helped develop. The Executive further acknowledges that the foregoing restrictive covenants are a material inducement for the Company to enter into this Agreement, and that the covenants are given as an integral part of this Agreement.

12.5. Counterclaims . The existence of any claim or cause of action the Executive may have against the Company will not at any time constitute a defense to the enforcement by the Company of the restrictions or rights provided by this Section 12.

13. Equitable Remedies . The Executive and the Company agree that the services to be rendered by the Executive pursuant to this Agreement, and the rights and interests granted and the obligations to be performed by the Executive to the Company pursuant to this Agreement, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by the Executive of any of the terms of this Agreement will cause the Company great and irreparable injury and damage. The Executive hereby expressly recognizes and agrees that the Company has the right to seek entry of a temporary restraining order, preliminary injunction and permanent injunction, and that such orders and injunctions may be issued against the Executive, to prevent or address a breach of Sections 10 through 12 of this Agreement. The existence of any claim or cause of action the Executive may have against the Company will not at any time constitute a defense to the request for such relief.

14. Compliance with Other Agreements . The Executive represents and warrants to the Company that he is free to enter this Agreement and that the execution of this Agreement and the performance of the obligations under this Agreement will not, as of the date of this Agreement or with the passage of time, conflict with, cause a breach of or constitute a default under any agreement to which the Executive is a party or by which he may be bound.

15. Severability . Every provision of this Agreement is intended to be severable. If any provision or portion of a provision is illegal, invalid or unenforceable, including as to geographic or temporal scope, then the remainder of this Agreement will not be affected. Moreover, any provision or portion of a provision of this Agreement which is determined to be unreasonable, arbitrary or against public policy, including as to geographic or temporal scope, will be modified by a court or arbitrator as appropriate so that it is not unreasonable, arbitrary or against public policy.

16. Rights and Remedies Preserved . Nothing in this Agreement will limit any right or remedy the Company or the Executive may have under this Agreement or pursuant to law for any breach of this Agreement by the other party. The rights granted to the parties herein are cumulative, and the election of one will not constitute a waiver of such party’s right to assert all other legal remedies available under the circumstances.

17. Waiver . No failure or delay on the of part either party to this Agreement in the exercise of any right, power or remedy the party may have will operate as a waiver, nor will any single or partial exercise of any right, power or remedy by either party preclude any other or further exercise of that right, power or remedy or the exercise of any other right, power or remedy. No express waiver or assent by any party to any breach of or default in any term or condition of this Agreement will constitute a waiver of or assent to any succeeding breach of or default in the same or any other term or conditions of this Agreement.

18. Notices . Any notices or deliveries permitted or required by this Agreement will be deemed given (i) when delivered in person or by messenger, if a receipt is obtained for delivery, (ii) when delivered by Federal Express, United Parcel Service, Airborne Express, U.S. Express Mail or similar nationally recognized overnight delivery service, if a confirmation of delivery is obtained, or (iii) five days after mailing, if mailed via certified or registered U.S. mail, return receipt requested, provided the notice is delivered or mailed to the party’s address as set forth below:

If to the Company:

HCI Group, Inc.

Suite 100

5300 West Cypress Street

Tampa, FL 33607

ATT: General Counsel

If to the Executive:

The Executive’s most recent address on file with the Company.

The parties may change addresses to which notices are to be delivered by giving notice of the change of address in the manner set forth above; except, however, that notwithstanding the foregoing provision, notice of a change of address will be deemed made upon actual receipt of the notice by the other party. Notices deemed given or delivered as set forth above on a Saturday, Sunday, or legal holiday will instead be deemed given or delivered on the next succeeding day which is not a Saturday, Sunday or legal holiday.

19. Successors and Assigns . The rights and obligations of the Company under this Agreement will inure to the benefit of and be binding upon the successors and assigns of the Company, including the survivor upon any merger, consolidation, share exchange or combination of the Company. The Executive will not have the right to assign this Agreement or to assign, delegate or otherwise transfer any duty or obligation to be performed by him hereunder.

20. Entire Agreement . With respect to its subject matter, this Agreement contains all the understandings and agreements of the parties and supersedes all previous and all contemporaneous agreements, understandings, discussions and negotiations between the parties, whether written or oral. The parties agree that no previous drafts of this Agreement will be admissible as evidence (whether in any arbitration or court of law) in any proceeding which involves the interpretation of any provisions of this Agreement.

21. Amendments . Except as otherwise provided herein as to terms that are unreasonable, arbitrary or against public policy, this Agreement will not be modified or amended except by an instrument in writing signed by the parties.

22. Governing Law . This Agreement will be governed by and construed in accordance with the internal laws of the State of Florida without reference to conflicts of law principles.

23. Further Assurances . Each party hereto will cooperate and will take such further action and will execute and deliver such further documents as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement.

24. Construction . This Agreement was negotiated at arm’s-length, with each party having the assistance of independent legal counsel. No court, arbitrator or finder of fact should construe this Agreement more strongly against either party on the basis of which party was responsible for the Agreement’s preparation. Wherever from the context it appears appropriate, each term stated in either the singular or the plural will include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender will include the other genders. The words “Agreement,” “hereof,” “herein”

and “hereunder” and words of similar import referring to this Agreement refer to this Agreement as a whole, including Exhibits, and not to any particular provision of this Agreement. Whenever the word “include,” “includes” or “including” is used in this Agreement, it will be deemed to be followed by the words “without limitation.” The various headings contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of any of the provisions of this Agreement.

25. Counterparts . This Agreement may be executed in one or more counterparts, all of which taken together will be deemed one original.

26. Affiliated Entities . For the purposes of this Agreement, the capitalized term “ Affiliated Entity ” means any association or entity, including any corporation, partnership, joint venture, or limited liability company, controlled by or under common control with the Company.

27. Confidential Arbitration . The parties hereto agree that any dispute concerning or arising out of the provisions of this Agreement, the Executive’s employment or the termination of the Executive’s employment will be resolved by confidential arbitration in accordance with the rules of the American Arbitration Association. Such confidential arbitration will be held in Tampa, Florida and the decision of the arbitrator or arbitrators will be conclusive and binding on the parties and will be enforceable in any court of competent jurisdiction. In rendering a decision, the arbitrator will have the discretion to award attorneys’ fees and costs. Notwithstanding the foregoing, if any dispute arises hereunder as to which a party desires to exercise any equitable rights or remedies under this Agreement, such party may, in its discretion, in lieu of submitting the matter to arbitration, bring an action thereon in any court of competent jurisdiction in Florida, which court may grant any and all relief available in equity or at law for any and all claims made by such party based on or arising from the provisions of this Agreement. In any such action, the prevailing party will be entitled to reasonable attorneys’ fees and costs as may be awarded by the court.

28. Survival . The warranties and representations in this Agreement will survive the execution of this Agreement and continue without limitation. The Executive has incurred the obligations set forth in Sections 10 through 12 solely in consideration of the Company’s execution of this Agreement and such obligations and this Section 28 will survive and continue notwithstanding the termination, rescission or expiration of this Agreement or any provision of this Agreement.

29. Exhibits . All exhibits, schedules and other attachments to this Agreement are hereby incorporated by this reference as integral parts of this Agreement.

30. Saturday, Sunday or Legal Holiday . When the last day of a period during which an act may be performed under this Agreement falls on a Saturday, Sunday, or legal holiday that period will be deemed to end on the next succeeding day which is not a Saturday, Sunday or legal holiday.

31. Electronic Signatures . Signed copies of this Agreement, addenda, attachments and exhibits delivered electronically via Internet (e-mail) or telephone (fax) will legally bind the parties to the same extent as original documents.

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first set forth above.


		EXECUTIVE


		Mark Harmsworth

		HCI Group, Inc.

By:
		Paresh Patel, as Chief Executive Officer

Exhibit A

HCI GROUP, INC.

2012 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK AWARD CONTRACT

Mark Harmsworth

101 West Beach Place

Unit 1700

Tampa, Florida 33606

Dear Mr. Harmsworth:

You have been granted a Restricted Stock award for shares of common stock of HCI Group, Inc. (the “Company”) under the HCI Group, Inc. 2012 Omnibus Incentive Plan (the “Plan”) with the following terms and conditions. For the purposes of this contract “Restricted Shares” means Restricted Stock awarded pursuant to the Plan and this contract.


Grant Date:		December 5, 2016

Number of Shares:		40,000 Shares

Vesting Schedule:		Your Restricted Shares will initially be subject to a Restriction Period. The Restriction Period will lapse and the Restricted Shares will vest as follows: One-fourth of your Restricted Shares on December 5, 2017, one-fourth on December 5, 2018, one-fourth on December 5, 2019 and the remaining shares on December 5, 2020. Fractional shares will be rounded down to the nearest whole number until the last vesting date. If your service to the Company ends for any reason other than (i) a termination for “Good Cause” as described in your employment agreement, (ii) Retirement, (iii) death or (iv) Disability, then for one-fourth of the Restricted Shares (if any remain) the Restriction Period will lapse and those Restricted Shares will vest. For clarity, this provision supersedes the terms “Cause” and “Inimical “Conduct” as defined in the Plan and as they relate to the vesting or forfeiture of your Restricted Shares. All your Restricted Shares will vest and the Restriction Period will lapse upon a Change of Control as defined in the Plan. The lapse of your Restriction Period and vesting may be suspended or delayed as a result of a leave of absence.

Exhibit A


Form of Issuance:		The Company will instruct its transfer agent to evidence the Restricted Shares by electronic entry on the transfer agent’s books and to indicate the Restriction Period (and any other restrictions the Company may require to ensure compliance with the Securities Act and state and other securities laws) and the risks of forfeiture within those book entries. Upon the lapse of a Restriction Period, provided you have paid applicable withholding taxes, the Company will instruct the transfer agent to deliver the applicable shares, without restriction, to a brokerage account established in your name.

Transferability of Restricted Shares:		You may not assign, sell, transfer, pledge, encumber or otherwise alienate or hypothecate any of your Restricted Shares until they are vested. In addition, by accepting this Award, you agree not to sell any Restricted Shares acquired under this Award at a time when applicable laws, Company policies or any agreement between the Company and its underwriters prohibits a sale. You will not sell your shares except during an open trading window as described in the Company’s Insider Trading Policy.

Forfeiture		Unvested Restricted Shares will be forfeited when your service to the Company ends. Forfeiture may also occur under other circumstances described in the Plan.

Voting and Dividends:		You may exercise full voting rights and will receive all dividends and other distributions paid with respect to the Restricted Shares, in each case so long as the applicable record date occurs before you forfeit such Shares. If, however, any such dividends or distributions are paid in Shares, such Shares will be subject to the same risk of forfeiture, restrictions on transferability and other terms of this Award as are the Restricted Stock with respect to which they were paid. Dividends on unvested Restricted Shares will be treated as wages for federal income tax purposes and will therefore be subject to federal income tax, Social Security tax, and Medicare tax withholdings.

Tax Withholding:		You understand that you (and not the Company or any Affiliate) will be responsible for your own federal, state, local or foreign tax liability and any of your other tax consequences that may arise as a result of the transactions contemplated by this Award. You shall rely solely on the determinations of your tax advisors or your own determinations, and not on any statements or representations by the Company, its Affiliates or any of their agents, with regard to all such tax matters. You may be able to alter the tax consequences of the acquisition of the Shares by filing an election under Section 83(b) of the Internal Revenue Code of 1986, as

Exhibit A


		amended (the “Code”). Such election may be filed only within thirty (30) days after the date of this Award. You should consult with your tax advisor to determine the tax consequences of acquiring the Shares and the advantages and disadvantages of filing the Code Section 83(b) election. You acknowledge that it is your sole responsibility, and not the Company’s, to file a timely election under Code Section 83(b), even if you request the Company or its representatives make this filing on your behalf. To the extent that the receipt of the Restricted Stock or the vesting of the Restricted Stock results in income to you for Federal, state or local income tax purposes, you shall surrender to the Company (or any Affiliate) at the time the Company (or its Affiliate) is obligated to withhold taxes in connection with such receipt or vesting, as the case may be, such number of Restricted Shares as the Company (or its Affiliate) requires to meet its withholding obligation under applicable tax laws or regulations, and if you fail to do so, the Company (and its Affiliate) has the right and authority to deduct or withhold from other compensation payable to you an amount sufficient to satisfy its withholding obligations. You will surrender that number of Restricted Shares having an aggregate Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that the Company (or its Affiliate) must withhold in connection with the vesting of such Shares. The Company, in its discretion, may permit a larger number of shares to be surrendered in connection with tax withholding.

Miscellaneous:		• This Restricted Stock Award may be amended only by written consent signed by you and the Company, except if the amendment is not to your detriment or as otherwise permitted by the terms of the Plan. • As a condition of the granting of this Award, you agree, for yourself and your legal representatives or guardians, that this contract and the Plan shall be interpreted by the Committee and that any interpretation by the Committee of the terms of this contract or the Plan and any determination made by the Committee pursuant to this contract or the Plan shall be final, binding and conclusive. • This contract may be executed in counterparts.

This Restricted Stock Award is granted under and governed by the terms and conditions of the Plan. Additional provisions regarding your Award and definitions of capitalized terms used and not defined in this Award can be found in the Plan.

Exhibit A

BY SIGNING BELOW AND ACCEPTING THIS RESTRICTED STOCK AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED HEREIN AND IN THE PLAN. YOU ALSO ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT, THE PLAN AND THE PROSPECTUS DESCRIBING THE PLAN.



		Paresh Patel				Mark Harmsworth
		Chief Executive Officer
		HCI Group, Inc.

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EXHIBIT 10.16

**** indicates material that has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the U.S. Securities and Exchange Commission.

WORKING LAYER CATASTROPHE EXCESS OF LOSS

SPECIFIC RETROCESSION CONTRACT

issued to

CLADDAUGH CASUALTY INSURANCE COMPANY, LTD.

Hamilton, Bermuda


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WORKING LAYER CATASTROPHE EXCESS OF LOSS

SPECIFIC RETROCESSION CONTRACT

TABLE OF CONTENTS


Article		Page
	Preamble		3
1	Business Covered		3
2	Concurrency of Conditions		3
3	Term		3
4	Special Termination		4
5	Retention and Limit		5
6	Premium		5
7	Definitions		6
8	Extra Contractual Obligations/Excess of Original Contract Limits		6
9	No Third Party Rights		7
10	Notice of Loss and Loss Settlements		7
11	Late Payments		8
12	Offset		9
13	Currency		9
14	Unauthorized Reinsurance		10
15	Taxes		12
16	Access to Records		12
17	Confidentiality		13
18	Indemnification and Errors and Omissions		14
19	Insolvency		15
20	Arbitration		16
21	Service of Suit		17
22	Governing Law		18
23	Entire Agreement		18
24	Non-Waiver		18
25	Intermediary		19
26	Mode of Execution		19
	Retrocedent Signing Block		20

Attachments
	Trust Agreement Requirements Clause		21

WORKING LAYER CATASTROPHE EXCESS OF LOSS

SPECIFIC RETROCESSION CONTRACT

(the “Contract”)


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issued to

CLADDAUGH CASUALTY INSURANCE COMPANY LTD.

