HCI Group, Inc. (Form: 10-Q, Received: 11/06/2019 16:04:01)

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

Form 10-Q

☑

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

For the quarterly period ended September 30, 2019

☐

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)

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

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Shares, no par value	HCI	New York Stock Exchange

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

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

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

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

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

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

The aggregate number of shares of the Registrant’s Common Stock, no par value, outstanding on October 29, 2019 was 8,018,449.

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets:
	September 30, 2019 (unaudited) and December 31, 2018	1-2
	Consolidated Statements of Income:
	Three and nine months ended September 30, 2019 and 2018 (unaudited)	3
	Consolidated Statements of Comprehensive Income:
	Three and nine months ended September 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Stockholders’ Equity:
	Three and nine months ended September 30, 2019 and 2018 (unaudited)	5-8
	Consolidated Statements of Cash Flows:
	Nine months ended September 30, 2019 and 2018 (unaudited)	9-10
	Notes to Consolidated Financial Statements (unaudited)	11-40

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41-53

Item 3	Quantitative and Qualitative Disclosures about Market Risk	54-55

Item 4	Controls and Procedures	56


	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	57

Item 1A	Risk Factors	57

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58-59

Item 3	Defaults upon Senior Securities	59

Item 4	Mine Safety Disclosures	59

Item 5	Other Information	59

Item 6	Exhibits	60-65

Signatures		66
Certifications

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

	September 30,		December 31,
	2019		2018
	(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $207,983 and $184,670, respectively)	$	210,753	$	182,723
Equity securities, at fair value (cost: $29,710 and $45,671, respectively)		32,443		41,143
Short-term investments, at fair value		495		66,479
Limited partnership investments, at equity		30,690		32,293
Investment in unconsolidated joint venture, at equity		774		845
Assets held for sale		10,031		9,810
Real estate investments		63,454		54,490
Total investments		348,640		387,783
Cash and cash equivalents		214,626		239,458
Restricted cash		700		700
Accrued interest and dividends receivable		2,074		1,792
Income taxes receivable		315		971
Premiums receivable		25,649		16,667
Prepaid reinsurance premiums		32,758		17,932
Reinsurance recoverable:
Paid losses and loss adjustment expenses		20,321		11,151
Unpaid losses and loss adjustment expenses		143,123		112,760
Deferred policy acquisition costs		23,135		16,507
Property and equipment, net		14,360		13,338
Intangible assets, net		4,347		4,800
Other assets		13,451		9,004
Total assets	$	843,499	$	832,863

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets - continued

(Dollar amounts in thousands)

	September 30,		December 31,
	2019		2018
	(Unaudited)
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses	$	237,921	$	207,586
Unearned premiums		204,755		157,729
Advance premiums		11,646		6,192
Assumed reinsurance balances payable		—		14
Accrued expenses		13,387		6,483
Deferred income taxes, net		3,340		1,068
Revolving credit facility		9,750		—
Long-term debt		162,996		250,150
Other liabilities		15,499		22,200
Total liabilities		659,294		651,422
Commitments and contingencies (Note 18)
Stockholders' equity:
7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued or 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, 7,883,306 and 8,356,730 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)		—		—
Additional paid-in capital		—		—
Retained income		182,114		182,894
Accumulated other comprehensive income (loss), net of taxes		2,091		(1,453	)
Total stockholders’ equity		184,205		181,441
Total liabilities and stockholders’ equity	$	843,499	$	832,863

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						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue
Gross premiums earned	$	86,002		$	86,163		$	251,914		$	257,854
Premiums ceded		(31,568	)		(31,986	)		(94,298	)		(97,190	)
Net premiums earned		54,434			54,177			157,616			160,664
Net investment income		3,621			5,054			11,125			11,671
Net realized investment (losses) gains		(30	)		1,626			(535	)		6,520
Net unrealized investment gains (losses)		642			(390	)		7,261			(4,547	)
Net other-than-temporary impairment losses		—			—			—			(80	)
Policy fee income		811			843			2,406			2,563
Other		501			433			1,370			1,504
Total revenue		59,979			61,743			179,243			178,295
Expenses
Losses and loss adjustment expenses		27,327			25,769			78,616			67,227
Policy acquisition and other underwriting expenses		10,988			9,829			30,738			29,148
General and administrative personnel expenses		7,951			6,781			23,313			20,904
Interest expense		2,907			4,552			10,128			13,527
Other operating expenses		3,087			2,889			9,131			9,242
Total expenses		52,260			49,820			151,926			140,048
Income before income taxes		7,719			11,923			27,317			38,247
Income tax expense		1,866			2,926			7,173			12,056
Net income	$	5,853		$	8,997		$	20,144		$	26,191
Basic earnings per share	$	0.73		$	1.08		$	2.49		$	3.29
Diluted earnings per share	$	0.73		$	1.00		$	2.49		$	3.03

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income	$	5,853		$	8,997		$	20,144		$	26,191
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments:
Net unrealized gain (loss) arising during the period		447			35			4,777			(2,658	)
Other-than-temporary impairment loss charged to income		—			—			—			80
Call and repayment losses charged to investment income		(2	)		(19	)		(1	)		(15	)
Reclassification adjustment for net realized loss (gain)		(26	)		(71	)		(59	)		(732	)
Net change in unrealized gain (loss)		419			(55	)		4,717			(3,325	)
Deferred income taxes on above change		(83	)		13			(1,173	)		842
Total other comprehensive income (loss), net of income taxes		336			(42	)		3,544			(2,483	)
Comprehensive income	$	6,189		$	8,955		$	23,688		$	23,708

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

For the Three Months Ended September 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income		Total Stockholders’
	Shares			Amount		Capital			Income			Net of Tax		Equity
Balance at June 30, 2019		8,053,573		$	—	$	—		$	184,739		$	1,755	$	186,494
Net income		—			—		—			5,853			—		5,853
Total other comprehensive income, net of income taxes		—			—		—			—			336		336
Issuance of restricted stock		7,244			—		—			—			—		—
Forfeiture of restricted stock		(2,351	)		—		—			—			—		—
Repurchase and retirement of common stock under share repurchase plan		(175,160	)		—		(7,185	)		—			—		(7,185	)
Common stock dividends ($0.40 per share)		—			—		—			(3,171	)		—		(3,171	)
Stock-based compensation		—			—		1,746			—			—		1,746
Tax basis adjustment on equity method investment		—			—		132			—			—		132
Additional paid-in capital shortfall allocated to retained income		—			—		5,307			(5,307	)		—		—
Balance at September 30, 2019		7,883,306		$	—	$	—		$	182,114		$	2,091	$	184,205

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended September 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive (Loss) Income,			Total Stockholders’
	Shares			Amount		Capital			Income			Net of Tax			Equity
Balance at June 30, 2018		8,517,888		$	—	$	—		$	192,080		$	(1,059	)	$	191,021
Net income		—			—		—			8,997			—			8,997
Total other comprehensive loss, net of income taxes		—			—		—			—			(42	)		(42	)
Issuance of restricted stock		6,500			—		—			—			—			—
Forfeiture of restricted stock		(7,432	)		—		—			—			—			—
Repurchase and retirement of common stock under share repurchase plan		(148,768	)		—		(6,156	)		—			—			(6,156	)
Common stock dividends ($0.375 per share)		—			—		—			(3,054	)		—			(3,054	)
Stock-based compensation		—			—		1,369			—			—			1,369
Additional paid-in capital shortfall allocated to retained income		—			—		4,787			(4,787	)		—			—
Balance at September 30, 2018		8,368,188		$	—	$	—		$	193,236		$	(1,101	)	$	192,135

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

	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, 2018		8,356,730		$	—	$	—		$	182,894		$	(1,453	)	$	181,441
Net income		—			—		—			20,144			—			20,144
Total other comprehensive income, net of income taxes		—			—		—			—			3,544			3,544
Exercise of common stock options		10,000			—		63			—			—			63
Issuance of restricted stock		180,404			—		—			—			—			—
Forfeiture of restricted stock		(271,243	)		—		—			—			—			—
Repurchase and retirement of common stock		(24,849	)		—		(1,023	)		—			—			(1,023	)
Repurchase and retirement of common stock under share repurchase plan		(367,736	)		—		(15,191	)		—			—			(15,191	)
Common stock dividends ($1.20 per share)		—			—		—			(9,599	)		—			(9,599	)
Stock-based compensation		—			—		4,694			—			—			4,694
Tax basis adjustment on equity method investment		—			—		132			—			—			132
Additional paid-in capital shortfall allocated to retained income		—			—		11,325			(11,325	)		—			—
Balance at September 30, 2019		7,883,306		$	—	$	—		$	182,114		$	2,091		$	184,205

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

For the Nine Months Ended September 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income (Loss),			Total Stockholders’
	Shares			Amount		Capital			Income			Net of Tax			Equity
Balance at December 31, 2017		8,762,416		$	—	$	—		$	189,409		$	4,566		$	193,975
Net income		—			—		—			26,191			—			26,191
Total other comprehensive loss, net of income taxes		—			—		—			—			(2,483	)		(2,483	)
Cumulative effect adjustments for adoption of new accounting standards:
Reclassification of after-tax net unrealized holding gains related to equity securities		—			—		—			4,168			(4,168	)		—
Reclassification of stranded tax effects related to available-for-sale fixed-maturity and equity securities		—			—		—			(984	)		984			—
Issuance of restricted stock		189,860			—		—			—			—			—
Forfeiture of restricted stock		(52,452	)		—		—			—			—			—
Repurchase and retirement of common stock		(23,346	)		—		(941	)		—			—			(941	)
Repurchase and retirement of common stock under share repurchase plan		(508,290	)		—		(19,867	)		—			—			(19,867	)
Purchase of noncontrolling interest		—			—		(539	)		—			—			(539	)
Common stock dividends ($1.10 per share)		—			—		—			(7,475	)		—			(7,475	)
Stock-based compensation		—			—		3,274			—			—			3,274
Additional paid-in capital shortfall allocated to retained income		—			—		18,073			(18,073	)		—			—
Balance at September 30, 2018		8,368,188		$	—	$	—		$	193,236		$	(1,101	)	$	192,135