Hamilton, Bermuda

(the “Retrocedent”)

THE SUBSCRIBING RETROCESSIONAIRE(S) IDENTIFIED IN THE

INTERESTS AND LIABILITIES AGREEMENT(S) ATTACHED TO

AND FORMING PART OF THIS CONTRACT

(the “Retrocessionaire”)

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Retrocedent in respect of the liability that may accrue to the Retrocedent as a result of loss or losses under the Working Layer Catastrophe Excess of Loss Reinsurance Contract, issued to Homeowners Choice Property & Casualty Insurance Company, Tampa, Florida (the “Original Reinsured”), for the Contract Year effective June 1, 2017 (“Original Contract”), subject to the terms and conditions herein contained.

ARTICLE 2

CONCURRENCY OF CONDITIONS

This Contract shall be effective June 1, 2017 and shall follow in all respects the terms and conditions of the Original Contract, and any amendment added thereto, except as otherwise specified herein. The Retrocessionaire shall follow the Retrocedent in all matters pertaining to the Original Contract.

ARTICLE 3

TERM

This Contract shall take effect June 1, 2017, and shall remain in effect until May 31, 2018, both days inclusive, applying to Loss Occurrences commencing during the term of this Contract.


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ARTICLE 4

SPECIAL TERMINATION

A.	The Retrocedent may terminate a Subscribing Retrocessionaire’s percentage share in this Contract at any time by giving written notice to the Subscribing Retrocessionaire in the event of any of the following circumstances:

The Subscribing Retrocessionaire ceases underwriting operations.

A state insurance department or other legal authority orders the Subscribing Retrocessionaire to cease writing business, or the Subscribing Retrocessionaire is placed under regulatory supervision.

The Subscribing Retrocessionaire has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations.

The Subscribing Retrocessionaire’s policyholders’ surplus (or the equivalent under the Subscribing Retrocessionaire’s accounting system) as reported in such financial statements of the Subscribing Retrocessionaire as designated by the Retrocedent, has been reduced by 20% of the amount thereof at any date during the prior 12-month period (including the period prior to the inception of this Contract).

The Subscribing Retrocessionaire has merged with or has become acquired or controlled by any Retrocedent, corporation, or individual(s) not controlling the Subscribing Retrocessionaire’s operations at the inception of this Contract.

The Subscribing Retrocessionaire has retroceded its entire liability under this Contract without the Retrocedent’s prior written consent, except for retrocessions to members of the Subscribing Retrocessionaire’s holding Retrocedent group.

The Subscribing Retrocessionaire has been assigned an A.M. Best’s rating of less than “A-” and/or an S&P rating of less than “BBB+.” However, as respects Underwriting Members of Lloyd’s, London, a Lloyd’s Market Rating of less than “A-” by A.M. Best and/or less than “BBB+” by S&P shall apply.

The Subscribing Retrocessionaire has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid.

B.	Termination shall be effected on a cut-off basis and the Subscribing Retrocessionaire shall have no liability for Loss Occurrences commencing after the date of termination. The reinsurance premium due the Subscribing Retrocessionaire hereunder (including any


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minimum reinsurance premium) shall be prorated based on the period of the Subscribing Retrocessionaire’s participation hereon, and the Subscribing Retrocessionaire shall immediately return any excess reinsurance premium received. Reinstatement premium, if any, shall be calculated based on the Subscribing Retrocessionaire’s reinsurance premium earned during the period of the Subscribing Retrocessionaire’s participation hereon.

Additionally, in the event of any of the circumstances listed in paragraph A of this Article, the Retrocedent shall have the option to commute the Subscribing Retrocessionaire’s liability for losses on Policies covered by this Contract. In the event the Retrocedent and the Subscribing Retrocessionaire cannot agree on the commutation amount, they shall appoint an actuary and/or appraiser to assess such amount and shall share equally any expense of the actuary and/or appraiser. If the Retrocedent and the Subscribing Retrocessionaire cannot agree on an actuary and/or appraiser, the Retrocedent and the Subscribing Retrocessionaire each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Subscribing Retrocessionaire of the amount of liability ascertained shall constitute a complete and final release of both parties in respect of liability arising from the Subscribing Retrocessionaire’s participation under this Contract.

D.	The Retrocedent’s option to require commutation under paragraph C above shall survive the termination or expiration of this Contract.

ARTICLE 5

RETENTION AND LIMIT

The Retrocessionaire shall be liable in respect of each Loss Occurrence, for an amount of Ultimate Net Loss of up to **** for each such Loss Occurrence, and subject further to a limit of liability of **** for all Loss Occurrences commencing during the term of this Contract. The coverage provided hereunder shall not apply unless and until the Retrocedent shall have retained an aggregate deductible of **** (i.e., the total of Ultimate Net Loss otherwise subject to this Article pursuant to the terms of the Original Contract) for Loss Occurrences commencing during the term of this Contract.

B.	No Loss Occurrence shall be covered hereunder unless it involves two or more risks subject to this Contract. The Retrocedent shall be the sole judge of what constitutes one risk for purposes of this Contract.

ARTICLE 6

PREMIUM

A.	The Retrocedent shall pay the Retrocessionaire an annual premium of **** for coverage provided under this Contract to be paid on June 1, 2017.


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B.	The Retrocedent shall furnish the Retrocessionaire with such reasonably available information as may be reasonably required by the Retrocessionaire for completion of the Retrocessionaire’s financial statements.

ARTICLE 7

DEFINITIONS

“Ultimate Net Loss” means the actual loss paid by the Retrocedent or which the Retrocedent becomes liable to pay, such loss to include loss adjustment expense, 100% of any extra contractual obligations and 100% of any loss in excess of policy limits as defined in the Original Contract, and 100% of any Extra Contractual Obligations and 100% of any Loss in Excess of Original Contract Limit, as provided in the Extra Contractual Obligations/Loss in Excess of Original Contract Limits Article.

Salvages and all recoveries (including amounts due from all reinsurances that inure to the benefit of this Contract, whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder.

All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto.

The Retrocedent shall be deemed to be “liable to pay” a loss when a judgment has been rendered that the Retrocedent does not plan to appeal, and/or the Retrocedent has obtained a release, and/or the Retrocedent has accepted a proof of loss.

Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Retrocedent’s “Ultimate Net Loss” has been ascertained.

B.	“Loss Occurrence” shall follow the definition contained in the Original Contract.

ARTICLE 8

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF ORIGINAL CONTRACT LIMITS

This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss. “Extra Contractual Obligations” shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Retrocedent to settle within the Original Contract limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its reinsured or in the preparation or prosecution of an appeal consequent upon such action.


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This Contract shall cover Loss in Excess of Original Contract Limits, as provided in the definition of Ultimate Net Loss. “Loss in Excess of Original Contract Limits” shall be defined as Loss in excess of the Original Contract limit, having been incurred because of, but not limited to, failure by the Retrocedent to settle within the Original Contract limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its reinsured or in the preparation or prosecution of an appeal consequent upon such action.

C.	An Extra Contractual Obligation and/or Loss in Excess of Original Contract Limits shall be deemed to have occurred on the same date as the loss covered under the Original Contract, and shall constitute part of the original loss.

D.	For the purposes of the Loss in Excess of Original Contract Limits coverage hereunder, the word “Loss” shall mean any amounts for which the Retrocedent would have been contractually liable to pay had it not been for the limit of the Original Contract.

However, this Article shall not apply where the loss has been incurred due to final legal adjudication of fraud of a member of the Board of Directors or a corporate officer of the Retrocedent acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

F.	In no event shall coverage be provided to the extent not permitted under law.

ARTICLE 9

NO THIRD PARTY RIGHTS

This Contract is solely between the Retrocedent and the Retrocessionaire, and in no instance shall any insured, claimant or other third party have any rights under this Contract except as may be expressly provided otherwise herein.

ARTICLE 10

NOTICE OF LOSS AND LOSS SETTLEMENTS

The Retrocedent shall advise the Retrocessionaire promptly if paid and estimated Ultimate Net Loss is in excess of 75% of the Retrocedent’s retention, or if, in the opinion of the Retrocedent, such Ultimate Net Loss may result in a claim hereunder. Thereafter, the Retrocedent shall advise the Retrocessionaire, at least monthly, of all subsequent developments thereto that may materially affect the position of the Retrocessionaire.

B.	The Retrocedent alone and at its full discretion shall adjust, settle or compromise all claims and losses.


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As respects losses subject to this Contract, all loss settlements made by the Retrocedent, whether under strict Policy terms or by way of compromise, and any Extra Contractual Obligations and/or Loss in Excess of Policy Limits, shall be binding upon the Retrocessionaire. The Retrocessionaire agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of reasonable evidence of the amount paid by the Retrocedent or that the Retrocedent estimates it will pay within the next 14 days. Within 30 days after receipt of the Retrocessionaire’s payment, the Retrocedent shall report to the Retrocessionaire the Retrocessionaire’s payment, minus the Retrocessionaire’s share of losses subject to this Contract that the Retrocedent has paid, or become liable to pay, as of the date of the report. Any positive difference shall be remitted to the Retrocessionaire with the Retrocedent’s report.

ARTICLE 11

LATE PAYMENTS

In the event any payment due either party is not received by the Intermediary by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times

1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made, plus 1%; times

The amount past due, including accrued interest.

Interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

B.	The due date shall, for purposes of this Article, be determined as follows:

Payments from the Retrocessionaire to the Retrocedent shall be due on the date on which the demand for payment (including delivery of bordereaux or quarterly or monthly reports) is received by the Retrocessionaire, and shall be overdue 30 days thereafter.

Payments from the Retrocedent to the Retrocessionaire shall be due on the dates specified within this Contract. Payments shall be overdue 30 days thereafter except for the first installment of premium, if applicable, which shall be overdue 60 days from inception or 30 days from final line-signing, whichever the later. Reinstatement premium, if applicable, shall have as a due date the date when the Retrocedent


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receives payment for the claim giving rise to such reinstatement premium, and payment shall be overdue 30 days thereafter. In the event a due date is not specifically stated for a given payment, the overdue date shall be 30 days following the date of billing.

If the information contained in the Retrocedent’s demand for payment is insufficient or not in accordance with the conditions of this Contract, then within 30 days the Retrocessionaire shall request from the Retrocedent all additional information necessary to validate its claim and the payment due date as defined in paragraph B shall be deemed to be the date upon which the Retrocessionaire received the requested additional information. This paragraph is only for the purpose of establishing when a payment is overdue, and shall not alter the provisions of the Notice of Loss and Loss Settlements Article or other pertinent contractual stipulations.

D.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the prevailing party. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.

E.	Any interest owed pursuant to this Article may be waived by the party to which it is owed. Waiver of such interest, however, shall not affect the waiving party’s rights to other interest amounts due as a result of this Article.

ARTICLE 12

OFFSET

Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any and all balances due from a party to the other arising under this Contract. In the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of any applicable law governing offset entitlement.

ARTICLE 13

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars, and all payments hereunder shall be in United States Dollars.

For purposes of this Contract, where the Retrocedent receives premiums or pays losses in currencies other than United States Dollars, such premiums or losses shall be converted into United States Dollars at the actual rates of exchange at which these premiums or losses are entered in the Retrocedent’s books.


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ARTICLE 14

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Retrocessionaire does not qualify for credit with any insurance regulatory authority having jurisdiction over the Retrocedent’s reserves.

The Retrocedent agrees, in respect of its Policies or bonds falling within the scope of this Contract, that when it files with its insurance regulatory authority, or sets up on its books liabilities as required by law, it shall forward to the Retrocessionaire a statement showing the proportion of such liabilities applicable to the Retrocessionaire. The “Retrocessionaire’s Obligations” shall be defined as follows:

unearned premium (if applicable);

known outstanding losses that have been reported to the Retrocessionaire and Loss Adjustment Expense relating thereto;

losses and Loss Adjustment Expense paid by the Retrocedent but not recovered from the Retrocessionaire;

losses incurred but not reported and Loss Adjustment Expense relating thereto;

all other amounts for which the Retrocedent cannot take credit on its financial statements unless funding is provided by the Retrocessionaire.

The Retrocessionaire’s Obligations shall be funded by funds withheld, cash advances, Trust Agreement or a Letter of Credit (LOC). The Retrocessionaire shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Retrocedent’s reserves.

When funding by Trust Agreement, the Retrocessionaire shall ensure that the Trust Agreement complies with the provisions of the “Trust Agreement Requirements Clause” attached hereto. When funding by an LOC, the Retrocessionaire agrees to apply for and secure timely delivery to the Retrocedent of a clean, irrevocable and unconditional LOC issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Retrocedent’s reserves in an amount equal to the Retrocessionaire’s Obligations. Such LOC shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (or such other time period as may be required by insurance regulatory authorities), prior to any expiration date the issuing bank shall notify the Retrocedent by certified or registered mail that the issuing bank elects not to consider the LOC extended for any additional period.


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The Retrocessionaire and the Retrocedent agree that any funding provided by the Retrocessionaire pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Retrocedent or any successor, by operation of law, of the Retrocedent including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Retrocedent, for the following purposes, unless otherwise provided for in a separate Trust Agreement:

to reimburse the Retrocedent for the Retrocessionaire’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;

to make refund of any sum that is in excess of the actual amount required to pay the Retrocessionaire’s Obligations under this Contract (or in excess of 102% of the Retrocessionaire’s Obligations, if funding is provided by a Trust Agreement);

to fund an account with the Retrocedent for the Retrocessionaire’s Obligations. Such cash deposit shall be held in an interest bearing account separate from the Retrocedent’s other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Retrocessionaire. Any taxes payable on accrued interest shall be paid out of the assets in the account that are in excess of the Retrocessionaire’s Obligations (or in excess of 102% of the Retrocessionaire’s Obligations, if funding is provided by a Trust Agreement). If the assets are inadequate to pay taxes, any taxes due shall be paid or reimbursed by the Retrocessionaire;

to pay the Retrocessionaire’s share of any other amounts the Retrocedent claims are due under this Contract.

If the amount drawn by the Retrocedent is in excess of the actual amount required for E(1) or E(3), or in the case of E(4), the actual amount determined to be due, the Retrocedent shall promptly return to the Retrocessionaire the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Retrocedent or the Retrocessionaire.

G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Retrocedent or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Retrocedent.

At annual intervals, or more frequently at the discretion of the Retrocedent, but never more frequently than quarterly, the Retrocedent shall prepare a specific statement of the Retrocessionaire’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

If the statement shows that the Retrocessionaire’s Obligations exceed the balance of the LOC as of the statement date, the Retrocessionaire shall, within 30 days after receipt of the statement, secure delivery to the Retrocedent of an amendment to the


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LOC increasing the amount of credit by the amount of such difference. Should another method of funding be used, the Retrocessionaire shall, within the time period outlined above, increase such funding by the amount of such difference.

If, however, the statement shows that the Retrocessionaire’s Obligations are less than the balance of the LOC (or that 102% of the Retrocessionaire’s Obligations are less than the trust account balance if funding is provided by a Trust Agreement), as of the statement date, the Retrocedent shall, within 30 days after receipt of written request from the Retrocessionaire, release such excess credit by agreeing to secure an amendment to the LOC reducing the amount of credit available by the amount of such excess credit. Should another method of funding be used, the Retrocedent shall, within the time period outlined above, decrease such funding by the amount of such excess.

ARTICLE 15

TAXES

In consideration of the terms under which this Contract is issued, the Retrocedent undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia.

Each Subscribing Retrocessionaire has agreed to allow, for the purpose of paying the Federal Excise Tax, the applicable percentage of the premium payable hereon (as imposed under the Internal Revenue Code) to the extent such premium is subject to Federal Excise Tax.

In the event of any return of premium becoming due hereunder, the Subscribing Retrocessionaire shall deduct the applicable percentage of the premium from the amount of the return, and the Retrocedent or its agent should take steps to recover the Tax from the U.S. Government.

ARTICLE 16

ACCESS TO RECORDS

The Retrocessionaire or its duly authorized representatives shall have the right to visit the offices of the Retrocedent to inspect, examine, audit, and verify any of the policy, accounting or claim files (“Records”) relating to business reinsured under this Contract during regular business hours after giving five working days’ prior notice. This right shall be exercisable during the term of this Contract or after the expiration of this Contract. Notwithstanding the above, the Retrocessionaire shall not have any right of access to the Records of the Retrocedent if it is not current in all undisputed payments due the Retrocedent.


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Notwithstanding the above, the Retrocedent reserves the right to withhold from the Retrocessionaire any Privileged Documents. However, the Retrocedent shall permit and not object to the Retrocessionaire’s access to Privileged Documents in connection with the underlying claim reinsured hereunder following final settlement or final adjudication of the case or cases involving such claim, with prejudice against all claimants and all parties to such adjudications; the Retrocedent may defer release of such Privileged Documents if there are subrogation, contribution, or other third party actions with respect to that claim or case, and the Retrocedent’s defense might be jeopardized by release of such Privileged Documents. In the event that the Retrocedent seeks to defer release of such Privileged Documents, it shall, in consultation with the Retrocessionaire, take other steps as reasonably necessary to provide the Retrocessionaire with the information it reasonably requires to indemnify the Retrocedent without causing a loss of such privileges or protections. The Retrocessionaire shall not have access to Privileged Documents relating to any dispute between the Retrocedent and the Retrocessionaire.

C.	For purposes of this Article:

“Privileged Documents” means any documents that are Attorney-Client Privilege Documents and/or Work Product Privilege Documents.

“Attorney-Client Privilege Documents” means communications of a confidential nature between (a) the Retrocedent, or anyone retained by or at the direction of the Retrocedent, or its in-house or outside legal counsel, or anyone in the control of such legal counsel, and (b) any in-house or outside legal counsel, if such communications relate to legal advice being sought by the Retrocedent and/or contain legal advice being provided to the Retrocedent.

“Work Product Privilege Documents” means communications, written materials and tangible things prepared by or for in-house or outside counsel, or prepared by or for the Retrocedent, in anticipation of or in connection with litigation, arbitration, or other dispute resolution proceedings.

ARTICLE 17

CONFIDENTIALITY

The Retrocessionaire hereby acknowledges that the documents, information and data provided to it by the Retrocedent, whether directly or through an authorized agent, in connection with the placement and execution of this Contract (“Confidential Information”) are proprietary and confidential to the Retrocedent. Confidential Information shall not include documents, information or data that the Retrocessionaire can show:

are publicly known or have become publicly known through no unauthorized act of the Retrocessionaire;


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have been rightfully received from a third person without obligation of confidentiality; or

were known by the Retrocessionaire prior to the placement of this Contract without an obligation of confidentiality.

Absent the written consent of the Retrocedent, the Retrocessionaire shall not disclose any Confidential Information to any third parties, including any affiliated companies (except to the extent necessary to enable affiliated companies or third parties engaged by the Retrocessionaire to perform services related to this Contract on behalf of the Retrocessionaire), except:

when required by retrocessionaires as respects business ceded to this Contract;

when required by regulators performing an audit of the Retrocessionaire’s records and/or financial condition; or

when required by external auditors performing an audit of the Retrocessionaire’s records in the normal course of business.

Further, the Retrocessionaire agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.

Notwithstanding the above, in the event that the Retrocessionaire is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Retrocessionaire agrees to provide the Retrocedent with written notice of same at least 10 days prior to such release or disclosure and to use its best efforts to assist the Retrocedent in maintaining the confidentiality provided for in this Article.

D.	The provisions of this Article shall extend to the officers, directors and employees of the Retrocessionaire and its affiliates, and shall be binding upon their successors and assigns.

ARTICLE 18

INDEMNIFICATION AND ERRORS AND OMISSIONS

A.	The Retrocessionaire is reinsuring, subject to the terms and conditions of this Contract, the obligations of the Retrocedent under any Policy. The Retrocedent shall be the sole judge as to:

what shall constitute a claim or loss covered under any Policy;

the Retrocedent’s liability thereunder;

the amount or amounts that it shall be proper for the Retrocedent to pay thereunder.


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B.	The Retrocessionaire shall be bound by the judgment of the Retrocedent as to the obligation(s) and liability(ies) of the Retrocedent under any Policy.

Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability that would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery.

D.	Nothing in this Article shall be construed to override any of the other terms and conditions of this Contract.

ARTICLE 19

INSOLVENCY

If more than one reinsured company is referenced within the definition of “Retrocedent” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.

In the event of the insolvency of the Retrocedent, this reinsurance (or the portion of any risk or obligation assumed by the Retrocessionaire, if required by applicable law) shall be payable directly to the Retrocedent, or to its liquidator, receiver, conservator or statutory successor, either: (1) on the basis of the liability of the Retrocedent, or (2) on the basis of claims filed and allowed in the liquidation proceeding, whichever may be required by applicable statute, without diminution because of the insolvency of the Retrocedent or because the liquidator, receiver, conservator or statutory successor of the Retrocedent has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Retrocedent shall give written notice to the Retrocessionaire of the pendency of a claim against the Retrocedent indicating the Policy or bond reinsured, which claim would involve a possible liability on the part of the Retrocessionaire within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Retrocessionaire may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Retrocedent or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Retrocessionaire shall be chargeable, subject to the approval of the court, against the Retrocedent as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Retrocedent solely as a result of the defense undertaken by the Retrocessionaire.

C.	Where two or more Retrocessionaires are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Retrocedent.


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As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Contract, the reinsurance shall be payable as set forth above by the Retrocessionaire to the Retrocedent or to its liquidator, receiver, conservator or statutory successor, (except as provided by Section 4118(a)(1)(A) of the New York Insurance Law, provided the conditions of 1114(c) of such law have been met, if New York law applies) or except (1) where the Contract specifically provides another payee in the event of the insolvency of the Retrocedent, or (2) where the Retrocessionaire, with the consent of the direct insured or insureds, has assumed such Policy obligations of the Retrocedent as direct obligations of the Retrocessionaire to the payees under such Policies and in substitution for the obligations of the Retrocedent to such payees. Then, and in that event only, the Retrocedent, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Financial Services of the State of New York, or with the prior approval of such other regulatory authority as may be applicable, is entirely released from its obligation and the Retrocessionaire shall pay any loss directly to payees under such Policy.

ARTICLE 20

ARBITRATION

Any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested.

One arbitrator shall be chosen by each party and the two arbitrators shall then choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after 10 days’ prior notice by certified or registered mail of its intention to do so, may appoint the second arbitrator.

If the two arbitrators do not agree on a third arbitrator within 60 days of their appointment, the third arbitrator shall be chosen in accordance with the procedures for selecting the third arbitrator in force on the date the arbitration is demanded, established by the AIDA Reinsurance and Insurance Arbitration Society – U.S. (ARIAS). The arbitrators shall be persons knowledgeable about insurance and reinsurance who have no personal or financial interest in the result of the arbitration. If a member of the panel dies, becomes disabled or is otherwise unwilling or unable to serve, a substitute shall be selected in the same manner as the departing member was chosen and the arbitration shall continue.

D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.


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The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Notwithstanding anything to the contrary in this Contract, the arbitrators may at their discretion, consider underwriting and placement information provided by the Retrocedent to the Retrocessionaire, as well as any correspondence exchanged by the parties that is related to this Contract. The arbitration shall take place in Tampa, Florida, or at such other place as the parties shall agree. The decision of any two arbitrators shall be in writing and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate.

The panel shall interpret this Contract as an honorable engagement rather than as merely a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible after the hearings. Judgment upon an award may be entered in any court having jurisdiction thereof.

Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent permitted by law.

ARTICLE 21

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Retrocessionaires not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.

This Article shall not be read to conflict with or override the obligations of the parties to arbitrate their disputes as provided for in the Arbitration Article. This Article is intended as an aid to compelling arbitration or enforcing such arbitration or arbitral award, not as an alternative to the Arbitration Article for resolving disputes arising out of this Contract.

In the event of the failure of the Retrocessionaire to perform its obligations hereunder, the Retrocessionaire, at the request of the Retrocedent, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Retrocessionaire’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. The Retrocessionaire, once the appropriate court is selected, whether such court is the one originally chosen by the Retrocedent and accepted by the Retrocessionaire or is determined by removal, transfer, or otherwise, as provided for above, shall comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against the Retrocessionaire upon this Contract, shall abide by the final decision of such court or of any appellate court in the event of an appeal.


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Service of process in such suit may be made upon Messrs. Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. The above-named are authorized and directed to accept service of process on behalf of the Retrocessionaire in any such suit.

Further, pursuant to any statute of any state, territory or district of the United States that makes provision therefor, the Retrocessionaire hereby designates the Superintendent, Commissioner or Director of Insurance, or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Retrocedent or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 22

GOVERNING LAW

This Contract shall be governed as to performance, administration and interpretation by the laws of Bermuda, exclusive of conflict of law rules. However, with respect to credit for reinsurance, the rules of all applicable jurisdictions shall apply.

ARTICLE 23

ENTIRE AGREEMENT

This Contract sets forth all of the duties and obligations between the Retrocedent and the Retrocessionaire and supersedes any and all prior or contemporaneous written agreements with respect to matters referred to in this Contract. This Contract may not be modified or changed except by an amendment to this Contract in writing signed by both parties. However, this Article shall not be construed as limiting the admissibility of evidence regarding the formation, interpretation, purpose or intent of this Contract.

ARTICLE 24

NON-WAIVER

The failure of the Retrocedent or the Retrocessionaire to insist on compliance with this Contract or to exercise any right or remedy hereunder shall not constitute a waiver of any rights contained in this Contract nor prevent either party from thereafter demanding full and complete compliance nor prevent either party from exercising such remedy in the future.


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ARTICLE 25

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Retrocedent or the Retrocessionaire through the Intermediary. Payments by the Retrocedent to the Intermediary shall be deemed payment to the Retrocessionaire. Payments by the Retrocessionaire to the Intermediary shall be deemed payment to the Retrocedent only to the extent that such payments are actually received by the Retrocedent.

ARTICLE 26

MODE OF EXECUTION

A.	This Contract may be executed by:

an original written ink signature of paper documents;

an exchange of facsimile copies showing the original written ink signature of paper documents;

electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B.	The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.


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IN WITNESS WHEREOF, the Retrocedent has caused this Contract to be executed by its duly authorized representative(s), who also confirms the Retrocedent’s review of and agreement to be bound by the terms and conditions of the Interests and Liabilities Agreements attached to and forming part of this Contract, this day of , in the year of .

CLADDAUGH CASUALTY INSURANCE COMPANY LTD.

WORKING LAYER CATASTROPHE EXCESS OF LOSS

SPECIFIC RETROCESSION CONTRACT


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TRUST AGREEMENT REQUIREMENTS CLAUSE

A.	Except as provided in paragraph B of this Clause, if the Retrocessionaire satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Retrocessionaire shall ensure that the Trust Agreement:

Requires the Retrocessionaire to establish a trust account for the benefit of the Retrocedent, and specifies what the Trust Agreement is to cover;

Stipulates that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash (United States legal tender), and certificates of deposit (issued by a United States bank and payable in United States legal tender), or any combination of the two, provided that the investments are issued by an institution that is not the parent, subsidiary or affiliate of either the Retrocessionaire or the Retrocedent;

Requires the Retrocessionaire, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Retrocedent, or the trustee upon the direction of the Retrocedent, may whenever necessary negotiate these assets without consent or signature from the Retrocessionaire or any other entity;

Requires that all settlements of account between the Retrocedent and the Retrocessionaire be made in cash or its equivalent; and

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the Retrocedent or the Retrocessionaire.

B.	If a ceding insurer is domiciled in California and the Retrocessionaire satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Retrocessionaire shall ensure that the Trust Agreement:

Provides that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash in United States dollars, certificates of deposit issued by a United States financial institution as defined in California Insurance Code Section 922.7(a) and payable in United States dollars, and investments permitted by the California Insurance Code, or any combination of the above.

Provides that investments in or issued by an entity controlling, controlled by or under common control with either the grantor or the beneficiary of the trust shall not exceed 5% of total investments.


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Requires the Retrocessionaire, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the ceding insurer, or the trustee upon the direction of the ceding insurer, may, whenever necessary, negotiate these assets without consent or signature from the Retrocessionaire or any other entity.

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the ceding insurer or the Retrocessionaire.

C.	If there are multiple ceding insurers that collectively comprise the Retrocedent, “regulatory authorities” as referenced in subparagraph A(2) above, shall mean the individual ceding insurer’s domestic regulator.


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EXHIBIT 10.17

**** indicates material that has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the U.S. Securities and Exchange Commission.

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida


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PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

TABLE OF CONTENTS


Article		Page
	Preamble		4
1	Business Covered		4
2	Retention and Limit		5
3	Florida Hurricane Catastrophe Fund		5
4	Term		6
5	Special Termination		6
6	Territory		8
7	Exclusions		8
8	Special Acceptance		9
9	Premium		10
10	Reinstatement		11
11	Definitions		11
12	Extra Contractual Obligations/Excess of Policy Limits		14
13	Net Retained Liability		15
14	Other Reinsurance		16
15	Original Conditions		16
16	No Third Party Rights		16
17	Notice of Loss and Loss Settlements		16
18	Late Payments		17
19	Offset		18
20	Currency		18
21	Unauthorized Reinsurance		18
22	Taxes		21
23	Access to Records		21
24	Confidentiality		22
25	Indemnification and Errors and Omissions		23
26	Insolvency		23
27	Run-Off Reinsurer		25
28	Arbitration		26
29	Service of Suit		27
30	Governing Law		28
31	Entire Agreement		28
32	Non-Waiver		28
33	Intermediary		29
34	Mode of Execution		29
	Company Signing Block		30


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PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

TABLE OF CONTENTS


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PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

(the “Contract”)

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida

(the “Company”)

THE SUBSCRIBING REINSURER(S) IDENTIFIED IN THE

INTERESTS AND LIABILITIES AGREEMENT(S) ATTACHED TO

AND FORMING PART OF THIS CONTRACT

(the “Reinsurer”)

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Company in respect of its net excess liability as a result of any loss or losses which may occur during the Term of this Contract under any Policies not covered by the Company’s Flood Tower, in force at the effective date hereof or issued or renewed on or after that date, covering direct and assumed business classified by the Company as the property perils of Homeowners, Condominium Owners, Renters and Dwelling, subject to the terms and conditions herein contained.