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	Nine Months Ended
	September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	20,144		$	26,191
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		4,694			3,274
Net amortization of premiums on investments in fixed-maturity securities		171			344
Depreciation and amortization		6,677			8,195
Deferred income tax expense		1,231			1,173
Net realized investment losses (gains)		535			(6,520	)
Net unrealized investment (gains) losses		(7,261	)		4,547
Other-than-temporary impairment losses		—			80
Loss (income) from unconsolidated joint venture		71			(320	)
Distributions received from unconsolidated joint venture		—			68
Net income from limited partnership interests		(1,308	)		(2,816	)
Distributions received from limited partnership interests		3,647			1,495
Foreign currency remeasurement loss		31			200
Other non-cash items		286			—
Changes in operating assets and liabilities:
Accrued interest and dividends receivable		(282	)		456
Income taxes		656			13,187
Premiums receivable		(8,982	)		(7,654	)
Prepaid reinsurance premiums		(14,826	)		(5,172	)
Reinsurance recoverable		(39,533	)		30,009
Deferred policy acquisition costs		(6,628	)		(3,957	)
Other assets		(4,165	)		1,829
Losses and loss adjustment expenses		30,335			(60,164	)
Unearned premiums		47,026			34,154
Advance premiums		5,454			5,402
Assumed reinsurance balances payable		(14	)		127
Reinsurance recovered in advance on unpaid losses		—			(13,885	)
Accrued expenses and other liabilities		135			(794	)
Net cash provided by operating activities		38,094			29,449

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)

	Nine Months Ended
	September 30,
	2019			2018
Cash flows from investing activities:
Investments in limited partnership interests	$	(1,899	)	$	(4,823	)
Distributions received from limited partnership interests		1,163			384
Distributions received from unconsolidated joint venture		—			696
Purchase of property and equipment		(2,166	)		(1,654	)
Purchase of real estate investments		(10,475	)		(6,685	)
Purchase of intangible assets		—			(409	)
Purchase of fixed-maturity securities		(79,355	)		(58,098	)
Purchase of equity securities		(19,278	)		(41,844	)
Purchase of short-term and other investments		(689	)		(155,252	)
Proceeds from sales of fixed-maturity securities		5,225			78,540
Proceeds from calls, repayments and maturities of fixed-maturity securities		50,738			52,843
Proceeds from sales of equity securities		34,345			55,879
Proceeds from sales, redemptions and maturities of short-term and other investments		66,902			67,991
Net cash provided by (used in) investing activities		44,511			(12,432	)
Cash flows from financing activities:
Cash dividends paid		(9,829	)		(8,371	)
Cash dividends received under share repurchase forward contract		230			896
Proceeds from revolving credit facility		9,750			—
Proceeds from exercise of common stock options		63			—
Proceeds from issuance of long-term debt		—			6,000
Repayment of long-term debt		(90,980	)		(804	)
Repurchases of common stock		(1,023	)		(941	)
Repurchases of common stock under share repurchase plan		(15,191	)		(19,867	)
Purchase of non-controlling interest		—			(539	)
Debt issuance costs		(459	)		(105	)
Net cash used in financing activities		(107,439	)		(23,731	)
Effect of exchange rate changes on cash		2			(196	)
Net decrease in cash, cash equivalents, and restricted cash		(24,832	)		(6,910	)
Cash, cash equivalents, and restricted cash at beginning of period		240,158			256,693
Cash, cash equivalents, and restricted cash at end of period	$	215,326		$	249,783
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	5,285		$	3,625
Cash paid for interest	$	8,904		$	10,403
Non-cash investing and financing activities:
Unrealized gain (loss) on investments in available-for-sale securities, net of tax	$	3,544		$	(2,483	)
Receivable from sales of equity securities	$	—		$	1,978
Receivable from maturities of fixed-maturity securities	$	—		$	15,070
Addition to property and equipment under capital lease	$	18		$	61

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 -- Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements for HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2019 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, 2019. 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, 2018 included in the Company’s Form 10-K, which was filed with the SEC on March 8, 2019.

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

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

All significant intercompany balances and transactions have been eliminated.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). The guidance establishes new principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 is effective for the Company January 1, 2019 and supersedes accounting for leases prescribed in Topic 840, Leases. ASU 2016-02 leaves lessor accounting substantially unchanged. The key change affecting the Company is the requirement that operating leases be recorded on the balance sheet. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU No. 2019-01, Codification Improvements to Topic 842. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company was initially required to use a modified retrospective method and apply this standard at the beginning of the earliest comparative period presented in the financial statements. Subsequently, the FASB permitted the application of this standard at the beginning of the adoption period as an alternative.

Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. As a result, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. The Company elected a package of practical expedients, which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. Upon adoption, the Company, as a lessee, recognized ROU assets of approximately $771 and lease liabilities of approximately $812 for all operating leases except for those that have a lease term of 12 months or less.

Leases

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

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

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Reclassification

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

Note 2 -- Recent Accounting Pronouncements

Accounting Standard to be Adopted in Fiscal Year 2020

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326), effective January 1, 2020. This update amends guidance on the recognition and measurement of credit losses for assets held at amortized cost and available-for-sale debt securities. For assets held at amortized cost, ASU 2016-13 eliminates the probable initial recognition threshold and, instead, requires credit losses to be measured using the Current Expected Credit Loss (“CECL”) model. The CECL model requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. For available-for-sale debt securities, credit losses will continue to be measured in a manner similar to the current standard. ASU 2016-13 requires a valuation allowance, rather than a write-down, to be recognized for the Company’s expected credit losses. The valuation allowance account is a deduction from the amortized cost basis of the financial assets to reflect the net amount expected to be collected. Any subsequent changes to the expected credit losses of the financial assets will be recorded in earnings. The Company is required to use the modified-retrospective method by recognizing a cumulative-effect adjustment to the beginning retained income of fiscal year 2020. As for debt securities in which an other-than-temporary impairment had been recognized before the effective date, the prospective transition method will be used. The Company does not anticipate a material impact on its financial position as a result of adopting this update.

Note 3 -- Cash, Cash Equivalents, and Restricted Cash

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

	September 30,		December 31,
	2019		2018
Cash and cash equivalents	$	214,626	$	239,458
Restricted cash		700		700
Total	$	215,326	$	240,158

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 4 -- Investments

a) Available-for-Sale Fixed-Maturity Securities

The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At September 30, 2019 and December 31, 2018, 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 September 30, 2019
U.S. Treasury and U.S. government agencies	$	26,399	$	92	$	(7	)	$	26,484
Corporate bonds		162,725		2,366		(322	)		164,769
State, municipalities, and political subdivisions		9,995		166		—			10,161
Exchange-traded debt		8,746		472		(2	)		9,216
Redeemable preferred stock		118		5		—			123
Total	$	207,983	$	3,101	$	(331	)	$	210,753
As of December 31, 2018
U.S. Treasury and U.S. government agencies	$	61,979	$	24	$	(206	)	$	61,797
Corporate bonds		103,580		134		(1,809	)		101,905
State, municipalities, and political subdivisions		10,567		98		(3	)		10,662
Exchange-traded debt		8,426		82		(261	)		8,247
Redeemable preferred stock		118		—		(6	)		112
Total	$	184,670	$	338	$	(2,285	)	$	182,723

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of September 30, 2019 and December 31, 2018 are as follows:

	Amortized		Estimated
	Cost		Fair Value
As of September 30, 2019
Due in one year or less	$	50,836	$	51,056
Due after one year through five years		144,989		146,773
Due after five years through ten years		8,068		8,518
Due after ten years		4,090		4,406
	$	207,983	$	210,753

	Amortized		Estimated
	Cost		Fair Value
As of December 31, 2018
Due in one year or less	$	50,659	$	50,574
Due after one year through five years		117,826		116,498
Due after five years through ten years		11,602		11,253
Due after ten years		4,583		4,398
	$	184,670	$	182,723

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and nine months ended September 30, 2019 and 2018 were as follows:

			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2019	$	2,240	$	27	$	(1	)
Three months ended September 30, 2018	$	771	$	71	$	—
Nine months ended September 30, 2019	$	5,225	$	61	$	(2	)
Nine months ended September 30, 2018	$	78,540	$	1,232	$	(500	)

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.

There was no impairment loss recognized for the three and nine months ended September 30, 2019. The Company did not recognize any impairment loss for the three months ended September 30, 2018. For the nine months ended September 30, 2018, the Company recognized $80 of impairment loss on one fixed-maturity security. At September 30, 2019, none of the fixed-maturity securities were considered other-than-temporarily impaired versus one fixed-maturity security at September 30, 2018.

Securities with gross unrealized loss positions at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross			Estimated		Gross			Estimated		Gross			Estimated
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
As of September 30, 2019	Loss			Value		Loss			Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(6	)	$	3,394	$	(1	)	$	699	$	(7	)	$	4,093
Corporate bonds		(1	)		4,093		(321	)		1,323		(322	)		5,416
Exchange-traded debt		(2	)		286		—			—		(2	)		286
Total	$	(9	)	$	7,773	$	(322	)	$	2,022	$	(331	)	$	9,795

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

At September 30, 2019, there were 11 securities in an unrealized loss position. Of these securities, five securities had been in an unrealized loss position for 12 months or longer.

	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, 2018	Loss			Value		Loss			Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(59	)	$	21,031	$	(147	)	$	35,393	$	(206	)	$	56,424
Corporate bonds		(542	)		19,932		(1,267	)		36,682		(1,809	)		56,614
State, municipalities, and political subdivisions		(3	)		715		—			—		(3	)		715
Exchange-traded debt		(261	)		5,275		—			—		(261	)		5,275
Redeemable preferred stock		(6	)		112		—			—		(6	)		112
Total	$	(871	)	$	47,065	$	(1,414	)	$	72,075	$	(2,285	)	$	119,140

At December 31, 2018, there were 82 securities in an unrealized loss position. Of these securities, 35 securities had been in an unrealized loss position for 12 months or longer.

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At September 30, 2019 and December 31, 2018, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

			Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Gain		Loss			Value
September 30, 2019	$	29,710	$	3,179	$	(446	)	$	32,443
December 31, 2018	$	45,671	$	1,059	$	(5,587	)	$	41,143

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net gains recognized	$	586		$	1,097		$	6,616		$	1,167
Exclude: Net realized (losses) gains recognized for securities sold		(56	)		1,487			(645	)		5,714
Net unrealized gains (losses) recognized	$	642		$	(390	)	$	7,261		$	(4,547	)

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and nine months ended September 30, 2019 and 2018 were as follows:

			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2019	$	1,504	$	43	$	(99	)
Three months ended September 30, 2018	$	15,443	$	1,926	$	(439	)
Nine months ended September 30, 2019	$	34,345	$	2,230	$	(2,875	)
Nine months ended September 30, 2018	$	55,879	$	6,897	$	(1,183	)

c) Short-Term Investments

Short-term investments consist of the following at September 30, 2019 and December 31, 2018.

	September 30,		December 31,
	2019		2018
Certificates of deposit	$	—	$	56,519
Zero-coupon commercial paper		495		9,960
Total	$	495	$	66,479

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

d) Limited Partnership Investments

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

	September 30, 2019						December 31, 2018
	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)	$	10,311	$	2,085		15.37	$	10,169	$	2,577		15.37
Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e)		6,497		—		1.76		9,219		—		1.76
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g)		9,415		1,391		0.18		9,023		2,329		0.18
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)		1,418		3,300		0.47		1,156		3,706		0.47
Value-oriented investments in mature real estate private equity funds and portfolio globally. (b)(j)		3,049		7,629		2.24		2,726		7,692		3.28
Total	$	30,690	$	14,405			$	32,293	$	16,304

(a)

Represents the Company’s percentage investment in the fund at each balance sheet date.

(b)

Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated.

(c)

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

(d)

Expected to have a three-year term from June 30, 2018. Although the capital commitment period already ended, the general partner could still request an additional funding of approximately $843 under certain circumstances.

(e)

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

(f)

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

(g)

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

(h)

Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.

(i)

Unless extended or terminated for reasons specified in the agreement, the capital commitment is expected to expire on December 1, 2019.

(j)

Expected to have an eight-year term after the final fund closing date, which has yet to be determined.

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 summary of aggregated unaudited financial information of limited partnerships included in the investment strategy table above, which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. 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						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Operating results:
Total income	$	(100,043	)	$	959,721		$	147,858		$	1,168,751
Total expenses		(27,212	)		(30,192	)		(108,385	)		(115,887	)
Net income	$	(127,255	)	$	929,529		$	39,473		$	1,052,864

	September 30,		December 31,
	2019		2018
Balance Sheet:
Total assets	$	6,690,633	$	6,689,792
Total liabilities	$	466,985	$	394,029

For the three and nine months ended September 30, 2019, the Company recognized net investment income of $476 and $1,308, respectively, for these investments. During the three and nine months ended September 30, 2019, the Company received total cash distributions of $724 and $4,810, respectively. Cash distributions representing return on investment were $31 and $3,647 for the three and nine months ended September 30, 2019, respectively.

For the three and nine months ended September 30, 2018, the Company recognized net investment income of $1,964 and $2,816, respectively. During the three months ended September 30, 2018, the Company received total cash distributions of $1,156, representing $270 of returned capital and $886 of return on investment. During the nine months ended September 30, 2018, the Company received total cash distributions of $1,879, representing $384 of returned capital and $1,495 of return on investment. At September 30, 2019 and December 31, 2018, the Company’s cumulative contributed capital to the partnerships at each respective balance sheet date totaled $30,253 and $28,354, respectively, and the Company’s maximum exposure to loss aggregated $30,690 and $32,293, respectively.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

e) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At September 30, 2019 and December 31, 2018, the Company’s maximum exposure to loss relating to the variable interest entity was $774 and $845, respectively, representing the carrying value of the investment. There were no cash distributions during the three months ended September 30, 2019 and 2018. The Company did not receive any cash distribution during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the Company received a cash distribution of $764, representing a combined distribution of $68 in earnings and $696 in capital. At September 30, 2019 and December 31, 2018, there was no undistributed income from this equity method investment. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Operating results:
Total revenues and gain	$	—		$	—		$	2		$	438
Total expenses		(18	)		(12	)		(80	)		(83	)
Net (loss) income	$	(18	)	$	(12	)	$	(78	)	$	355
The Company’s share of net (loss) income*	$	(17	)	$	(10	)	$	(71	)	$	320

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

	September 30,		December 31,
	2019		2018
Balance Sheet:
Property and equipment, net	$	750	$	787
Cash		124		149
Other		4		5
Total assets	$	878	$	941

Other liabilities	$	18	$	3
Members’ capital		860		938
Total liabilities and members’ capital	$	878	$	941
Investment in unconsolidated joint venture, at equity**	$	774	$	845

Includes 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)

f) Real Estate Investments

Real estate investments consist of the following as of September 30, 2019 and December 31, 2018.

	September 30,			December 31,
	2019			2018
Land	$	32,473		$	23,884
Land improvements		10,255			8,717
Buildings		19,207			19,201
Tenant and leasehold improvements		1,379			1,261
Other		5,112			5,266
Total, at cost		68,426			58,329
Less: accumulated depreciation and amortization		(4,972	)		(3,839	)
Real estate investments	$	63,454		$	54,490

On February 27, 2019, the Company acquired approximately nine acres of undeveloped land located near its current headquarters in Tampa, Florida for a purchase price of $8,500, which was primarily financed by the Company’s revolving credit facility. The transaction was accounted for as an asset acquisition. As such, all acquisition-related costs were capitalized.

Depreciation and amortization expense related to real estate investments was $379 and $389 for the three months ended September 30, 2019 and 2018, respectively, and $1,133 and $1,185 for the nine months ended September 30, 2019 and 2018, respectively.

g) Net Investment Income

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Available-for-sale fixed-maturity securities	$	1,637		$	1,273		$	4,794		$	3,531
Equity securities		305			486			979			1,641
Investment expense		(114	)		(137	)		(349	)		(447	)
Limited partnership investments		476			1,964			1,308			2,816
Real estate investments		(28	)		22			173			239
(Loss) income from unconsolidated joint venture		(17	)		(10	)		(71	)		320
Cash and cash equivalents		1,354			889			3,908			2,531
Short-term investments		8			567			383			1,040
Net investment income	$	3,621		$	5,054		$	11,125		$	11,671

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 5 -- 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
	September 30, 2019									September 30, 2018
													Income Tax
	Before			Income Tax			Net of			Before			Expense			Net of
	Tax			Expense			Tax			Tax			(Benefit)			Tax
Unrealized gain arising during the period	$	447		$	90		$	357		$	35		$	9		$	26
Call and repayment gains charged to investment income		(2	)		—			(2	)		(19	)		(5	)		(14	)
Reclassification adjustment for realized gains		(26	)		(7	)		(19	)		(71	)		(17	)		(54	)
Total other comprehensive gain (loss)	$	419		$	83		$	336		$	(55	)	$	(13	)	$	(42	)

	Nine Months Ended									Nine Months Ended
	September 30, 2019									September 30, 2018
													Income Tax
	Before			Income Tax			Net of			Before			Expense			Net of
	Tax			Expense			Tax			Tax			(Benefit)			Tax
Unrealized gain (loss) arising during the period	$	4,777		$	1,188		$	3,589		$	(2,658	)	$	(673	)	$	(1,985	)
Other-than-temporary impairment loss		—			—			—			80			20			60
Call and repayment gains charged to investment income		(1	)		—			(1	)		(15	)		(4	)		(11	)
Reclassification adjustment for realized gains		(59	)		(15	)		(44	)		(732	)		(185	)		(547	)
Total other comprehensive gain (loss)	$	4,717		$	1,173		$	3,544		$	(3,325	)	$	(842	)	$	(2,483	)

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:

Level 1	-	Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2	-	Other inputs that are observable for the asset, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.
Level 3	-	Inputs that are unobservable.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Valuation Methodology

Cash and cash equivalents

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

Short-term investments

Short-term investments consist of certificates of deposit and zero-coupon commercial paper with maturities of 91 to 365 days. Due to their short maturity, the carrying value approximates fair value.