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ARTICLE 2

RETENTION AND LIMIT

For each Excess Layer of reinsurance provided hereunder, the Reinsurer shall be liable in respect of each Loss Occurrence for the Ultimate Net Loss over and above the initial Ultimate Net Loss retention as set forth in the schedule below for the Loss Occurrence, subject to a limit of liability to the Reinsurer for each such Loss Occurrence, and subject further to a limit of liability for all Loss Occurrences commencing during the term of this Contract, as set forth below:

RETENTION AND LIMIT SCHEDULE


	Company’s Retention	Reinsurer’s Limit of Liability
Layer	Ultimate Net Loss in respect of each Loss Occurrence	Ultimate Net Loss in respect of each Loss Occurrence	Ultimate Net Loss in respect of all Loss Occurrences during the term of this Contract
Third Layer	********	********	********
Fourth Layer	********	********	********
Fifth Layer	********	********	********

In addition to reductions under the provisions of the Florida Hurricane Catastrophe Fund Article, recoveries hereunder shall always be made under the lowest Excess Layer that is not entirely exhausted. If there is any amount of Ultimate Net Loss arising out of a Loss Occurrence in excess of the Company’s retention under the lowest Excess Layer that has not been recovered thereunder due to the exhaustion of the lowest Excess Layer, such amount shall be recovered under the next or subsequent Excess Layer or Layers, as appropriate. Recoveries as respects losses applicable to each Excess Layer shall inure as follows:

Recoveries under the Third Layer shall inure to the benefit of the Fourth Layer, whether or not recoverable; and

Recoveries under the Third and Fourth Layers shall inure to the benefit of the Fifth Layer, whether or not recoverable.

It is understood, however, that any fully exhausted Layer or the exhausted portion of any Excess Layer shall no longer inure to the benefit of any subsequent Layer(s).

C.	No Loss Occurrence shall be covered hereunder unless it involves two or more risks subject to this Contract. The Company shall be the sole judge of what constitutes one risk for purposes of this Contract.

ARTICLE 3

FLORIDA HURRICANE CATASTROPHE FUND

A.	As respects Loss Occurrences subject to this Contract, any loss reimbursement recoverable by the Company under the Florida Hurricane Catastrophe Fund (FHCF), shall be deducted in determining Ultimate Net Loss under this Contract, subject to the following:

The full reimbursement amount due from the FHCF, based on statutory limits of coverage as of June 1, shall be deemed recovered by the Company, whether or not actually received from the FHCF and whether or not reduced because of the FHCF’s inability to pay.


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For purposes of allocating recoveries from the FHCF with respect to each Loss Occurrence, only amounts recoverable by applying the pay-out and retention multiples for the FHCF prior to any reduction in retention due to multiple Loss Occurrences in the same annual period shall be included in calculating the deduction from Ultimate Net Loss.

If the Company’s aggregate limit of FHCF reimbursement coverage is exhausted from Loss Occurrences commencing during the term of this Contract, and the FHCF does not designate the portion of said limit allocable to each Loss Occurrence, the total FHCF reimbursement received shall be allocated to the each individual Loss Occurrence in the proportion that the Company’s losses in that Loss Occurrence bear to the Company’s total losses arising out of all Loss Occurrences to which the reimbursement applies.

For purposes of loss recoveries under this Contract prior to the final determination of the Company’s retention and limit under the FHCF, FHCF coverage shall be calculated using the Company’s “Projected Payout Multiple” under the FHCF. Upon determination of the Company’s retention and limit under the FHCF, losses will be adjusted, recognizing any adjustment to the “Projected Payout Multiple” caused by a change in the Aggregate Mandatory FHCF Premium but disregarding any change due to a decrease in the statutory limit.

B.	Any FHCF reimbursement premiums paid by the Company for FHCF layers that inure to the benefit of this Contract shall be deemed to be premiums paid for inuring reinsurance.

C.	The Company has opted for a 45% coverage selection from the FHCF.

ARTICLE 4

TERM

This Contract shall take effect at 12:01 a.m., Standard Time, June 1, 2017, and unless terminated prior to that time and date as provided in the Special Termination Article, shall remain in effect until 12:01 a.m., Standard Time, June 1, 2018, applying to Loss Occurrences commencing during the term of this Contract. For purposes of this Contract, “Standard Time” shall mean the time as described in the original Policy.

ARTICLE 5

SPECIAL TERMINATION

A.	The Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event of any of the following circumstances:

The Subscribing Reinsurer ceases underwriting operations.


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A state insurance department or other legal authority orders the Subscribing Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under regulatory supervision.

The Subscribing Reinsurer has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations.

The Subscribing Reinsurer’s policyholders’ surplus (or the equivalent under the Subscribing Reinsurer’s accounting system) as reported in such financial statements of the Subscribing Reinsurer as designated by the Company, has been reduced by 20% of the amount thereof at any date during the prior 12-month period (including the period prior to the inception of this Contract).

The Subscribing Reinsurer has merged with or has become acquired or controlled by any company, corporation, or individual(s) not controlling the Subscribing Reinsurer’s operations at the inception of this Contract.

The Subscribing Reinsurer has retroceded its entire liability under this Contract without the Company’s prior written consent, except for retrocessions to members of the Subscribing Reinsurer’s holding company group.

The Subscribing Reinsurer has been assigned an A.M. Best’s rating of less than “A-” and/or an S&P rating of less than “BBB+.” However, as respects Underwriting Members of Lloyd’s, London, a Lloyd’s Market Rating of less than “A-” by A.M. Best and/or less than “BBB+” by S&P shall apply.

The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid.

Termination shall be effected on a cut-off basis and the Subscribing Reinsurer shall have no liability for Loss Occurrences commencing after the date of termination. The reinsurance premium due the Subscribing Reinsurer hereunder (including any minimum reinsurance premium) shall be prorated based on the period of the Subscribing Reinsurer’s participation hereon, and the Subscribing Reinsurer shall immediately return any excess reinsurance premium received. Reinstatement premium, if any, shall be calculated based on the Subscribing Reinsurer’s reinsurance premium earned during the period of the Subscribing Reinsurer’s participation hereon.

C.	Additionally, in the event of any of the circumstances listed in paragraph A of this Article, the Company shall have the option to commute the Subscribing Reinsurer’s liability for


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losses on Policies covered by this Contract. In the event the Company and the Subscribing Reinsurer cannot agree on the commutation amount, they shall appoint an actuary and/or appraiser to assess such amount and shall share equally any expense of the actuary and/or appraiser. If the Company and the Subscribing Reinsurer cannot agree on an actuary and/or appraiser, the Company and the Subscribing Reinsurer each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Subscribing Reinsurer of the amount of liability ascertained shall constitute a complete and final release of both parties in respect of liability arising from the Subscribing Reinsurer’s participation under this Contract.

D.	The Company’s option to require commutation under paragraph C above shall survive the termination or expiration of this Contract.

ARTICLE 6

TERRITORY

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 7

EXCLUSIONS

A.	This Contract shall not apply to and specifically excludes:

Flood when written as such.

Earthquake for standalone Policies where earthquake is the only named peril.

Hail damage to an insured’s growing or standing crops.

Reinsurance assumed by the Company under obligatory reinsurance agreements, except intercompany reinsurance between the Company and its affiliates and agency reinsurance where the Policies involved are to be re-underwritten in accordance with the underwriting standards of the Company and reissued as Policies of the Company at the next anniversary or expiration date.

Pools, Associations & Syndicates, per the attached exclusion.

Liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, that provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, that has been declared by any competent authority to be insolvent, or that is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.


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Loss or damage occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage that would be covered under a standard form of Policy containing a standard war exclusion clause.

Losses excluded by the attached Nuclear Incident Exclusion Clause – Physical Damage – Reinsurance – U.S.A.

Terrorism as defined in the attached Terrorism Exclusion.

10.

Mold unless directly resulting from an otherwise covered peril.

11.

Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25.0% of the Company’s property loss under the applicable original Policy.

12.

Financial guarantee and insolvency.

13.

Loss or damage to overhead transmission and distribution lines, including supporting structures, of electrical companies, telephone companies, and cable companies. This exclusion shall not apply, however, to transmission and distribution lines and their supporting structures located on the property of any original insured or within 1,000 feet thereof.

Except as respects exclusions A(7), A(8), A(9), and A(12), if the Company inadvertently issues a Policy falling within the scope of one or more of the exclusions, such Policy shall be covered hereunder, provided that the Company issues, or causes to be issued, the required notice of cancellation within 30 days after a member of the executive or managerial staff at the Company’s home office having underwriting authority in the class of business involved becomes aware that the Policy applies to excluded classes, unless the Company is prevented from canceling said Policy within such period by applicable statute or regulation, in which case such Policy shall be covered hereunder until the earliest date on which the Company may cancel.

ARTICLE 8

SPECIAL ACCEPTANCE

Business that is not within the scope of this Contract may be submitted to the Reinsurer for special acceptance hereunder, and such business, if accepted by the Reinsurer shall be covered


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hereunder, subject to the terms and conditions of this Contract, except as modified by the special acceptance. The Reinsurer shall be deemed to have accepted a risk, if it has not responded within five business days after receiving the underwriting information on such risk. Any renewal of a special acceptance agreed to for a predecessor contract to this Contract, shall automatically be covered hereunder.

ARTICLE 9

PREMIUM

As respects each Excess Layer, the Company shall pay the Reinsurer a deposit premium in accordance with the schedule set forth below. The Final Adjusted Premium to be paid to the Reinsurer for the reinsurance provided under each Excess Layer shall be calculated at the rates set out below multiplied by the Company’s final Total Insured Value, subject to the applicable minimum premium stated below:

PREMIUM SCHEDULE


Layer	Final Adjusted Premium Rate	Deposit Premium	Minimum Premium
Third Layer	********	********	********
Fourth Layer	********	********	********
Fifth Layer	********	********	********

B.	The deposit premiums set forth in paragraph A above shall be payable to the Reinsurer by the Company in installments as follows:

DEPOSIT INSTALLMENT SCHEDULE


Layer	June 1, 2017	September 1, 2017	January 1, 2018	April 1, 2018
Third Layer	********	********	********	********
Fourth Layer	********	********	********	********
Fifth Layer	********	********	********	********

Within 45 days following the expiration of this Contract, the Company shall provide the Reinsurer with a report showing the Company’s final Total Insured Value. This final Total Insured Value shall be multiplied by the rate for each Excess Layer as stated in paragraph A above. Should this amount be greater than or equal to ****% and less than or equal to ****% of the Deposit Premium as set forth above, there shall be no additional or return premium due. Should the amount so calculated exceed ****% of the Deposit Premium paid in accordance with paragraph A above, the Company shall immediately pay the Reinsurer the difference in excess of ****% of the Deposit Premium. Should the amount so calculated be less than ****% of the Deposit Premium paid in accordance with


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paragraph A of this Article, the Reinsurer shall immediately pay the Company the difference below ****% of the Deposit Premium, subject to the Minimum Premium as set forth above.

D.	“Total Insured Value” means the Company’s aggregate wind exposures on September 30, 2017 for business covered hereunder.

E.	The estimated Total Insured Value is $41,747,735,369.

F.	The Company shall furnish the Reinsurer with such reasonably available information as may be reasonably required by the Reinsurer for completion of the Reinsurer’s financial statements.

ARTICLE 10

REINSTATEMENT

Loss payments under any Excess Layer of this Contract shall reduce the limit of coverage afforded by the amounts paid, but the limit of coverage shall be reinstated from the time of the occurrence of the loss, and for each amount so reinstated, the Company agrees to pay , simultaneously with the Reinsurer’s loss payment, an additional premium calculated at pro rata of the Reinsurer’s premium for the applicable layer(s) for the term of this Contract, being pro rata only as to the fraction of the Reinsurer’s limit of liability hereunder (i.e., the fraction of the Reinsurer’s limit of liability for each Loss Occurrence as set forth for the Excess Layer in the Retention and Limit Article) so reinstated. Nevertheless, the Reinsurer’s liability under the applicable layer(s) shall not exceed such limit(s) in respect of any one Loss Occurrence, nor the applicable limit(s) in respect of all Loss Occurrences commencing during the term of this Contract, as set forth in the Retention and Limit Article.

B.	If at the time of a loss settlement hereon the reinsurance premium, as calculated in accordance with the Premium Article, is unknown, the above calculation of reinstatement premium shall be based upon the deposit premium, subject to adjustment when the reinsurance premium is finally established.

ARTICLE 11

DEFINITIONS

“Ultimate Net Loss” means the actual loss paid by the Company or which the Company becomes liable to pay, such loss to include Loss Adjustment Expense, 100% of any Extra Contractual Obligation and 100% of any Loss in Excess of Policy Limits as defined in the Extra Contractual Obligations/Excess of Policy Limits Article. In no event, however, shall more than 25% of “Ultimate Net Loss” for any one Loss Occurrence be comprised of Extra Contractual Obligations and Loss in Excess of Policy Limits.


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The Company shall be deemed to be “liable to pay” a loss when a judgment has been rendered that the Company does not plan to appeal, and/or the Company has obtained a release, and/or the Company has accepted a proof of loss.

Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company’s “Ultimate Net Loss” has been ascertained.

B.	“Loss Adjustment Expense” means costs and expenses incurred by the Company in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim or loss, or alleged loss, including but not limited to:

court costs;

costs of supersedeas and appeal bonds;

monitoring counsel expenses;

legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions;

post-judgment interest;

pre-judgment interest, unless included as part of an award or judgment;

a pro rata share of salaries and expenses of Company field employees, calculated in accordance with the time occupied in adjusting such loss, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract; and

subrogation, salvage and recovery expenses.

“Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees, except as provided in subparagraph (7) above, and office and other overhead expenses.


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“Loss Occurrence” means the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

As regards any “Named Storm,” all individual losses sustained by the Company arising out of and directly occasioned by such “Named Storm,” without regard to the limitations of duration and extent set forth above. “Named Storm” means any storm or storm system declared by the US National Hurricane Center, US Central Pacific Hurricane Center, US Weather Prediction Center, or their successor organizations, all being divisions of the US National Weather Service to be a tropical storm or hurricane, and any successors thereof. A storm or storm system that merges with a “Named Storm” shall be considered part of that “Named Storm.” A “Named Storm” shall be deemed to begin at the effective time and date of the first watch, warning or other official advisory applicable to such tropical storm or hurricane issued by the above referenced governmental meteorological agencies. A “Named Storm” shall be deemed to end 72 hours after the cancellation of the last watch, warning or other official advisory applicable to such tropical storm, hurricane or successor, issued by the above referenced governmental meteorological agencies irrespective of the duration of the timing or spacing between such watches, warnings or other official advisories. If two or more storms are assigned different names by the above referenced governmental meteorological agencies, each of those storms shall constitute a separate event for purposes of this definition.