Fixed-maturity and equity securities

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

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

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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
3.875% Convertible senior notes	2019	Quoted price
4.25% Convertible senior notes	2037	Quoted price
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% Callable promissory note	2036	Discounted cash flow method/Level 3 inputs
4.55% Promissory note	2036	Discounted cash flow method/Level 3 inputs

Assets Measured at Estimated Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2019 and December 31, 2018:

	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2019
Financial Assets:
Cash and cash equivalents	$	214,626	$	—	$	—	$	214,626
Restricted cash	$	700	$	—	$	—	$	700
Short-term investments	$	495	$	—	$	—	$	495
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	25,483	$	1,001	$	—	$	26,484
Corporate bonds		164,769		—		—		164,769
State, municipalities, and political subdivisions		—		10,161		—		10,161
Exchange-traded debt		9,216		—		—		9,216
Redeemable preferred stock		123		—		—		123
Total available-for-sale securities		199,591		11,162		—		210,753
Equity securities	$	32,443	$	—	$	—	$	32,443

	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of December 31, 2018
Financial Assets:
Cash and cash equivalents	$	239,458	$	—	$	—	$	239,458
Restricted cash	$	700	$	—	$	—	$	700
Short-term investments	$	66,479	$	—	$	—	$	66,479
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	60,297	$	1,500	$	—	$	61,797
Corporate bonds		101,905		—		—		101,905
State, municipalities, and political subdivisions		—		10,662		—		10,662
Exchange-traded debt		8,247		—		—		8,247
Redeemable preferred stock		112		—		—		112
Total available-for-sale securities	$	170,561	$	12,162	$	—	$	182,723
Equity securities	$	41,143	$	—	$	—	$	41,143

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 Estimated 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 September 30, 2019 and December 31, 2018:

	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
As of September 30, 2019
Financial Assets:
Limited partnership investments	$	30,690	$	—	$	—	$	30,690	$	30,690
Financial Liabilities:
Revolving credit facility	$	9,750	$	9,750	$	—	$	—	$	9,750
Long-term debt:
4.25% Convertible senior notes	$	133,058	$	—	$	142,852	$	—	$	142,852
3.95% Promissory note		8,927		—		—		8,963		8,963
4% Promissory note		7,363		—		—		7,632		7,632
3.75% Callable promissory note		7,919		—		—		7,954		7,954
4.55% Promissory note		5,665		—		—		5,962		5,962
Total long-term debt	$	162,932	$	—	$	142,852	$	30,511	$	173,363

	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
As of December 31, 2018
Financial Assets:
Limited partnership investments	$	32,293	$	—	$	—	$	32,293	$	32,293
Financial Liabilities:
Long-term debt:
3.875% Convertible senior notes	$	89,181	$	—	$	89,824	$	—	$	89,824
4.25% Convertible senior notes		130,120		—		145,617		—		145,617
3.95% Promissory note		9,077		—		—		9,128		9,128
4% Promissory note		7,732		—		—		7,788		7,788
3.75% Callable promissory note		8,159		—		—		8,001		8,001
4.55% Promissory note		5,826		—		—		6,025		6,025
Total long-term debt	$	250,095	$	—	$	235,441	$	30,942	$	266,383

Note 7 -- Other Assets

The following table summarizes the Company’s other assets.

	September 30,		December 31,
	2019		2018
Benefits receivable related to retrospective reinsurance contract	$	6,960	$	3,136
Prepaid expenses		2,411		2,069
Deposits		1,767		1,413
Lease acquisition costs, net		559		620
Right-of-use assets – operating leases		557		—
Other		1,197		1,766
Total other assets	$	13,451	$	9,004

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 8 -- Revolving Credit Facility

In February 2019, the Company borrowed $8,000 to fund the purchase of the undeveloped land as described in Note 4 -- “Investments” under Real Estate Investments. The Company incurred and capitalized $459 of issuance costs in other assets. Thereafter, the Company borrowed an additional amount of $1,750 for real estate investment purposes. For the three months ended September 30, 2019, interest expense was $132 including $39 of amortization of issuance costs. For the nine months ended September 30, 2019, interest expense totaled $328, which included $118 of amortized issuance costs. At September 30, 2019, the Company was in compliance with all required covenants, and there were $9,750 of borrowings outstanding.

Note 9 -- Long-Term Debt

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

	September 30,			December 31,
	2019			2018
3.875% Convertible senior notes, due March 15, 2019	$	—		$	89,990
4.25% Convertible senior notes, due March 1, 2037		143,750			143,750
3.95% Promissory note, due through February 17, 2020		8,943			9,125
4% Promissory note, due through February 1, 2031		7,475			7,857
3.75% Callable promissory note, due through September 1, 2036		8,040			8,290
4.55% Promissory note, due through August 1, 2036		5,761			5,928
Finance lease liabilities, due through August 15, 2023		64			55
Total principal amount		174,033			264,995
Less: unamortized discount and issuance costs		(11,037	)		(14,845	)
Total long-term debt	$	162,996		$	250,150

The following table summarizes future maturities of long-term debt as of September 30, 2019, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.

Due in 12 months following September 30,
2019	$	10,064
2020		1,166
2021		144,963
2022		1,258
2023		1,297
Thereafter		15,285
Total	$	174,033

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						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Interest Expense:
Contractual interest	$	1,835		$	2,717		$	6,229		$	8,024
Non-cash expense (a)		1,018			1,888			3,807			5,556
Capitalized interest (b)		(78	)		(53	)		(236	)		(53	)
	$	2,775		$	4,552		$	9,800		$	13,527

(a)

Includes amortization of debt discount and issuance costs.

(b)

Interest was capitalized for a construction project.

Convertible Senior Notes

On March 15, 2019, the Company repaid the remaining principal balance of its 3.875% Convertible Notes totaling $89,990 plus accrued interest of $1,744. Prior to the repayment, the conversion rate of the 3.875% Convertible Notes was 16.4074 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.95 per share.

4.25% Convertible Notes. Since May 2018, the Company’s cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of September 30, 2019, the conversion rate of the Company’s 4.25% Convertible Notes was 16.3481 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.17 per share.

As of September 30, 2019, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 2.42 years.

Note 10 -- Reinsurance

The Company cedes a portion of its insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Premiums Written:
Direct	$	97,331		$	90,370		$	298,384		$	292,986
Assumed		—			(10	)		(2	)		(107	)
Gross written		97,331			90,360			298,382			292,879
Ceded		(31,568	)		(31,986	)		(94,298	)		(97,190	)
Net premiums written	$	65,763		$	58,374		$	204,084		$	195,689
Premiums Earned:
Direct	$	86,002		$	85,804		$	251,916		$	255,840
Assumed		—			359			(2	)		2,014
Gross earned		86,002			86,163			251,914			257,854
Ceded		(31,568	)		(31,986	)		(94,298	)		(97,190	)
Net premiums earned	$	54,434		$	54,177		$	157,616		$	160,664

The Company recognized ceded losses of $113,888 in each of the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, ceded losses of $27 and $58,493, respectively, were recognized as a reduction in losses and losses adjustment expenses. At September 30, 2019 and December 31, 2018, there were 31 and 38 reinsurers, respectively, participating in the Company’s reinsurance program. Total amounts recoverable and receivable from reinsurers at September 30, 2019 and December 31, 2018 were $163,444 and $123,911, respectively. Approximately 40.4% of the reinsurance recoverable balance at September 30, 2019 was concentrated in four reinsurers. Based on the insurance ratings, the payment history and the financial strength of the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of September 30, 2019.

One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three and nine months ended September 30, 2019, the Company recognized reductions in premiums ceded of $2,520 and $4,258, respectively, related to these adjustments. In contrast, these adjustments were reflected in the consolidated statements of income as a net reduction in ceded premiums of $600 for the three months ended September 30, 2018 and a net increase in ceded premiums of $115 for the nine months ended September 30, 2018. Included in the three and nine months ended September 30, 2018 were $0 and $448, respectively, attributable to the Company’s contract with Oxbridge Reinsurance Limited, a related party, which was terminated effective June 1, 2018.

In addition, adjustments related to retrospective provisions are reflected in other assets. At September 30, 2019 and December 31, 2018, other assets included $6,960 and $3,136 related to these adjustments, respectively. 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 condition.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 11 -- 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.

The Company primarily 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.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net balance, beginning of period*	$	95,345		$	89,389		$	94,826		$	97,818
Incurred, net of reinsurance, related to:
Current period		25,177			21,250			70,914			61,657
Prior period		2,150			4,519			7,702			5,570
Total incurred, net of reinsurance		27,327			25,769			78,616			67,227
Paid, net of reinsurance, related to:
Current period		(15,111	)		(14,397	)		(32,819	)		(28,554	)
Prior period		(12,763	)		(13,242	)		(45,825	)		(48,972	)
Total paid, net of reinsurance		(27,874	)		(27,639	)		(78,644	)		(77,526	)
Net balance, end of period		94,798			87,519			94,798			87,519
Add: reinsurance recoverable		143,123			50,895			143,123			50,895
Gross balance, end of period	$	237,921		$	138,414		$	237,921		$	138,414

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

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 nine months ended September 30, 2019, the Company recognized losses related to prior periods of $2,150 and $7,702, respectively, which were primarily attributable to unfavorable development resulting from litigation. Included in adverse development for the nine months ended September 30, 2019 were losses related to Hurricane Matthew of $1,052. Losses for the 2019 loss year included estimated losses of $6,500 related to one severe storm event during the first quarter. During the three months ended September 30, 2019, the Company increased its estimated gross losses for Hurricane Irma from $411,000 to $514,000 and for Hurricane Michael from $22,250 to $33,000 due to an increase in the number of claims and lawsuits. These increases had no impact to the Company’s results of operations as these additional losses were entirely ceded.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 12 -- Segment Information

The Company identifies its operating divisions based on organizational structure and revenue source. Currently, the Company has three reportable segments: insurance operations, real estate operations, and corporate and other. 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. The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and other segment represents the activities of the holding companies, the information technology division, and other companies that do not meet the quantitative and qualitative thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performance based on revenue and operating income.

For the three months ended September 30, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 95.2% and 95.3%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 95.0% and 95.3%, respectively, of total revenues of all operating segments. At September 30, 2019 and December 31, 2018, insurance operations’ total assets represented 86.2% and 85.5%, respectively, of the combined assets of all operating segments. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.

	Insurance			Real			Corporate/			Reclassification/
For Three Months Ended September 30, 2019	Operations			Estate(a)			Other(b)			Elimination			Consolidated
Revenue:
Net premiums earned	$	54,434		$	—		$	—		$	—		$	54,434
Net investment income		3,365			—			461			(205	)		3,621
Net realized investment (losses) gains		(33	)		—			3			—			(30	)
Net unrealized investment gains		533			—			109			—			642
Policy fee income		811			—			—			—			811
Other		186			2,317			1,341			(3,343	)		501
Total revenue		59,296			2,317			1,914			(3,548	)		59,979
Expenses:
Losses and loss adjustment expenses		27,327			—			—			—			27,327
Amortization of deferred policy acquisition costs		9,556			—			—			—			9,556
Interest expense		1			409			2,659			(162	)		2,907
Depreciation and amortization		29			627			261			(530	)		387
Other		7,978			1,292			5,669			(2,856	)		12,083
Total expenses		44,891			2,328			8,589			(3,548	)		52,260
Income (loss) before income taxes	$	14,405		$	(11	)	$	(6,675	)	$	—		$	7,719
Total revenue from non-affiliates(c)	$	59,296		$	1,910		$	1,466

(a)

Other revenue under real estate primarily consisted of rental income from investment properties.

(b)

Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	Insurance			Real		Corporate/			Reclassification/
For Three Months Ended September 30, 2018	Operations			Estate(a)		Other(b)			Elimination			Consolidated
Revenue:
Net premiums earned	$	54,177		$	—	$	—		$	—		$	54,177
Net investment income		2,777			—		2,377			(100	)		5,054
Net realized investment gains		1,227			—		399			—			1,626
Net unrealized investment (losses) gains		(478	)		—		88			—			(390	)
Policy fee income		843			—		—			—			843
Other		80			2,318		1,214			(3,179	)		433
Total revenue		58,626			2,318		4,078			(3,279	)		61,743
Expenses:
Losses and loss adjustment expenses		25,769			—		—			—			25,769
Amortization of deferred policy acquisition costs		8,996			—		—			—			8,996
Interest expense		—			393		4,270			(111	)		4,552
Depreciation and amortization		32			592		242			(540	)		326
Other		6,187			1,166		5,452			(2,628	)		10,177
Total expenses		40,984			2,151		9,964			(3,279	)		49,820
Income (loss) before income taxes	$	17,642		$	167	$	(5,886	)	$	—		$	11,923
Total revenue from non-affiliates(c)	$	58,626		$	1,935	$	3,806

(a)

Other revenue under real estate primarily consisted of rental income from investment properties.

(b)

Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

	Insurance		Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2019	Operations		Estate(a)		Other(b)			Elimination			Consolidated
Revenue:
Net premiums earned	$	157,616	$	—	$	—		$	—		$	157,616
Net investment income		9,381		—		2,064			(320	)		11,125
Net realized investment gains (losses)		33		—		(568	)		—			(535	)
Net unrealized investment gains		5,951		—		1,310			—			7,261
Policy fee income		2,406		—		—			—			2,406
Other		524		7,009		4,590			(10,753	)		1,370
Total revenue		175,911		7,009		7,396			(11,073	)		179,243
Expenses:
Losses and loss adjustment expenses		78,616		—		—			—			78,616
Amortization of deferred policy acquisition costs		26,982		—		—			—			26,982
Interest expense		2		1,174		9,374			(422	)		10,128
Depreciation and amortization		82		1,878		791			(1,586	)		1,165
Other		22,842		3,866		17,392			(9,065	)		35,035
Total expenses		128,524		6,918		27,557			(11,073	)		151,926
Income (loss) before income taxes	$	47,387	$	91	$	(20,161	)	$	—		$	27,317
Total revenue from non-affiliates(c)	$	175,911	$	5,787	$	6,088

(a)

Other revenue under real estate primarily consisted of rental income from investment properties.

(b)

Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	Insurance			Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2018	Operations			Estate(a)		Other(b)			Elimination			Consolidated
Revenue:
Net premiums earned	$	160,664		$	—	$	—		$	—		$	160,664
Net investment income		7,520			1		3,941			209			11,671
Net realized investment gains		4,982			—		1,538			—			6,520
Net unrealized investment losses		(3,985	)		—		(562	)		—			(4,547	)
Net other-than-temporary impairment losses		—			—		(80	)		—			(80	)
Policy fee income		2,563			—		—			—			2,563
Other		452			6,965		3,948			(9,861	)		1,504
Total revenue		172,196			6,966		8,785			(9,652	)		178,295
Expenses:
Losses and loss adjustment expenses		67,227			—		—			—			67,227
Amortization of deferred policy acquisition costs		26,506			—		—			—			26,506
Interest expense		—			1,176		12,700			(349	)		13,527
Depreciation and amortization		98			1,788		751			(1,638	)		999
Other		20,135			3,202		16,117			(7,665	)		31,789
Total expenses		113,966			6,166		29,568			(9,652	)		140,048
Income (loss) before income taxes	$	58,230		$	800	$	(20,783	)	$	—		$	38,247
Total revenue from non-affiliates(c)	$	172,196		$	5,818	$	7,945

(a)

Other revenue under real estate primarily consisted of rental income from investment properties.

(b)

Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses.

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

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

	September 30,			December 31,
	2019			2018
Segment:
Insurance Operations	$	702,651		$	615,983
Real Estate Operations		93,279			83,828
Corporate and Other		65,956			146,651
Consolidation and Elimination		(18,387	)		(13,599	)
Total assets	$	843,499		$	832,863

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 13 -- Leases

At September 30, 2019, the Company had operating leases’ ROU assets and corresponding liabilities of $557 and $590, respectively. In addition, the Company had finance leases with ROU assets of $79 and corresponding lease liabilities of $64 at September 30, 2019. The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:

		Renewal	Other Terms and
Class of Assets	Initial Term	Option	Conditions
Operating lease:
Office equipment	1 to 63 months	Yes	(a), (b)
Storage units	2 years	Yes	(b)
Office space	3 to 10 years	Yes	(b), (c)
Finance lease:
Office equipment	3 to 5 years	Not applicable	(d)

(a)

At the end of the lease term, the Company can purchase the equipment at fair market value.

(b)

There are no variable lease payments.

(c)

Rent escalation provisions exist.

(d)

There is a bargain purchase option.

As of September 30, 2019, maturities of lease liabilities were as follows:

	Leases
	Operating		Finance
Due in 12 months following September 30,
2019	$	330	$	19
2020		248		19
2021		54		18
2022		—		13
Total lease payments		632		69
Less: interest and foreign taxes		42		5
Total lease obligations	$	590	$	64

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
Lease costs:
Finance lease costs:
Amortization – ROU assets*	$	4		$	10
Interest expense		1			2
Operating lease costs*		90			244
Short-term lease costs*		37			141
Total lease costs	$	132		$	397
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases	$	1		$	2
Operating cash flows – operating leases	$	80		$	239
Financing cash flows – finance leases	$	4		$	9

	September 30, 2019
Weighted-average remaining lease term:
Finance leases (in years)		3.8
Operating leases (in years)		1.9
Weighted-average discount rate:
Finance leases		3.7	%
Operating leases		4.0	%

Included in other operating expenses of the consolidated statement of income.

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

		Renewal	Other Terms and
Class of Assets	Initial Term	Option	Conditions
Operating lease:
Office space	1 to 3 years	Yes	(e)
Retail space	3 to 20 years	Yes	(e)
Boat docks/wet slips	1 to 12 months	Yes	(e)

(e)

There are no purchase options.

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 -- Income Taxes

During the three months ended September 30, 2019 and 2018, the Company recorded approximately $1,866 and $2,926 respectively, of income taxes, which resulted in effective tax rates of 24.2% and 24.5%, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded approximately $7,173 and $12,056, respectively, of income taxes, which resulted in effective tax rates of 26.3% and 31.5%, respectively. The decrease in the effective tax rate in 2019 as compared with the corresponding period in the prior year was primarily attributable to the derecognition of deferred tax assets of $1,620 for restricted stock awards with market-based vesting conditions that would not vest and the disallowance of the deductibility of the $1,727 expense representing dividends cumulatively paid on such restricted stock awards, both of which occurred in the second quarter of 2018 (see Restricted Stock Awards in Note 17 -- “Stock-Based Compensation”). Furthermore, in September 2019, the Florida corporate income tax rate was reduced from 5.5% to 4.458%, which was effective retroactively to January 1, 2019. The Company’s estimated annual effective tax rate differs from the statutory federal tax rate due to state and foreign income taxes as well as certain nondeductible and tax-exempt items.