As regards windstorm, hail, tornado, cyclone, including ensuing collapse and water damage other than “Named Storm,” all individual losses sustained by the Company occurring during any period of 96 consecutive hours arising out of and directly occasioned by the same event.

As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 96 consecutive hours arising out of and directly occasioned by the same event. The maximum duration of 96 consecutive hours may be extended in respect of individual losses that occur beyond such 96 consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

As regards earthquake and fire following directly occasioned by the earthquake, those earthquake losses and individual fire losses that commence during the period of 168 consecutive hours may be included in the Company’s “Loss Occurrence.”


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As regards any related weather conditions involving snow, sleet, freezing rain, freeze, ice, winter weather, and wind losses related to such conditions, all individual losses sustained by the Company, that occur during any period of 168 consecutive hours arising out of and directly occasioned by the same event.

Except as provided in subparagraph (1)(a) above:

The Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

Only one period of consecutive hours shall apply with respect to one event, except that, as respects those “Loss Occurrences” referred to in subparagraph (1)(c) above, if the disaster, accident or loss occasioned by the event is of greater duration than 96 consecutive hours, then the Company may divide that disaster, accident or loss into two or more “Loss Occurrences” provided no two periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

Losses arising from a combination of two or more perils as a result of the same event shall be considered as having arisen from one “Loss Occurrence.” Furthermore, all losses arising from an event involving a combination of losses described in subparagraphs (1)(a) and (1)(b) may be considered as having arisen from one “Loss Occurrence.” Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils, and, except as respects those “Loss Occurrences” involving a “Named Storm” referred to in subparagraph (1)(a) above, no single “Loss Occurrence” shall encompass a time period greater than 168 consecutive hours.

D.	“Policy” means any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

ARTICLE 12

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss. “Extra Contractual Obligations” shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.


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This Contract shall cover Loss in Excess of Policy Limits, as provided in the definition of Ultimate Net Loss. “Loss in Excess of Policy Limits” shall be defined as Loss in excess of the Policy limit, having been incurred because of, but not limited to, failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.

C.	An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s Policy, and shall constitute part of the original loss.

D.	For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the word “Loss” shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.

E.	Loss Adjustment Expense in respect of Extra Contractual Obligations and/or Loss in Excess of Policy Limits shall be covered hereunder in the same manner as other Loss Adjustment Expense.

However, this Article shall not apply where the loss has been incurred due to final legal adjudication of fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

G.	In no event shall coverage be provided to the extent not permitted under law.

ARTICLE 13

NET RETAINED LIABILITY

A.	This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).

The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts that may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.


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ARTICLE 14

OTHER REINSURANCE

The Company shall be permitted to carry in force other reinsurance, recoveries under which shall inure to the benefit of this Contract.

ARTICLE 15

ORIGINAL CONDITIONS

All reinsurance under this Contract shall be subject to the same terms, conditions, waivers and interpretations, and to the same modifications and alterations as the respective Policies of the Company. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

ARTICLE 16

NO THIRD PARTY RIGHTS

This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract except as may be expressly provided otherwise herein.

ARTICLE 17

NOTICE OF LOSS AND LOSS SETTLEMENTS

The Company shall advise the Reinsurer promptly if paid and estimated Ultimate Net Loss is in excess of 75% of the Company’s retention, or if, in the opinion of the Company, such Ultimate Net Loss may result in a claim hereunder. Thereafter, the Company shall advise the Reinsurer, at least monthly, of all subsequent developments thereto that may materially affect the position of the Reinsurer.

B.	The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.

As respects losses subject to this Contract, all loss settlements made by the Company, whether under strict Policy terms or by way of compromise, and any Extra Contractual Obligations and/or Loss in Excess of Policy Limits, shall be binding upon the Reinsurer. The Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of reasonable evidence of the amount paid by the Company or that the Company estimates it will pay within the next 14 days. Within 30 days after receipt of the Reinsurer’s payment, the Company shall report to the Reinsurer the Reinsurer’s payment, minus the Reinsurer’s share of losses subject to this Contract that the Company has paid, or become liable to pay, as of the date of the report. Any positive difference shall be remitted to the Reinsurer with the Company’s report.


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ARTICLE 18

LATE PAYMENTS

The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times

1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made, plus 1%; times

The amount past due, including accrued interest.

Interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

B.	The due date shall, for purposes of this Article, be determined as follows:

Payments from the Reinsurer to the Company shall be due on the date on which the demand for payment (including delivery of bordereaux or quarterly or monthly reports) is received by the Reinsurer, and shall be overdue 30 days thereafter.

Payments from the Company to the Reinsurer shall be due on the dates specified within this Contract. Payments shall be overdue 30 days thereafter except for the first installment of premium, if applicable, which shall be overdue 60 days from inception or 30 days from final line-signing, whichever the later. Reinstatement premium, if applicable, shall have as a due date the date when the Company receives payment for the claim giving rise to such reinstatement premium, and payment shall be overdue 30 days thereafter. In the event a due date is not specifically stated for a given payment, the overdue date shall be 30 days following the date of billing.

If the information contained in the Company’s demand for payment is insufficient or not in accordance with the conditions of this Contract, then within 30 days the Reinsurer shall request from the Company all additional information necessary to validate its claim and the payment due date as defined in paragraph B shall be deemed to be the date upon which the Reinsurer received the requested additional information. This paragraph is only for the purpose of establishing when a payment is overdue, and shall not alter the provisions of the Notice of Loss and Loss Settlements Article or other pertinent contractual stipulations.


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D.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the prevailing party. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.

E.	Any interest owed pursuant to this Article may be waived by the party to which it is owed. Waiver of such interest, however, shall not affect the waiving party’s rights to other interest amounts due as a result of this Article.

ARTICLE 19

OFFSET

ARTICLE 20

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars, and all payments hereunder shall be in United States Dollars.

For purposes of this Contract, where the Company receives premiums or pays losses in currencies other than United States Dollars, such premiums or losses shall be converted into United States Dollars at the actual rates of exchange at which these premiums or losses are entered in the Company’s books.

ARTICLE 21

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Reinsurer does not qualify for credit with any insurance regulatory authority having jurisdiction over the Company’s reserves.

The Company agrees, in respect of its Policies or bonds falling within the scope of this Contract, that when it files with its insurance regulatory authority, or sets up on its books liabilities as required by law, it shall forward to the Reinsurer a statement showing the proportion of such liabilities applicable to the Reinsurer. The “Reinsurer’s Obligations” shall be defined as follows:

unearned premium (if applicable);


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known outstanding losses that have been reported to the Reinsurer and Loss Adjustment Expense relating thereto;

losses and Loss Adjustment Expense paid by the Company but not recovered from the Reinsurer;

losses incurred but not reported and Loss Adjustment Expense relating thereto;

all other amounts for which the Company cannot take credit on its financial statements unless funding is provided by the Reinsurer.

The Reinsurer’s Obligations shall be funded by funds withheld, cash advances, Trust Agreement or a Letter of Credit (LOC). The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves.

When funding by Trust Agreement, the Reinsurer shall ensure that the Trust Agreement complies with the provisions of the “Trust Agreement Requirements Clause” attached hereto. When funding by an LOC, the Reinsurer agrees to apply for and secure timely delivery to the Company of a clean, irrevocable and unconditional LOC issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves in an amount equal to the Reinsurer’s Obligations. Such LOC shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (or such other time period as may be required by insurance regulatory authorities), prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the LOC extended for any additional period.

The Reinsurer and the Company agree that any funding provided by the Reinsurer pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company, for the following purposes, unless otherwise provided for in a separate Trust Agreement:

to reimburse the Company for the Reinsurer’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;

to make refund of any sum that is in excess of the actual amount required to pay the Reinsurer’s Obligations under this Contract (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement);


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benefit of the Reinsurer. Any taxes payable on accrued interest shall be paid out of the assets in the account that are in excess of the Reinsurer’s Obligations (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement). If the assets are inadequate to pay taxes, any taxes due shall be paid or reimbursed by the Reinsurer;

to pay the Reinsurer’s share of any other amounts the Company claims are due under this Contract.

If the amount drawn by the Company is in excess of the actual amount required for E(1) or E(3), or in the case of E(4), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer.

G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.

H.	At annual intervals, or more frequently at the discretion of the Company, but never more frequently than quarterly, the Company shall prepare a specific statement of the Reinsurer’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

If the statement shows that the Reinsurer’s Obligations exceed the balance of the LOC as of the statement date, the Reinsurer shall, within 30 days after receipt of the statement, secure delivery to the Company of an amendment to the LOC increasing the amount of credit by the amount of such difference. Should another method of funding be used, the Reinsurer shall, within the time period outlined above, increase such funding by the amount of such difference.

If, however, the statement shows that the Reinsurer’s Obligations are less than the balance of the LOC (or that 102% of the Reinsurer’s Obligations are less than the trust account balance if funding is provided by a Trust Agreement), as of the statement date, the Company shall, within 30 days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the LOC reducing the amount of credit available by the amount of such excess credit. Should another method of funding be used, the Company shall, within the time period outlined above, decrease such funding by the amount of such excess.


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ARTICLE 22

TAXES

In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia.

Each Subscribing Reinsurer has agreed to allow, for the purpose of paying the Federal Excise Tax, the applicable percentage of the premium payable hereon (as imposed under the Internal Revenue Code) to the extent such premium is subject to Federal Excise Tax.

In the event of any return of premium becoming due hereunder, the Subscribing Reinsurer shall deduct the applicable percentage of the premium from the amount of the return, and the Company or its agent should take steps to recover the Tax from the U.S. Government.

ARTICLE 23

ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to visit the offices of the Company to inspect, examine, audit, and verify any of the policy, accounting or claim files (“Records”) relating to business reinsured under this Contract during regular business hours after giving five working days’ prior notice. This right shall be exercisable during the term of this Contract or after the expiration of this Contract. Notwithstanding the above, the Reinsurer shall not have any right of access to the Records of the Company if it is not current in all undisputed payments due the Company.

Notwithstanding the above, the Company reserves the right to withhold from the Reinsurer any Privileged Documents. However, the Company shall permit and not object to the Reinsurer’s access to Privileged Documents in connection with the underlying claim reinsured hereunder following final settlement or final adjudication of the case or cases involving such claim, with prejudice against all claimants and all parties to such adjudications; the Company may defer release of such Privileged Documents if there are subrogation, contribution, or other third party actions with respect to that claim or case, and the Company’s defense might be jeopardized by release of such Privileged Documents. In the event that the Company seeks to defer release of such Privileged Documents, it shall, in consultation with the Reinsurer, take other steps as reasonably necessary to provide the Reinsurer with the information it reasonably requires to indemnify the Company without causing a loss of such privileges or protections. The Reinsurer shall not have access to Privileged Documents relating to any dispute between the Company and the Reinsurer.


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C.	For purposes of this Article:

“Privileged Documents” means any documents that are Attorney-Client Privilege Documents and/or Work Product Privilege Documents.

“Attorney-Client Privilege Documents” means communications of a confidential nature between (a) the Company, or anyone retained by or at the direction of the Company, or its in-house or outside legal counsel, or anyone in the control of such legal counsel, and (b) any in-house or outside legal counsel, if such communications relate to legal advice being sought by the Company and/or contain legal advice being provided to the Company.

“Work Product Privilege Documents” means communications, written materials and tangible things prepared by or for in-house or outside counsel, or prepared by or for the Company, in anticipation of or in connection with litigation, arbitration, or other dispute resolution proceedings.

ARTICLE 24

CONFIDENTIALITY

The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract (“Confidential Information”) are proprietary and confidential to the Company. Confidential Information shall not include documents, information or data that the Reinsurer can show:

are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

have been rightfully received from a third person without obligation of confidentiality; or

were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

Absent the written consent of the Company, the Reinsurer shall not disclose any Confidential Information to any third parties, including any affiliated companies (except to the extent necessary to enable affiliated companies or third parties engaged by the Reinsurer to perform services related to this Contract on behalf of the Reinsurer), except:

when required by retrocessionaires as respects business ceded to this Contract;

when required by regulators performing an audit of the Reinsurer’s records and/or financial condition; or


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when required by external auditors performing an audit of the Reinsurer’s records in the normal course of business.

Further, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.

Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article.

D.	The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns.

ARTICLE 25

INDEMNIFICATION AND ERRORS AND OMISSIONS

A.	The Reinsurer is reinsuring, subject to the terms and conditions of this Contract, the obligations of the Company under any Policy. The Company shall be the sole judge as to:

what shall constitute a claim or loss covered under any Policy;

the Company’s liability thereunder;

the amount or amounts that it shall be proper for the Company to pay thereunder.

B.	The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any Policy.

D.	Nothing in this Article shall be construed to override any of the other terms and conditions of this Contract.

ARTICLE 26

INSOLVENCY

A.	If more than one reinsured company is referenced within the definition of “Company” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the


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insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.

In the event of the insolvency of the Company, this reinsurance (or the portion of any risk or obligation assumed by the Reinsurer, if required by applicable law) shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor, either: (1) on the basis of the liability of the Company, or (2) on the basis of claims filed and allowed in the liquidation proceeding, whichever may be required by applicable statute, without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the Policy or bond reinsured, which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C.	Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Company.

As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Contract, the reinsurance shall be payable as set forth above by the Reinsurer to the Company or to its liquidator, receiver, conservator or statutory successor, (except as provided by Section 4118(a)(1)(A) of the New York Insurance Law, provided the conditions of 1114(c) of such law have been met, if New York law applies) or except (1) where the Contract specifically provides another payee in the event of the insolvency of the Company, or (2) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. Then, and in that event only, the Company, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Financial Services of the State of New York, or with the prior approval of such other regulatory authority as may be applicable, is entirely released from its obligation and the Reinsurer shall pay any loss directly to payees under such Policy.


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ARTICLE 27

RUN-OFF REINSURER

A.	“Run-off Reinsurer” means any Subscribing Reinsurer that:

has been ordered by a state insurance department or other legal authority to cease writing business, or has been placed under regulatory supervision or in rehabilitation; or

has ceased reinsurance underwriting operations; or

has transferred its claims-paying authority to an unaffiliated entity; or

engages in a process of Scheme of Arrangement or similar procedure related to this Contract, including but not limited to an insurance business transfer scheme pursuant to Part VII of the Financial Services and Markets Act 2000 (U.K.), as may be amended from time to time; or

in any other way has assigned its interests or delegated its obligations under this Contract to an unaffiliated entity.

Notwithstanding the foregoing, agreement by a Lloyd’s syndicate to follow claim settlements procedures under Lloyd’s Claims Scheme (Combined) shall not constitute a transfer of its claims-paying authority, for purposes of subparagraphs (3) and (5) of this paragraph.