Note 15 -- Earnings Per Share

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

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

	Three Months Ended							Three Months Ended
	September 30, 2019							September 30, 2018
	Income			Shares		Per Share		Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Net income	$	5,853						$	8,997
Less: Income attributable to participating securities		(325	)						(591	)
Basic Earnings Per Share:
Income allocated to common stockholders		5,528			7,531	$	0.73		8,406			7,791	$	1.08
Effect of Dilutive Securities:
Stock options		—			8				—			17
Convertible senior notes*		—			—				3,188			3,808
Diluted Earnings Per Share:
Income available to common stockholders and assumed conversions	$	5,528			7,539	$	0.73	$	11,594			11,616	$	1.00

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	Nine Months Ended							Nine Months Ended
	September 30, 2019							September 30, 2018
	Income			Shares		Per Share		Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Net income	$	20,144						$	26,191
Less: Income attributable to participating securities**		(1,114	)						(92	)
Basic Earnings Per Share:
Income allocated to common stockholders		19,030			7,644	$	2.49		26,099			7,931	$	3.29
Effect of Dilutive Securities:
Stock options		—			14				—			17
Convertible senior notes		6,828			2,745				9,481			3,803
Diluted Earnings Per Share:
Income available to common stockholders and assumed conversions	$	25,858			10,403	$	2.49	$	35,580			11,751	$	3.03

*	Convertible senior notes for the three months ended September 30, 2019 were excluded due to anti-dilutive effect.

Income attributable to participating securities for the nine months ended September 30, 2018 included the reclassification of cumulative dividends paid on certain restricted stock with market-based vesting conditions from retained income to expense. See Restricted Stock Awards in Note 17 -- “Stock-Based Compensation” for additional information.

Note 16 -- Stockholders’ Equity

Common Stock

In December 2018, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended September 30, 2019, the Company repurchased and retired a total of 175,160 shares at a weighted average price per share of $40.99 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2019 was $7,185 or $41.02 per share. During the nine months ended September 30, 2019, the Company repurchased and retired a total of 367,736 shares at a weighted average price per share of $41.28 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2019 was $15,191, or $41.31 per share.

In December 2017, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended September 30, 2018, the Company repurchased and retired a total of 148,768 shares at a weighted average price per share of $41.35 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2018 was $6,156, or $41.38 per share. During the nine months ended September 30, 2018, the Company repurchased and retired a total of 508,290 shares at a weighted average price per share of $39.06. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2018 was $19,867, or $39.09 per share.

On July 2, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on September 20, 2019 to stockholders of record on August 6, 2019.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 17 -- 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. At September 30, 2019, there were 1,733,271 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.

A summary of the stock option activity for the three and nine months ended September 30, 2019 and 2018 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, 2019		240,000	$	37.19	8.8 years	$	3,278
Granted		110,000	$	53.00
Outstanding at March 31, 2019		350,000	$	42.16	8.5 years	$	1,329
Exercised		10,000	$	6.30
Outstanding at June 30, 2019		340,000	$	43.21	8.4 years	$	445
Outstanding at September 30, 2019		340,000	$	43.21	8.1 years	$	1,057
Exercisable at September 30, 2019		92,500	$	36.36	7.0 years	$	627

Outstanding at January 1, 2018		130,000	$	34.82	8.2 years	$	472
Granted		110,000	$	40.00
Outstanding at March 31, 2018		240,000	$	37.19	8.8 years	$	637
Outstanding at June 30, 2018		240,000	$	37.19	8.6 years	$	749
Outstanding at September 30, 2018		240,000	$	37.19	8.3 years	$	1,574
Exercisable at September 30, 2018		47,500	$	25.81	6.0 years	$	852

There were 10,000 options exercised during the nine months ended September 30, 2019. During the three months ended September 30, 2019, the Company recognized a reduction in realized tax benefits of $3 resulting from the change in the Florida corporate income tax rate described in Note 14 -- “Income Taxes.” Tax benefits realized for the exercise of common stock options totaled $85 for the nine months ended September 30, 2019. For the three months ended September 30, 2019 and 2018, the Company recognized $222 and $138, respectively, of compensation expense which was included in general and administrative personnel expenses. For the nine months ended September 30, 2019 and 2018, the Company recognized $647 and $384, respectively, of compensation expense. Deferred tax benefits related to stock options were $18 and $20 for the three months ended September 30, 2019 and 2018, and $57 and $59 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, there was $2,057 and $1,359, 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 2.7 years.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the nine months ended September 30, 2019 and 2018:

	2019			2018
Expected dividend yield		3.34	%		4.00	%
Expected volatility		40.17	%		42.22	%
Risk-free interest rate		2.53	%		2.57	%
Expected life (in years)		5			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 containing 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 nine months ended September 30, 2019 and 2018 is as follows:

	Number of			Weighted
	Restricted			Average
	Stock			Grant Date
	Awards			Fair Value
Nonvested at January 1, 2019		632,296		$	33.33
Granted		40,000		$	47.94
Vested		(21,250	)	$	37.69
Forfeited		(4,681	)	$	42.79
Nonvested at March 31, 2019		646,365		$	34.03
Granted		133,160		$	41.30
Vested		(84,914	)	$	41.58
Forfeited		(264,211	)	$	23.81
Nonvested at June 30, 2019		430,400		$	41.06
Granted		7,244		$	41.76
Forfeited		(2,351	)	$	41.97
Nonvested at September 30, 2019		435,293		$	41.07

Nonvested at January 1, 2018		597,690		$	32.82
Granted		40,000		$	34.92
Vested		(28,643	)	$	45.17
Forfeited		(17,905	)	$	38.55
Nonvested at March 31, 2018		591,142		$	31.53
Granted		143,360		$	43.83
Vested		(59,974	)	$	40.09
Forfeited		(27,115	)	$	32.76
Nonvested at June 30, 2018		647,413		$	33.41
Granted		6,500		$	39.80
Forfeited		(7,432	)	$	41.60
Nonvested at September 30, 2018		646,481		$	33.38

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $1,524 and $1,231 for the three months ended September 30, 2019 and 2018, respectively, and $4,047 and $2,890 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, there was approximately $14,392 and $11,199, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.7 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Deferred tax benefits recognized	$	282	$	264	$	772	$	600
Tax benefits realized for restricted stock and paid dividends	$	1	$	68	$	986	$	916
Fair value of vested restricted stock	$	—	$	—	$	4,331	$	3,698

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 2019, 260,000 shares of the Company’s restricted stock awards granted to employee and nonemployee directors were forfeited for not meeting their market-based vesting conditions. For the same reason, the Company expects another 24,000 shares of restricted stock awards with similar vesting conditions to be forfeited in November 2019. Any dividend payment associated with these awards was expensed when declared. As a result, for the three months ended September 30, 2019, the Company recognized dividends of $10 related to these awards in other operating expenses. For the nine months ended September 30, 2019, the Company recognized dividends of $237 in general and administrative personnel expenses for $170 and in other operating expenses for $67. In May 2018, the Company reclassified from retained income dividends of $1,727 cumulatively paid on these unvested restricted stock awards to general and administrative personnel expenses for $1,346 and to other operating expenses for $381. Therefore, for the three months ended September 30, 2018, the Company recognized dividends of $98 in general and administrative personnel expenses for $80 and in other operating expenses for $18. For the nine months ended September 30, 2018, dividends totaling $1,825 was recognized in general and administrative personnel expenses for $1,426 and in other operating expenses for $399.

Note 18 -- Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contract

As of September 30, 2019, the Company has a contractual obligation related to one multi-year reinsurance contract. This contract may be cancelled only with the other party’s consent. The future minimum aggregate premium amounts payable to the reinsurer is $2,967 due in 12 months following September 30, 2019. Reinsurance premiums payable after December 31, 2019 are estimated and subject to subsequent revision as the premiums are determined on a quarterly basis based on the premiums associated with the applicable flood total insured value on the last day of the preceding quarter.

Capital Commitment

As described in Note 4 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for four limited partnership interests. At September 30, 2019, there was an aggregate unfunded balance of $14,405.

Note 19 -- Subsequent Events

On October 17, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 20, 2019 to stockholders of record on November 15, 2019.

On October 22, 2019, Homeowners Choice Property & Casualty Insurance Company, Inc., the Company’s wholly owned insurance subsidiary, was approved by the Florida Office of Insurance Regulation to assume approximately 2,700 policies from Citizens Property Insurance Corporation, a Florida state-supported insurer. Annualized gross written premiums from this assumption approximate $7,300.

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

You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019. 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 InsurTech company that, through its subsidiaries, is engaged in 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 the following operations:

Insurance Operations

▪

Property and casualty insurance

▪

Reinsurance

Real Estate Operations

Other Operations

▪

Information technology

▪

Other auxiliary operations

For the three months ended September 30, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 95.2% and 95.3%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 95.0% and 95.3%, respectively, of total revenues of all operating segments. At September 30, 2019 and December 31, 2018, insurance operations’ total assets represented 86.2% and 85.9%, respectively, of the combined assets of all operating segments. See Note 12 -- “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

Our insurance business is operated through two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), our principal operating subsidiary, and TypTap Insurance Company (“TypTap”). We provide various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. We are authorized to write residential property and casualty insurance in the states of Arkansas, California, Florida, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. Currently, Florida is our primary market.

Since the beginning of 2019, TypTap business has expanded rapidly. Over the nine-month period, TypTap’s policies in force have grown by 90.5% to approximately 19,500 policies. We expect this expansion to continue and contribute to our future growth.

Reinsurance

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, reducing the cost of third party reinsurance. Claddaugh fully collateralizes its exposure to our insurance subsidiaries by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance to non-affiliates.

Real Estate Operations

Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes. Properties used in operations consist of our Tampa headquarters building and a secondary insurance operations site in Ocala, Florida. Our investment properties include one full-service restaurant, retail shopping centers, one office building, two marinas, and undeveloped land near our headquarters in Tampa, Florida which we acquired in February 2019. See Note 4 -- “Investments” under Real Estate Investments to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Other Operations

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

Recent Events

On October 17, 2019, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 20, 2019 to stockholders of record on November 15, 2019.

On October 22, 2019, HCPCI, was approved by the Florida Office of Insurance Regulation to assume approximately 2,700 policies from Citizens Property Insurance Corporation, a Florida state-supported insurer. Annualized gross premiums written from this assumption approximate $7,300,000.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine months ended September 30, 2019 and 2018 (dollar amounts in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Operating Revenue
Gross premiums earned	$	86,002		$	86,163		$	251,914		$	257,854
Premiums ceded		(31,568	)		(31,986	)		(94,298	)		(97,190	)
Net premiums earned		54,434			54,177			157,616			160,664
Net investment income		3,621			5,054			11,125			11,671
Net realized investment (losses) gains		(30	)		1,626			(535	)		6,520
Net unrealized investment gains (losses)		642			(390	)		7,261			(4,547	)
Net other-than-temporary impairment losses		—			—			—			(80	)
Policy fee income		811			843			2,406			2,563
Other income		501			433			1,370			1,504
Total operating revenue		59,979			61,743			179,243			178,295
Operating Expenses
Losses and loss adjustment expenses		27,327			25,769			78,616			67,227
Policy acquisition and other underwriting expenses		10,988			9,829			30,738			29,148
General and administrative personnel expenses		7,951			6,781			23,313			20,904
Interest expense		2,907			4,552			10,128			13,527
Other operating expenses		3,087			2,889			9,131			9,242
Total operating expenses		52,260			49,820			151,926			140,048
Income before income taxes		7,719			11,923			27,317			38,247
Income tax expense		1,866			2,926			7,173			12,056
Net income	$	5,853		$	8,997		$	20,144		$	26,191
Ratios to Net Premiums Earned:
Loss Ratio		50.20	%		47.56	%		49.88	%		41.84	%
Expense Ratio		45.80	%		44.39	%		46.51	%		45.33	%
Combined Ratio		96.00	%		91.95	%		96.39	%		87.17	%
Ratios to Gross Premiums Earned:
Loss Ratio		31.78	%		29.91	%		31.21	%		26.07	%
Expense Ratio		28.99	%		27.91	%		29.10	%		28.24	%
Combined Ratio		60.77	%		57.82	%		60.31	%		54.31	%
Earnings Per Share Data:
Basic	$	0.73		$	1.08		$	2.49		$	3.29
Diluted	$	0.73		$	1.00		$	2.49		$	3.03

Comparison of the Three Months ended September 30, 2019 to the Three Months ended September 30, 2018

Our results of operations for the three months ended September 30, 2019 reflect income available to common stockholders of approximately $5,853,000, or $0.73 earnings per diluted common share, compared with approximately $8,997,000, or $1.00 earnings per diluted common share, for the three months ended September 30, 2018. The quarter-over-quarter decrease in pre-tax income was primarily due to an increase in losses and loss adjustment expenses of $1,558,000, an increase in policy acquisition and underwriting expenses of $1,159,000, increased payroll costs of $1,170,000, and a net decrease in income from our investment portfolio of $624,000, offset by a $1,645,000 decrease in interest expense.

Revenue

Gross Premiums Earned for the three months ended September 30, 2019 and 2018 were approximately $86,002,000 and $86,163,000, respectively. Although the number of policies in force and gross premiums written from TypTap business have increased steadily, these premiums have yet to be earned over the term of the policies.

Premiums Ceded for the three months ended September 30, 2019 and 2018 were approximately $31,568,000 and $31,986,000, respectively, representing 36.7% and 37.1%, respectively, of gross premiums earned. The $418,000 decrease was primarily attributable to a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract, offset by an increase in premiums ceded attributable to a lower retention level effective June 1, 2018.

Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses as defined in a quota share agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. For the three months ended September 30, 2019, premiums ceded included a decrease of approximately $2,520,000 related to retrospective provisions compared with a net reduction of approximately $600,000 for the three months ended September 30, 2018. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended September 30, 2019 and 2018 totaled approximately $65,763,000 and $58,374,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2019 resulted from an increase in gross premiums written from the growth of TypTap business. We had approximately 125,000 policies in force at September 30, 2019 as compared with approximately 128,000 policies in force at September 30, 2018.

Net Premiums Earned for the three months ended September 30, 2019 and 2018 were approximately $54,434,000 and $54,177,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended September 30, 2019 and 2018 (amounts in thousands):

	Three Months Ended
	September 30,
	2019			2018
Net Premiums Written	$	65,763		$	58,374
Increase in Unearned Premiums		(11,329	)		(4,197	)
Net Premiums Earned	$	54,434		$	54,177

Net Realized Investment Losses for the three months ended September 30, 2019 were approximately $30,000 versus approximately $1,626,000 of net realized investment gains for the three months ended September 30, 2018. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio.

Net Unrealized Investment Gains for the three months ended September 30, 2019 were approximately $642,000 versus approximately $390,000 of net unrealized investment losses for the three months ended September 30, 2018, reflecting a net favorable change in the fair value of equity securities.

Expenses

Our Losses and Loss Adjustment Expenses amounted to approximately $27,327,000 and $25,769,000 for the three months ended September 30, 2019 and 2018, respectively. The $1,558,000 increase primarily resulted from the strengthening of loss reserves pertaining to non-catastrophe claims during the third quarter. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2019 and 2018 were approximately $10,988,000 and $9,829,000, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, and premium taxes. The $1,159,000 increase was primarily attributable to higher agent commission rates and property inspection costs associated with the organic growth of TypTap business.

General and Administrative Personnel Expenses for the three months ended September 30, 2019 and 2018 were approximately $7,951,000 and $6,781,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The period-over-period increase of $1,170,000 was primarily attributable to higher share-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late March 2019 offset by capitalized and recoverable payroll costs.

Interest Expense for the three months ended September 30, 2019 and 2018 was approximately $2,907,000 and $4,552,000, respectively. The $1,645,000 decrease resulted from the repayment of our 3.875% Convertible Senior Notes in March 2019.

Income Tax Expense for the three months ended September 30, 2019 and 2018 was approximately $1,866,000 and $2,926,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.2% for 2019 and 24.5% for 2018.

Ratios:

The loss ratio applicable to the three months ended September 30, 2019 (losses and loss adjustment expenses incurred related to net premiums earned) was 50.2% compared with 47.6% for the three months ended September 30, 2018. The increase was primarily due to an increase in losses and loss adjustment expenses as described previously.

The expense ratio applicable to the three months ended September 30, 2019 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 45.8% compared with 44.4% for the three months ended September 30, 2018. The increase in our expense ratio was primarily attributable to the increase in policy acquisition, underwriting and personnel expenses, offset by the decrease in interest expense.

The combined ratio (total of all expenses in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the three months ended September 30, 2019 was 96.0% compared with 92.0% for the three months ended September 30, 2018. The increase was attributable to a net increase in total expenses.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the three months ended September 30, 2019 was 60.8% compared with 57.8% for the three months ended September 30, 2018. The increase in 2019 was attributable to the factors described above.

Comparison of the Nine Months ended September 30, 2019 to the Nine Months ended September 30, 2018

Our results of operations for the nine months ended September 30, 2019 reflect income available to common stockholders of approximately $20,144,000, or $2.49 earnings per diluted common share, compared with approximately $26,191,000, or $3.03 earnings per diluted common share, for the nine months ended September 30, 2018. The period-over-period decrease was primarily due to a $3,048,000 decrease in net premiums earned and $11,389,000 increase in losses and loss adjustment expenses, offset by a net increase in income from our investment portfolio of $4,833,000, which contributed to a decrease in pre-tax income of $10,930,000. In addition, our income tax expense in 2018 was negatively impacted by the factors described in Note 14 -- “Income Taxes” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Revenue

Gross Premiums Earned for the nine months ended September 30, 2019 and 2018 were approximately $251,914,000 and $257,854,000, respectively. The decrease in 2019 compared with the corresponding period in 2018 was primarily attributable to a net decrease in policies in force.

Premiums Ceded for the nine months ended September 30, 2019 and 2018 were approximately $94,298,000 and $97,190,000, respectively, representing 37.4% and 37.7%, respectively, of gross premiums earned. The $2,892,000 decrease was primarily attributable to a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract as opposed to a net increase of premiums ceded associated with retrospective provisions and the recognition of additional premiums ceded of approximately $1,222,000 resulting from the termination of our reinsurance contract with Oxbridge Reinsurance Limited, a related party, in the corresponding period in 2018.

For the nine months ended September 30, 2019, premiums ceded included a reduction of approximately $4,258,000 related to retrospective provisions. For the nine months ended September 30, 2018, premiums ceded included a net increase of approximately $115,000 related to retrospective provisions. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the nine months ended September 30, 2019 and 2018 totaled approximately $204,084,000 and $195,689,000, respectively. The $8,395,000 increase in 2019 resulted primarily from an increase in gross premiums written from the growth in TypTap business combined with the decrease in premiums ceded as described above.