Notwithstanding any other provision of this Contract, in the event that a Subscribing Reinsurer becomes a Run-off Reinsurer at any time, the Company may elect, by giving written notice to the Run-off Reinsurer at any time thereafter, that all or any of the following shall apply to the Run-off Reinsurer’s participation hereunder:

Should the Run-off Reinsurer fail to pay amounts due hereunder, the interest penalty specified in the Late Payments Article shall be increased by 0.5% for each 30 days that a payment is past due, subject to a maximum increase of 7.0%.

The Run-off Reinsurer’s liability for losses for Policies covered by this Contract shall be commuted. In the event the Company and the Run-off Reinsurer cannot agree on the commutation amount of the Run-off Reinsurer’s liability under such Policies, they shall appoint an actuary and/or appraiser to assess such liability and shall share equally any expense of the actuary and/or appraiser. If the Company and the Run-off Reinsurer cannot agree on an actuary and/or appraiser, the Company and the Run-off Reinsurer each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Run-off Reinsurer of the amount of liability ascertained shall constitute a complete and final release of both parties under this Contract.


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The Run-off Reinsurer shall have no right of access to the Records of the Company if the Run-off Reinsurer has denied payment of any claim hereunder or there is a pending arbitration between the Company and the Run-off Reinsurer regarding any claim hereunder. A reservation of rights shall be considered a denial of a claim. Notwithstanding the above, the Run-off Reinsurer shall continue to have access to Records of the Company for any claim for which it has raised a query within 30 days of its receipt of a billing, but any inspection of Records must be completed within 90 days of receipt of billing or access will be deemed waived.

The provisions of the Arbitration Article shall not apply.

C.	The Company’s waiver of any rights provided in this Article is not a waiver of that right or other rights at a later date.

ARTICLE 28

ARBITRATION

D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.


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the parties that is related to this Contract. The arbitration shall take place in Tampa, Florida, or at such other place as the parties shall agree. The decision of any two arbitrators shall be in writing and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate.

ARTICLE 29

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Reinsurers not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.

In the event of the failure of the Reinsurer to perform its obligations hereunder, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided for above, shall comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against the Reinsurer upon this Contract, shall abide by the final decision of such court or of any appellate court in the event of an appeal.


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Further, pursuant to any statute of any state, territory or district of the United States that makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance, or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 30

GOVERNING LAW

This Contract shall be governed as to performance, administration and interpretation by the laws of the State of Florida, exclusive of conflict of law rules. However, with respect to credit for reinsurance, the rules of all applicable states shall apply.

ARTICLE 31

ENTIRE AGREEMENT

This Contract sets forth all of the duties and obligations between the Company and the Reinsurer and supersedes any and all prior or contemporaneous written agreements with respect to matters referred to in this Contract. This Contract may not be modified or changed except by an amendment to this Contract in writing signed by both parties. However, this Article shall not be construed as limiting the admissibility of evidence regarding the formation, interpretation, purpose or intent of this Contract.

ARTICLE 32

NON-WAIVER

The failure of the Company or the Reinsurer to insist on compliance with this Contract or to exercise any right or remedy hereunder shall not constitute a waiver of any rights contained in this Contract nor prevent either party from thereafter demanding full and complete compliance nor prevent either party from exercising such remedy in the future.


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ARTICLE 33

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, Loss Adjustment Expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary shall be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed payment to the Company only to the extent that such payments are actually received by the Company.

ARTICLE 34

MODE OF EXECUTION

A.	This Contract may be executed by:

an original written ink signature of paper documents;

an exchange of facsimile copies showing the original written ink signature of paper documents;

B.	The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.


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IN WITNESS WHEREOF, the Company has caused this Contract to be executed by its duly authorized representative(s), who also confirms the Company’s review of and agreement to be bound by the terms and conditions of the Interests and Liabilities Agreements attached to and forming part of this Contract, this day of , in the year of .

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT


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POOLS, ASSOCIATIONS & SYNDICATES EXCLUSIONS CLAUSE

Section A:

This Contract excludes:

All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property, whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

Section B:

This Contract excludes business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in, any Pool, Association or Syndicate, whether by way of insurance or reinsurance, formed for the purpose of writing any of the following:

Oil, Gas or Petro-Chemical Plants

Oil or Gas Drilling Rigs and/or

Aviation Risks

2.	The exclusion under paragraph 1 of this Section B does not apply:

Where the Total Insured Value over all interests of the risk in question is less than $250,000,000.

To interests traditionally underwritten as Inland Marine and/or Stock and/or Contents written on a Blanket basis.

To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under subparagraph (a).

Section C:

1.	Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in Residual Market Mechanisms, including but not limited to the following, for all perils otherwise protected hereunder shall not be excluded herefrom:

So-called “Beach and Windstorm Plans” and so-called “Coastal Pools”;


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All “FAIR Plan” and “Rural Risk Plan” business;

Louisiana Citizens Property Insurance Corporation;

California Earthquake Authority (“CEA”) or any similar entity.

Notwithstanding the above, assessments related to the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation (Florida) shall be excluded hereunder.

2.	However, this reinsurance does not include any increase in such liability resulting from:

The inability of any other participant in such Residual Market Mechanisms to meet its liability;

Any claim against a Residual Market Mechanism or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Exclusions Article);

Any assessment or surcharge levied on the policyholder and therefore not a liability of the Company;

The Company’s initial capital contribution to the CEA;

Any assessments, other than interim and regular assessments, from a Residual Market Mechanism included in subparagraph 1(c) above;

Any expenditure to purchase or retire bonds.

The Company may include in Ultimate Net Loss for any Loss Occurrence covered hereunder only the liability attributable to that Loss Occurrence. If the relevant entity does not specify what portion of an assessment is attributable to each Loss Occurrence, the Company may include in Ultimate Net Loss in respect of each Loss Occurrence a percentage of the Company’s assessments from the relevant entity related to the calendar year in which the Loss Occurrence commenced, regardless of when assessed, such percentage to be determined by dividing the relevant entity’s losses arising from the Loss Occurrence by its total losses for the calendar year.

The Company will deduct from Ultimate Net Loss amounts received as recoupment of any assessment that has been included in the Ultimate Net Loss, provided the recoupment is directly allocable to the assessment (“itemized recoupment”). The Company shall use commercially reasonable efforts to recoup such assessment. Any amount received as an itemized recoupment of any assessment (whether under this Contract or any predecessor contract), and therefore deductible from Ultimate Net Loss, shall not be included in the subject premium of this Contract.


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However, if a state levies assessments but does not allow itemized recoupment from policyholders, instead allowing the Company to file an overall increased rate, any such premium increased thereby shall not be deemed to be a recoupment that is deductible from Ultimate Net Loss. Any recoupment received as part of a general premium rate increase, not specifically itemized, shall be included as part of the subject premium of this Contract or a successor contract, as applicable.

NOTES:

Wherever used herein the terms:

“Company”

shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Contract”

shall be understood to mean “Agreement,” “Contract,” “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurer”

shall be understood to mean “Reinsurer,” “Reinsurers,” “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.


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NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.

1.	This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

Without in any way restricting the operation of paragraph (1) of this clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

Nuclear reactor power plants including all auxiliary property on the site, or

II.

Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

III.

Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material”, and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or

IV.

Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate

(a)

where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b)

where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.


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5.	It is understood and agreed that this clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7.	Reassured to be sole judge of what constitutes:

(a)

substantial quantities, and

(b)

the extent of installation, plant or site.

Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

(a)

all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

(b)

with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

12/12/57

NMA 1119

NOTES:

Wherever used herein the terms:

“Reassured”

shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Agreement”

shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurers”

shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.


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TERRORISM EXCLUSION

Notwithstanding any provision to the contrary within this Contract or any endorsement thereto, it is agreed that this Contract excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any Act of Terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

An “Act of Terrorism” includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological, or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

involves violence against one or more persons; or

involves damage to property; or

endangers life other than that of the person committing the action; or

creates a risk to health or safety of the public or a section of the public; or

is designed to interfere with or to disrupt an electronic system.

C.	This Contract also excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this Contract, in respect only of personal lines, this Contract shall pay actual loss or damage (but not related cost or expense) caused by any Act of Terrorism, provided such act is not directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with biological, chemical, radiological or nuclear pollution or contamination.


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TRUST AGREEMENT REQUIREMENTS CLAUSE

A.	Except as provided in paragraph B of this Clause, if the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:

Requires the Reinsurer to establish a trust account for the benefit of the Company, and specifies what the Trust Agreement is to cover;

Requires the Reinsurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without consent or signature from the Reinsurer or any other entity;

Requires that all settlements of account between the Company and the Reinsurer be made in cash or its equivalent; and

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the Company or the Reinsurer.

B.	If a ceding insurer is domiciled in California and the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:


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Requires the Reinsurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the ceding insurer, or the trustee upon the direction of the ceding insurer, may, whenever necessary, negotiate these assets without consent or signature from the Reinsurer or any other entity.

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the ceding insurer or the Reinsurer.

C.	If there are multiple ceding insurers that collectively comprise the Company, “regulatory authorities” as referenced in subparagraph A(2) above, shall mean the individual ceding insurer’s domestic regulator.


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EXHIBIT 10.18

**** indicates material that has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the U.S. Securities and Exchange Commission.

PROPERTY CATASTROPHE SECOND EVENT EXCESS OF LOSS

REINSURANCE CONTRACT

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida


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PROPERTY CATASTROPHE SECOND EVENT EXCESS OF LOSS

REINSURANCE CONTRACT

TABLE OF CONTENTS


Article		Page
	Preamble		4
1	Business Covered		4
2	Retention and Limit		4
3	Florida Hurricane Catastrophe Fund		5
4	Term		6
5	Special Termination		6
6	Territory		7
7	Exclusions		7
8	Special Acceptance		9
9	Premium		9
10	Definitions		10
11	Extra Contractual Obligations/Excess of Policy Limits		13
12	Net Retained Liability		14
13	Other Reinsurance		14
14	Original Conditions		14
15	No Third Party Rights		14
16	Notice of Loss and Loss Settlements		15
17	Late Payments		15
18	Offset		16
19	Currency		17
20	Unauthorized Reinsurance		17
21	Taxes		19
22	Access to Records		20
23	Confidentiality		21
24	Indemnification and Errors and Omissions		22
25	Insolvency		22
26	Run-Off Reinsurer		23
27	Arbitration		25
28	Service of Suit		26
29	Governing Law		27
30	Entire Agreement		27
31	Non-Waiver		27
32	Intermediary		27
33	Mode of Execution		28
	Company Signing Block		29


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PROPERTY CATASTROPHE SECOND EVENT EXCESS OF LOSS

REINSURANCE CONTRACT

TABLE OF CONTENTS


Attachments		Page
	Pools, Associations & Syndicates Exclusions Clause	30
	Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.	33
	Terrorism Exclusion	35
	Trust Agreement Requirements Clause	36


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PROPERTY CATASTROPHE SECOND EVENT EXCESS OF LOSS

REINSURANCE CONTRACT

(the “Contract”)

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida

(the “Company”)

THE SUBSCRIBING REINSURER(S) IDENTIFIED IN THE

INTERESTS AND LIABILITIES AGREEMENT(S) ATTACHED TO

AND FORMING PART OF THIS CONTRACT

(the “Reinsurer”)

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Company in respect of its net excess liability as a result of any

loss or losses which may occur during the Term of this Contract under any Policies not covered by the Company’s Flood Tower, in force at the effective date hereof or issued or renewed on or after that date, covering direct and assumed business classified by the Company as the property perils of Homeowners, Condominium Owners, Renters and Dwelling, subject to the terms and conditions herein contained.

ARTICLE 2

RETENTION AND LIMIT

The Reinsurer shall be liable in respect of each Loss Occurrence for the Ultimate Net Loss over and above the initial Ultimate Net Loss of **** each Loss Occurrence, subject to a limit of liability to the Reinsurer of **** each Loss Occurrence, and subject further to a limit of liability of **** for all Loss Occurrences commencing during the term of this Contract.


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B.	In addition to the retention in paragraph A of this Article, the Company shall retain an aggregate deductible of **** (i.e., the total of Ultimate Net Loss otherwise recoverable under this Article) for Loss Occurrences commencing during the term of this Contract.

C.	No Loss Occurrence shall be covered hereunder unless it involves two or more risks subject to this Contract. The Company shall be the sole judge of what constitutes one risk for purposes of this Contract.

ARTICLE 3

FLORIDA HURRICANE CATASTROPHE FUND

A.	As respects Loss Occurrences subject to this Contract, any loss reimbursement recoverable by the Company under the Florida Hurricane Catastrophe Fund (FHCF), shall be deducted in determining Ultimate Net Loss under this Contract, subject to the following:

B.	Any FHCF reimbursement premiums paid by the Company for FHCF layers that inure to the benefit of this Contract shall be deemed to be premiums paid for inuring reinsurance.


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C.	The Company has opted for a 45% coverage selection from the FHCF.

ARTICLE 4

TERM

ARTICLE 5

SPECIAL TERMINATION

A.	The Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event of any of the following circumstances:

The Subscribing Reinsurer ceases underwriting operations.

A state insurance department or other legal authority orders the Subscribing Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under regulatory supervision.


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Additionally, in the event of any of the circumstances listed in paragraph A of this Article, the Company shall have the option to commute the Subscribing Reinsurer’s liability for losses on Policies covered by this Contract. In the event the Company and the Subscribing Reinsurer cannot agree on the commutation amount, they shall appoint an actuary and/or appraiser to assess such amount and shall share equally any expense of the actuary and/or appraiser. If the Company and the Subscribing Reinsurer cannot agree on an actuary and/or appraiser, the Company and the Subscribing Reinsurer each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Subscribing Reinsurer of the amount of liability ascertained shall constitute a complete and final release of both parties in respect of liability arising from the Subscribing Reinsurer’s participation under this Contract.

D.	The Company’s option to require commutation under paragraph C above shall survive the termination or expiration of this Contract.

ARTICLE 6

TERRITORY

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 7

EXCLUSIONS

A.	This Contract shall not apply to and specifically excludes:

Flood when written as such.

Earthquake for standalone Policies where earthquake is the only named peril.


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Hail damage to an insured’s growing or standing crops.

Pools, Associations & Syndicates, per the attached exclusion.

Losses excluded by the attached Nuclear Incident Exclusion Clause – Physical Damage – Reinsurance – U.S.A.

Terrorism as defined in the attached Terrorism Exclusion.

10.

Mold unless directly resulting from an otherwise covered peril.

11.

12.

Financial guarantee and insolvency.

13.


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ARTICLE 8

SPECIAL ACCEPTANCE

Business that is not within the scope of this Contract may be submitted to the Reinsurer for special acceptance hereunder, and such business, if accepted by the Reinsurer shall be covered hereunder, subject to the terms and conditions of this Contract, except as modified by the special acceptance. The Reinsurer shall be deemed to have accepted a risk, if it has not responded within five business days after receiving the underwriting information on such risk. Any renewal of a special acceptance agreed to for a predecessor contract to this Contract, shall automatically be covered hereunder.

ARTICLE 9

PREMIUM

A.	The Company shall pay the Reinsurer a deposit premium of ** for the term of this Contract. The Final Adjusted Premium to be paid to the Reinsurer shall be calculated at a rate of multiplied by the Company’s final Total Insured Value, subject to a minimum premium of **.

B.	The deposit premium in paragraph A above shall be payable to the Reinsurer by the Company in four equal installments of **** on June 1, 2017, September 1, 2017, January 1, 2018 and April 1, 2018.

Within 45 days following the expiration of this Contract, the Company shall provide the Reinsurer with a report showing the Company’s final Total Insured Value. This final Total Insured Value shall be multiplied by the rate stated in paragraph A above. Should this amount be greater than or equal to ****% and less than or equal to ****% of the Deposit Premium, there shall be no additional or return premium due. Should the amount so calculated exceed ****% of the Deposit Premium paid in accordance with paragraph A above, the Company shall immediately pay the Reinsurer the difference in excess of ****% of the Deposit Premium. Should the amount so calculated be less than ****% of the Deposit Premium paid in accordance with paragraph A of this Article, the Reinsurer shall immediately pay the Company the difference below ****% of the Deposit Premium, subject to the Minimum Premium.


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D.	“Total Insured Value” means the Company’s aggregate wind exposures on September 30, 2017 for business covered hereunder.

E.	The estimated Total Insured Value is $41,747,735,369.

F.	The Company shall furnish the Reinsurer with such reasonably available information as may be reasonably required by the Reinsurer for completion of the Reinsurer’s financial statements.

ARTICLE 10

DEFINITIONS

Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company’s “Ultimate Net Loss” has been ascertained.

B.	“Loss Adjustment Expense” means costs and expenses incurred by the Company in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim or loss, or alleged loss, including but not limited to:

court costs;

costs of supersedeas and appeal bonds;


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monitoring counsel expenses;

legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions;

post-judgment interest;

pre-judgment interest, unless included as part of an award or judgment;

subrogation, salvage and recovery expenses.

“Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees, except as provided in subparagraph (7) above, and office and other overhead expenses.


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Except as provided in subparagraph (1)(a) above:


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subparagraphs (1)(a) and (1)(b) may be considered as having arisen from one “Loss Occurrence.” Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils, and, except as respects those “Loss Occurrences” involving a “Named Storm” referred to in subparagraph (1)(a) above, no single “Loss Occurrence” shall encompass a time period greater than 168 consecutive hours.

D.	“Policy” means any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

ARTICLE 11

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss. “Extra Contractual Obligations” shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.

C.	An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s Policy, and shall constitute part of the original loss.

D.	For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the word “Loss” shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.

E.	Loss Adjustment Expense in respect of Extra Contractual Obligations and/or Loss in Excess of Policy Limits shall be covered hereunder in the same manner as other Loss Adjustment Expense.


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G.	In no event shall coverage be provided to the extent not permitted under law.

ARTICLE 12

NET RETAINED LIABILITY

A.	This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).

ARTICLE 13

OTHER REINSURANCE

The Company shall be permitted to carry in force other reinsurance, recoveries under which shall inure to the benefit of this Contract.

ARTICLE 14

ORIGINAL CONDITIONS

ARTICLE 15

NO THIRD PARTY RIGHTS


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ARTICLE 16

NOTICE OF LOSS AND LOSS SETTLEMENTS

B.	The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.

ARTICLE 17

LATE PAYMENTS

The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times

1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made, plus 1%; times

The amount past due, including accrued interest.

Interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.


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B.	The due date shall, for purposes of this Article, be determined as follows:

D.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the prevailing party. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.

E.	Any interest owed pursuant to this Article may be waived by the party to which it is owed. Waiver of such interest, however, shall not affect the waiving party’s rights to other interest amounts due as a result of this Article.

ARTICLE 18

OFFSET


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ARTICLE 19

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars, and all payments hereunder shall be in United States Dollars.

ARTICLE 20

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Reinsurer does not qualify for credit with any insurance regulatory authority having jurisdiction over the Company’s reserves.

unearned premium (if applicable);

known outstanding losses that have been reported to the Reinsurer and Loss Adjustment Expense relating thereto;

losses and Loss Adjustment Expense paid by the Company but not recovered from the Reinsurer;

losses incurred but not reported and Loss Adjustment Expense relating thereto;

all other amounts for which the Company cannot take credit on its financial statements unless funding is provided by the Reinsurer.

D.	When funding by Trust Agreement, the Reinsurer shall ensure that the Trust Agreement complies with the provisions of the “Trust Agreement Requirements Clause” attached hereto. When funding by an LOC, the Reinsurer agrees to apply for and secure timely


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delivery to the Company of a clean, irrevocable and unconditional LOC issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves in an amount equal to the Reinsurer’s Obligations. Such LOC shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (or such other time period as may be required by insurance regulatory authorities), prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the LOC extended for any additional period.

to reimburse the Company for the Reinsurer’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;

to fund an account with the Company for the Reinsurer’s Obligations. Such cash deposit shall be held in an interest bearing account separate from the Company’s other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer. Any taxes payable on accrued interest shall be paid out of the assets in the account that are in excess of the Reinsurer’s Obligations (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement). If the assets are inadequate to pay taxes, any taxes due shall be paid or reimbursed by the Reinsurer;

to pay the Reinsurer’s share of any other amounts the Company claims are due under this Contract.

G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.


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H.	At annual intervals, or more frequently at the discretion of the Company, but never more frequently than quarterly, the Company shall prepare a specific statement of the Reinsurer’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

ARTICLE 21

TAXES


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ARTICLE 22

ACCESS TO RECORDS

C.	For purposes of this Article:

“Privileged Documents” means any documents that are Attorney-Client Privilege Documents and/or Work Product Privilege Documents.


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ARTICLE 23

CONFIDENTIALITY

are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

have been rightfully received from a third person without obligation of confidentiality; or

were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

when required by retrocessionaires as respects business ceded to this Contract;

when required by regulators performing an audit of the Reinsurer’s records and/or financial condition; or

when required by external auditors performing an audit of the Reinsurer’s records in the normal course of business.

Further, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.

D.	The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns.


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ARTICLE 24

INDEMNIFICATION AND ERRORS AND OMISSIONS

A.	The Reinsurer is reinsuring, subject to the terms and conditions of this Contract, the obligations of the Company under any Policy. The Company shall be the sole judge as to:

what shall constitute a claim or loss covered under any Policy;

the Company’s liability thereunder;

the amount or amounts that it shall be proper for the Company to pay thereunder.

B.	The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any Policy.

D.	Nothing in this Article shall be construed to override any of the other terms and conditions of this Contract.

ARTICLE 25

INSOLVENCY

If more than one reinsured company is referenced within the definition of “Company” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.


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time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C.	Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Company.

ARTICLE 26

RUN-OFF REINSURER

A.	“Run-off Reinsurer” means any Subscribing Reinsurer that:

has been ordered by a state insurance department or other legal authority to cease writing business, or has been placed under regulatory supervision or in rehabilitation; or

has ceased reinsurance underwriting operations; or

has transferred its claims-paying authority to an unaffiliated entity; or


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in any other way has assigned its interests or delegated its obligations under this Contract to an unaffiliated entity.

The provisions of the Arbitration Article shall not apply.

C.	The Company’s waiver of any rights provided in this Article is not a waiver of that right or other rights at a later date.


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ARTICLE 27

ARBITRATION

D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.

The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Notwithstanding anything to the contrary in this Contract, the arbitrators may at their discretion, consider underwriting and placement information provided by the Company to the Reinsurer, as well as any correspondence exchanged by the parties that is related to this Contract. The arbitration shall take place in Tampa, Florida, or at such other place as the parties shall agree. The decision of any two arbitrators shall be in writing and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate.


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ARTICLE 28

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Reinsurers not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.


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ARTICLE 29

GOVERNING LAW

ARTICLE 30

ENTIRE AGREEMENT

ARTICLE 31

NON-WAIVER

ARTICLE 32

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, Loss Adjustment Expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary shall be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed payment to the Company only to the extent that such payments are actually received by the Company.


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ARTICLE 33

MODE OF EXECUTION

A.	This Contract may be executed by:

an original written ink signature of paper documents;

an exchange of facsimile copies showing the original written ink signature of paper documents;

B.	The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.


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HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

PROPERTY CATASTROPHE SECOND EVENT EXCESS OF LOSS

REINSURANCE CONTRACT


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POOLS, ASSOCIATIONS & SYNDICATES EXCLUSIONS CLAUSE

Section A:

This Contract excludes:

All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

Section B:

Oil, Gas or Petro-Chemical Plants

Oil or Gas Drilling Rigs and/or

Aviation Risks

2.	The exclusion under paragraph 1 of this Section B does not apply:

Where the Total Insured Value over all interests of the risk in question is less than $250,000,000.

To interests traditionally underwritten as Inland Marine and/or Stock and/or Contents written on a Blanket basis.

Section C:

1.	Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in Residual Market Mechanisms, including but not limited to the following, for all perils otherwise protected hereunder shall not be excluded herefrom:

So-called “Beach and Windstorm Plans” and so-called “Coastal Pools”;


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All “FAIR Plan” and “Rural Risk Plan” business;

Louisiana Citizens Property Insurance Corporation;

California Earthquake Authority (“CEA”) or any similar entity.

Notwithstanding the above, assessments related to the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation (Florida) shall be excluded hereunder.

2.	However, this reinsurance does not include any increase in such liability resulting from:

The inability of any other participant in such Residual Market Mechanisms to meet its liability;

Any assessment or surcharge levied on the policyholder and therefore not a liability of the Company;

The Company’s initial capital contribution to the CEA;

Any assessments, other than interim and regular assessments, from a Residual Market Mechanism included in subparagraph 1(c) above;

Any expenditure to purchase or retire bonds.


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NOTES:

Wherever used herein the terms:

“Company”

shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Contract”

shall be understood to mean “Agreement,” “Contract,” “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurer”

shall be understood to mean “Reinsurer,” “Reinsurers,” “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.


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NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.

1.	This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

Nuclear reactor power plants including all auxiliary property on the site, or

II.

Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

III.

IV.

Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

(a)

where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b)


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5.	It is understood and agreed that this clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7.	Reassured to be sole judge of what constitutes:

(a)

substantial quantities, and

(b)

the extent of installation, plant or site.

Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

(a)

(b)

12/12/57

NMA 1119

NOTES:

Wherever used herein the terms:

“Reassured”

shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Agreement”

shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurers”

shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.


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TERRORISM EXCLUSION

involves violence against one or more persons; or

involves damage to property; or

endangers life other than that of the person committing the action; or

creates a risk to health or safety of the public or a section of the public; or

is designed to interfere with or to disrupt an electronic system.

C.	This Contract also excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.


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TRUST AGREEMENT REQUIREMENTS CLAUSE

A.	Except as provided in paragraph B of this Clause, if the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:

Requires the Reinsurer to establish a trust account for the benefit of the Company, and specifies what the Trust Agreement is to cover;

Requires that all settlements of account between the Company and the Reinsurer be made in cash or its equivalent; and

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the Company or the Reinsurer.

B.	If a ceding insurer is domiciled in California and the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:


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Requires the Reinsurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the ceding insurer, or the trustee upon the direction of the ceding insurer, may, whenever necessary, negotiate these assets without consent or signature from the Reinsurer or any other entity.

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the ceding insurer or the Reinsurer.

C.	If there are multiple ceding insurers that collectively comprise the Company, “regulatory authorities” as referenced in subparagraph A(2) above, shall mean the individual ceding insurer’s domestic regulator.


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EXHIBIT 10.19

**** indicates material that has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the U.S. Securities and Exchange Commission.

REINSTATEMENT PREMIUM PROTECTION REINSURANCE CONTRACT

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida


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REINSTATEMENT PREMIUM PROTECTION REINSURANCE CONTRACT

TABLE OF CONTENTS


Article		Page
	Preamble		3
1	Business Covered		3
2	Coverage		3
3	Term		4
4	Special Termination		4
5	Territory		5
6	Exclusions		5
7	Premium		5
8	Definitions		6
9	Original Conditions		7
10	No Third Party Rights		7
11	Notice of Loss and Loss Settlements		7
12	Late Payments		8
13	Offset		9
14	Currency		9
15	Unauthorized Reinsurance		9
16	Taxes		11
17	Access to Records		12
18	Confidentiality		13
19	Errors and Omissions		14
20	Insolvency		14
21	Run-Off Reinsurer		15
22	Arbitration		16
23	Service of Suit		17
24	Governing Law		18
25	Entire Agreement		18
26	Non-Waiver		18
27	Intermediary		19
28	Mode of Execution		19
	Company Signing Block		20

Attachments
	Trust Agreement Requirements Clause		21


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REINSTATEMENT PREMIUM PROTECTION REINSURANCE CONTRACT

(the “Contract”)

issued to

HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

Tampa, Florida

(the “Company”)

THE SUBSCRIBING REINSURER(S) IDENTIFIED

IN THE INTERESTS AND LIABILITIES AGREEMENT(S)

ATTACHED TO AND FORMING PART OF THIS CONTRACT

(the “Reinsurer”)

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Company in respect of the liability that may accrue to the Company as a result of Reinstatement Premium the Company may become liable to pay under the reinstatement provisions of the Property Catastrophe Excess of Loss Reinsurance Contract, effective at 12:01 a.m., Standard Time, June 1, 2017 and expiring 12:01 a.m., Standard Time, June 1, 2018, Document Number: U8GR0001 (the “Original Contract”), subject to the terms and conditions herein contained. The Original Contract covers losses under Policies not covered by the Company’s Flood Tower, covering direct and assumed business classified by the Company as the property perils of Homeowners, Condominium Owners, Renters and Dwelling, in force at the inception of this Contract, or issued or renewed during the term of this Contract. A copy of the Original Contract is attached to and forms part of this Contract.

ARTICLE 2

COVERAGE

The Reinsurer shall be liable to pay the Reinstatement Premium obligations under the Original Contract.


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ARTICLE 3

TERM

ARTICLE 4

SPECIAL TERMINATION

A.	The Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event of any of the following circumstances:

The Subscribing Reinsurer ceases underwriting operations.

A state insurance department or other legal authority orders the Subscribing Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under regulatory supervision.


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The Subscribing Reinsurer shall have no liability for Reinstatement Premium arising from Loss Occurrences commencing after termination. The premium due the Subscribing Reinsurer hereunder (including any minimum premium) shall be prorated based on the period of the Subscribing Reinsurer’s participation hereon, and the Subscribing Reinsurer shall immediately return any excess premium received.

ARTICLE 5

TERRITORY

The territorial limits of this Contract shall be identical with those of the Original Contract.

ARTICLE 6

EXCLUSIONS

This Contract shall follow the exclusions set forth in the Original Contract.

ARTICLE 7

PREMIUM

The premium for this Contract shall be based on the Excess Layers of the Original Contract. The Company shall pay the Reinsurer a deposit premium in accordance with the schedule set forth below. The adjusted premium to be paid to the Reinsurer for the reinsurance provided under each Excess Layer shall be calculated as the Rate on Line set out below multiplied by the Final Premium for that Excess Layer:

PREMIUM SCHEDULE


Layer	Rate on Line	Deposit Premium
Third Layer	********	********
Fourth Layer	********	********
Fifth Layer	********	********


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B.	The deposit premiums set forth in paragraph A above shall be payable to the Reinsurer by the Company in installments as follows:

DEPOSIT INSTALLMENT SCHEDULE


Layer	June 1, 2017	September 1, 2017	January 1, 2018	April 1, 2018
Third Layer	********	********	********	********
Fourth Layer	********	********	********	********
Fifth Layer	********	********	********	********

By April 1, 2018, the Company shall calculate and report the Final Premium in accordance with paragraph A above. If the Final Premium for an Excess Layer is less than the deposit premium payable hereunder (including the fourth deposit premium installment), the fourth quarterly deposit premium installment shall be waived, and any amount in excess of the sum of the previously paid three deposit premium installments shall be remitted to the Reinsurer with the Company’s report. If the Final Premium is less than the sum of the previously paid three deposit premium installments, the Reinsurer shall remit the difference to the Company. Notwithstanding the foregoing, if the Final Premium for an Excess Layer is greater than the deposit premium payable hereunder (including the fourth deposit premium installment), the Company shall remit to the Reinsurer the difference between the Final Premium and the full deposit premium within 45 days after the expiration of this Contract.

D.	The Company shall furnish the Reinsurer with such reasonably available information as may be reasonably required by the Reinsurer for completion of the Reinsurer’s financial statements.

ARTICLE 8

DEFINITIONS

“Reinstatement Premium” means premium paid by the Company for each Excess Layer under the provisions of the Reinstatement Article of the Original Contract. Reinstatement Premium shall be calculated at pro rata of the original reinsurance premium, being pro rata only for the amount being reinstated. If, at the time of a loss settlement under the Original Contract, the reinsurance premium thereunder is not yet known, Reinstatement Premium shall be based upon the deposit premium, subject to adjustment when said reinsurance premium is finally established. Nothing in this clause shall be construed to mean that amounts are not recoverable hereunder until the Company’s final Reinstatement Premium has been ascertained. All recoveries received subsequent to reimbursement hereunder shall be applied as if received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto.

B.	“Loss Occurrence” shall follow the definition set forth in the Original Contract.


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C.	“Final Premium” means the total reinsurance premium except for Reinstatement Premium.

D.	“Policy” means any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

ARTICLE 9

ORIGINAL CONDITIONS

All reinsurance under this Contract shall be subject to the same terms, conditions, waivers and interpretations, and to the same modifications and alterations as the Original Contract. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

ARTICLE 10

NO THIRD PARTY RIGHTS

ARTICLE 11

NOTICE OF LOSS AND LOSS SETTLEMENTS

A.	The Company shall advise the Reinsurer promptly of all losses that, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto that may materially affect the position of the Reinsurer.

B.	The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.

As respects losses subject to the Original Contract, all loss settlements made by the Company, whether under strict Policy terms or by way of compromise, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of reasonable evidence of the amount paid by the Company or that the Company estimates it will pay within the next 14 days. Within 30 days after receipt of the Reinsurer’s payment, the Company shall report to the Reinsurer the positive difference, if any, of the Reinsurer’s payment, minus the Reinsurer’s share of losses subject to this Contract that the Company has paid, or becomes liable to pay, as of the date of the report. Any such positive difference shall be remitted to the Reinsurer with the Company’s report.


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ARTICLE 12

LATE PAYMENTS

The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times

1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made, plus 1%; times

The amount past due, including accrued interest.

Interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary.

B.	The due date shall, for purposes of this Article, be determined as follows:

Payments from the Company to the Reinsurer shall be due on the dates specified within this Contract. Payments shall be overdue 30 days thereafter except for the first installment of premium, if applicable, which shall be overdue 60 days from inception or 30 days from final line-signing, whichever the later. Reinstatement Premium, if applicable, shall have as a due date the date when the Company receives payment for the claim giving rise to such Reinstatement Premium, and payment shall be overdue 30 days thereafter. In the event a due date is not specifically stated for a given payment, the overdue date shall be 30 days following the date of billing.


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D.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the prevailing party. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.

E.	Any interest owed pursuant to this Article may be waived by the party to which it is owed. Waiver of such interest, however, shall not affect the waiving party’s rights to other interest amounts due as a result of this Article.

ARTICLE 13

OFFSET

ARTICLE 14

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars, and all payments hereunder shall be in United States Dollars.

B.	For purposes of this Contract, where the Company receives or pays amounts in currencies other than United States Dollars, such amounts shall be converted into United States Dollars at the actual rates of exchange at which these amounts are entered in the Company’s books.

ARTICLE 15

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Reinsurer does not qualify for credit with any insurance regulatory authority having jurisdiction over the Company’s reserves.

The Company agrees, in respect of business falling within the scope of this Contract, that when it files with its insurance regulatory authority, or sets up on its books liabilities as required by law, it shall forward to the Reinsurer a statement showing the proportion of such liabilities applicable to the Reinsurer. The “Reinsurer’s Obligations” shall be defined as any amounts due the Company under this Contract, as set up on the Company’s books.


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to reimburse the Company for the Reinsurer’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;

to pay the Reinsurer’s share of any other amounts the Company claims are due under this Contract.


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G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.

H.	At annual intervals, or more frequently at the discretion of the Company, but never more frequently than quarterly, the Company shall prepare a specific statement of the Reinsurer’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

If, however, the statement shows that the Reinsurer’s Obligations are less than the balance of the LOC (or that 102% of the Reinsurer’s Obligations are less than the trust account if funding is provided by a Trust Agreement), as of the statement date, the Company shall, within 30 days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the LOC reducing the amount of credit available by the amount of such excess credit. Should another method of funding be used, the Company shall, within the time period outlined above, decrease such funding by the amount of such excess.

ARTICLE 16

TAXES


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ARTICLE 17

ACCESS TO RECORDS

C.	For purposes of this Article:

“Privileged Documents” means any documents that are Attorney-Client Privilege Documents and/or Work Product Privilege Documents.


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ARTICLE 18

CONFIDENTIALITY

are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

have been rightfully received from a third person without obligation of confidentiality; or

were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

when required by retrocessionaires as respects business ceded to this Contract;

when required by regulators performing an audit of the Reinsurer’s records and/or financial condition; or

when required by external auditors performing an audit of the Reinsurer’s records in the normal course of business.

Further, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.

D.	The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns.


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ARTICLE 19

ERRORS AND OMISSIONS

ARTICLE 20

INSOLVENCY

If more than one company is referenced within the definition of “Company” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.

In the event of the insolvency of the Company, this coverage (or the portion of any risk or obligation assumed by the Reinsurer, if required by applicable law) shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor, either: (1) on the basis of the liability of the Company, or (2) on the basis of claims filed and allowed in the liquidation proceeding, whichever may be required by applicable statute, without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the Policy or bond reinsured, which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C.	Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Company.


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ARTICLE 21

RUN-OFF REINSURER

A.	“Run-off Reinsurer” means any Subscribing Reinsurer that:

has been ordered by a state insurance department or other legal authority to cease writing business, or has been placed under regulatory supervision or in rehabilitation; or

has ceased reinsurance underwriting operations; or

has transferred its claims-paying authority to an unaffiliated entity; or

in any other way has assigned its interests or delegated its obligations under this Contract to an unaffiliated entity.


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The provisions of the Arbitration Article shall not apply.

C.	The Company’s waiver of any rights provided in this Article is not a waiver of that right or other rights at a later date.

ARTICLE 22

ARBITRATION

D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.


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ARTICLE 23

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Reinsurers not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.


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ARTICLE 24

GOVERNING LAW

ARTICLE 25

ENTIRE AGREEMENT

ARTICLE 26

NON-WAIVER


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ARTICLE 27

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, Loss Adjustment Expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary shall be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed payment to the Company only to the extent that such payments are actually received by the Company.

ARTICLE 28

MODE OF EXECUTION

A.	This Contract may be executed by:

an original written ink signature of paper documents;

an exchange of facsimile copies showing the original written ink signature of paper documents;

B.	The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.


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HOMEOWNERS CHOICE PROPERTY & CASUALTY

INSURANCE COMPANY, INC.

REINSTATEMENT PREMIUM PROTECTION REINSURANCE CONTRACT


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TRUST AGREEMENT REQUIREMENTS CLAUSE

A.	Except as provided in paragraph B of this Clause, if the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:

Requires the Reinsurer to establish a trust account for the benefit of the Company, and specifies what the Trust Agreement is to cover;

Requires that all settlements of account between the Company and the Reinsurer be made in cash or its equivalent; and

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the Company or the Reinsurer.

B.	If a ceding insurer is domiciled in California and the Reinsurer satisfies its funding obligations under the Unauthorized Reinsurance Article by providing a Trust Agreement, the Reinsurer shall ensure that the Trust Agreement:


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Requires the Reinsurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the ceding insurer, or the trustee upon the direction of the ceding insurer, may, whenever necessary, negotiate these assets without consent or signature from the Reinsurer or any other entity.

Provides that assets in the trust account shall be withdrawn only as permitted in this Contract, without diminution because of the insolvency of the ceding insurer or the Reinsurer.

C.	If there are multiple ceding insurers that collectively comprise the Company, “regulatory authorities” as referenced in subparagraph A(2) above, shall mean the individual ceding insurer’s domestic regulator.


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Exhibit 10.100

HCI GROUP, INC.

2012 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK AWARD CONTRACT

Mark Harmsworth

101 West Beach Place

Unit 1700

Tampa, Florida 33606

Dear Mr. Harmsworth:


Grant Date:		December 5, 2016

Number of Shares:		40,000 Shares

Vesting Schedule:		Your Restricted Shares will initially be subject to a Restriction Period. The Restriction Period will lapse and the Restricted Shares will vest as follows:

		One-fourth of your Restricted Shares on December 5, 2017, one-fourth on December 5, 2018, one-fourth on December 5, 2019 and the remaining shares on December 5, 2020. Fractional shares will be rounded down to the nearest whole number until the last vesting date.

		If your service to the Company ends for any reason other than (i) a termination for “Good Cause” as described in your employment agreement, (ii) Retirement, (iii) death or (iv) Disability, then for one-fourth of the Restricted Shares (if any remain) the Restriction Period will lapse and those Restricted Shares will vest. For clarity, this provision supersedes the terms “Cause” and “Inimical “Conduct” as defined in the Plan and as they relate to the vesting or forfeiture of your Restricted Shares.

		All your Restricted Shares will vest and the Restriction Period will lapse upon a Change of Control as defined in the Plan.

		The lapse of your Restriction Period and vesting may be suspended or delayed as a result of a leave of absence.


Form of Issuance:		The Company will instruct its transfer agent to evidence the Restricted Shares by electronic entry on the transfer agent’s books and to indicate the Restriction Period (and any other restrictions the Company may require to ensure compliance with the Securities Act and state and other securities laws) and the risks of forfeiture within those book entries. Upon the lapse of a Restriction Period, provided you have paid applicable withholding taxes, the Company will instruct the transfer agent to deliver the applicable shares, without restriction, to a brokerage account established in your name.

Transferability of Restricted Shares:		You may not assign, sell, transfer, pledge, encumber or otherwise alienate or hypothecate any of your Restricted Shares until they are vested. In addition, by accepting this Award, you agree not to sell any Restricted Shares acquired under this Award at a time when applicable laws, Company policies or any agreement between the Company and its underwriters prohibits a sale. You will not sell your shares except during an open trading window as described in the Company’s Insider Trading Policy.

Forfeiture		Unvested Restricted Shares will be forfeited when your service to the Company ends. Forfeiture may also occur under other circumstances described in the Plan.

Voting and Dividends:		You may exercise full voting rights and will receive all dividends and other distributions paid with respect to the Restricted Shares, in each case so long as the applicable record date occurs before you forfeit such Shares. If, however, any such dividends or distributions are paid in Shares, such Shares will be subject to the same risk of forfeiture, restrictions on transferability and other terms of this Award as are the Restricted Stock with respect to which they were paid. Dividends on unvested Restricted Shares will be treated as wages for federal income tax purposes and will therefore be subject to federal income tax, Social Security tax, and Medicare tax withholdings.

Tax Withholding:		You understand that you (and not the Company or any Affiliate) will be responsible for your own federal, state, local or foreign tax liability and any of your other tax consequences that may arise as a result of the transactions contemplated by this Award. You shall rely solely on the determinations of your tax advisors or your own determinations, and not on any statements or representations by the Company, its Affiliates or any of their agents, with regard to all such tax matters. You may be able to alter the tax consequences of the acquisition of the Shares by filing an election


		under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”). Such election may be filed only within thirty (30) days after the date of this Award. You should consult with your tax advisor to determine the tax consequences of acquiring the Shares and the advantages and disadvantages of filing the Code Section 83(b) election. You acknowledge that it is your sole responsibility, and not the Company’s, to file a timely election under Code Section 83(b), even if you request the Company or its representatives make this filing on your behalf.

		To the extent that the receipt of the Restricted Stock or the vesting of the Restricted Stock results in income to you for Federal, state or local income tax purposes, you shall surrender to the Company (or any Affiliate) at the time the Company (or its Affiliate) is obligated to withhold taxes in connection with such receipt or vesting, as the case may be, such number of Restricted Shares as the Company (or its Affiliate) requires to meet its withholding obligation under applicable tax laws or regulations, and if you fail to do so, the Company (and its Affiliate) has the right and authority to deduct or withhold from other compensation payable to you an amount sufficient to satisfy its withholding obligations. You will surrender that number of Restricted Shares having an aggregate Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that the Company (or its Affiliate) must withhold in connection with the vesting of such Shares. The Company, in its discretion, may permit a larger number of shares to be surrendered in connection with tax withholding.

Miscellaneous:		• This Restricted Stock Award may be amended only by written consent signed by you and the Company, except if the amendment is not to your detriment or as otherwise permitted by the terms of the Plan.

		• As a condition of the granting of this Award, you agree, for yourself and your legal representatives or guardians, that this contract and the Plan shall be interpreted by the Committee and that any interpretation by the Committee of the terms of this contract or the Plan and any determination made by the Committee pursuant to this contract or the Plan shall be final, binding and conclusive.

		• This contract may be executed in counterparts.


		/s/ Paresh Patel				/s/ Mark Harmsworth
		Paresh Patel				Mark Harmsworth
		Chief Executive Officer
		HCI Group, Inc.

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
August 3, 2017				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
August 3, 2017				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 June 30, 2017 as filed with the Securities and Exchange Commission on August 3, 2017 (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

August 3, 2017

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 June 30, 2017 as filed with the Securities and Exchange Commission on August 3, 2017 (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

August 3, 2017

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.