Net Premiums Earned for the nine months ended September 30, 2019 and 2018 were approximately $157,616,000 and $160,664,000, respectively, and reflect gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months ended September 30, 2019 and 2018 (amounts in thousands):

	Nine Months Ended
	September 30,
	2019			2018
Net Premiums Written	$	204,084		$	195,689
Increase in Unearned Premiums		(46,468	)		(35,025	)
Net Premiums Earned	$	157,616		$	160,664

Net Realized Investment Losses for the nine months ended September 30, 2019 were approximately $535,000 as opposed to approximately $6,520,000 of net realized investment gains for the nine months ended September 30, 2018. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the impact from a rising interest rate trend and to decrease our holdings in municipal bonds as they became less attractive in a low tax rate environment.

Net Unrealized Investment Gains for the nine months ended September 30, 2019 were approximately $7,261,000 versus net unrealized investment losses of approximately $4,547,000 for the nine months ended September 30, 2018, reflecting an improvement in the fair value of equity securities.

Expenses

Our Losses and Loss Adjustment Expenses amounted to approximately $78,616,000 and $67,227,000 for the nine months ended September 30, 2019 and 2018, respectively. The increase in 2019 was primarily attributable to approximately $6,500,000 of losses related to a severe storm event in March 2019, the strengthening of loss reserves due to litigation arising from non-catastrophe claims in current and prior years, and additional losses of approximately $1,052,000 pertaining to Hurricane Matthew. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2019 and 2018 were approximately $30,738,000 and $29,148,000, respectively. The $1,590,000 increase was primarily attributable to higher agent commission rates and property inspection costs as described earlier.

General and Administrative Personnel Expenses for the nine months ended September 30, 2019 and 2018 were approximately $23,313,000 and $20,904,000, respectively. The period-over-period increase of $2,409,000 was primarily attributable to higher share-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late March 2019 offset by capitalized and recoverable payroll costs. In addition, included in the 2018 period was the recognition of approximately $1,426,000 of cumulative dividends paid on unvested restricted stock awards with market-based vesting conditions that were not met.

Interest Expense for the nine months ended September 30, 2019 and 2018 was approximately $10,128,000 and $13,527,000, respectively. The decrease resulted from the repayment of our 3.875% Convertible Senior Notes as described earlier.

Income Tax Expense for the nine months ended September 30, 2019 and 2018 was approximately $7,173,000 and $12,056,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 26.3% for 2019 and 31.5% for 2018. The decrease was primarily attributable to the derecognition of deferred tax assets and the disallowance of the deductibility of dividends reclassified to expense from retained income, which occurred in the second quarter of 2018. See Note 14 -- “Income Taxes” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Ratios:

The loss ratio applicable to the nine months ended September 30, 2019 was 49.9% compared with 41.8% for the nine months ended September 30, 2018. The increase was primarily due to the increase in losses and loss adjustment expenses and the decrease in net premiums earned and as described above.

The expense ratio applicable to the nine months ended September 30, 2019 was 46.5% compared with 45.4% for the nine months ended September 30, 2018. The increase in our expense ratio was primarily attributable to the decrease in net premiums earned.

The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the nine months ended September 30, 2019 was 96.4% compared with 87.2% for the nine months ended September 30, 2018. The increase was attributable to the decrease in net premiums earned and the increase in losses and loss adjustment expenses as described above.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the nine months ended September 30, 2019 was 60.3% compared with 54.3% for the nine months ended September 30, 2018. The increase in 2019 was primarily attributable to the decrease in gross premiums earned combined with the increase in losses and loss adjustment expenses.

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 December 2018, we entered into a credit agreement with one financial institution for borrowing capacity of up to $65,000,000 to fund future operations and acquisitions. The credit facility had an unused balance of $55,250,000 at September 30, 2019.

In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions.

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

The following table summarizes the principal and interest payment obligations of our indebtedness at September 30, 2019:

	Maturity Date	Interest Payment Due Date
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
4.55% Promissory note	Through August 2036	1^st day of each month
Finance leases	Through August 2023	Various
Revolving credit facility	Through December 2021	January 1, April 1, July 1, October 1

See Note 9 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Limited Partnership Investments

Our limited partnership investments consist of five private equity funds managed by their general partners. Three of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances. At September 30, 2019, there was an aggregate unfunded capital balance of $14,405,000. 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 2018, 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 September 30, 2019, there was approximately $4,821,000 available under the plan. See Note 16 -- “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Sources and Uses of Cash

Cash Flows for the Nine Months Ended September 30, 2019

Net cash provided by operating activities for the nine months ended September 30, 2019 was approximately $38,094,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $74,355,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $44,511,000 was primarily due to the proceeds from redemptions and maturities of fixed-maturity securities of $50,738,000, the proceeds from sales of fixed-maturity and equity securities of $39,570,000, and the proceeds from sales and maturities of short-term and other investments of $66,902,000, offset by the purchases of fixed-maturity and equity securities of $98,633,000, the purchase of real estate investments of $10,475,000, limited partnership investments of $1,899,000, and the purchases of property and equipment of $2,166,000. Net cash used in financing activities totaled $107,439,000, which was primarily due to the repayments of long-term debt of $90,980,000, $9,599,000 of net cash dividend payments, and $16,214,000 used in our share repurchases, offset by $9,750,000 of borrowings from revolving credit facility.

Cash Flows for the Nine Months Ended September 30, 2018

Net cash provided by operating activities for the nine months ended September 30, 2018 was approximately $29,449,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $12,432,000 was primarily due to the purchases of fixed-maturity and equity securities of $99,942,000, the purchases of short-term and other investments of $155,252,000, the purchases of real estate investments of $6,685,000, and the limited partnership investments of $4,823,000, offset by the proceeds from sales of fixed-maturity and equity securities of $134,419,000, the proceeds from redemptions and maturities of fixed-maturity securities of $52,843,000, and the proceeds from sales and maturities of short-term and other investments of $67,991,000. Net cash used in financing activities totaled $23,731,000, which was primarily due to $20,808,000 used in our share repurchases and $7,475,000 of net cash dividend payments, offset by the proceeds from issuance of 4.55% promissory note of $6,000,000.

Investments

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

At September 30, 2019, we had $243,196,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2019, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 18 -- “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 September 30, 2019 (amounts in thousands):

	Payment Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating leases (1)	$	632	$	330	$	301	$	1	$	—
Service agreement (1)		58		25		33		—		—
Reinsurance contracts (2)		2,967		2,967		—		—		—
Unfunded capital commitments (3)		14,405		14,405		—		—		—
Revolving credit facility		9,750		9,750		—		—		—
Long-term debt obligations (4)		196,663		17,167		156,843		3,904		18,749
Total	$	224,475	$	44,644	$	157,177	$	3,905	$	18,749

(1)

Represents a lease for office space in Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment and storage space. Liabilities related to our India operations were converted from Indian rupees to U.S. dollars using the September 30, 2019 exchange rate.

(2)

Represents the minimum payment of reinsurance premiums under one multi-year reinsurance contract. Reinsurance premiums payable after December 31, 2019 are estimated and subject to subsequent revision as the premiums are determined on a quarterly basis based on the premiums associated with the applicable flood total insured value on the last day of the preceding quarter.

(3)

Represents the unfunded balance of capital commitments under the subscription agreements related to four limited partnerships in which we hold interests.

(4)

Amounts represent principal and interest payments over the lives of various long-term debt obligations. See Note 9 -- “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 recoverable, 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 expenses, 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 September 30, 2019, $196,542,000 of the total $237,921,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $41,379,000 relates to known cases which have been reported but not yet fully settled in which case we have established a reserve based on currently available information and our best estimate of the cost to settle each claim. At September 30, 2019, $35,294,000 of the $41,379,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $207,586,000 at December 31, 2018 to $237,921,000 at September 30, 2019. The $30,335,000 increase is comprised of $38,112,000 in Reserves established for claims occurring in the 2019 loss year and $30,346,000 in additional Reserves specific to Hurricane Irma in 2017 and Hurricane Michael in 2018, offset by net reductions in our non-catastrophe Reserves of $18,503,000 for 2018 and $19,620,000 for 2017 and prior loss years. The $38,112,000 in Reserves established for 2019 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2019. The decrease of $38,123,000 specific to our 2018 and prior loss-year reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at September 30, 2019 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

One of our reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

For the three months ended September 30, 2019 and 2018, we accrued benefits of $2,520,000 and $279,000, respectively. There were no premiums ceded recognized for the three months ended September 30, 2019, whereas we recognized a reduction in premiums ceded of $321,000 for the three months ended September 30, 2018. In combination, for the three months ended September 30, 2019 and 2018, we recognized decreases in ceded premiums of $2,520,000 and $600,000, respectively.

For the nine months ended September 30, 2019 and 2018, we accrued benefits of $3,824,000 and $465,000, respectively. We recognized a decrease in premiums ceded of $434,000 for the nine months ended September 30, 2019. For the nine months ended September 30, 2018, we recognized additional premiums ceded of $580,000. In combination, for the nine months ended September 30, 2019, we recognized a decrease in ceded premiums of $4,258,000 as opposed to a net increase in ceded premiums of $115,000 for the nine months ended September 30, 2018.

As of September 30, 2019, we had $6,960,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement. At December 31, 2018, we had $3,136,000 of accrued benefits related to this agreement.

We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the 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 March 8, 2019. For the nine months ended September 30, 2019, 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 2 to our Notes to Unaudited Consolidated Financial Statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolios at September 30, 2019 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our board of directors. From time to time, our investment committee may decide to invest in low risk assets such as U.S. government bonds.

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

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

Interest Rate Risk

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

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at September 30, 2019 (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	$	200,946	$	(9,807	)		-4.65	%
200 basis point increase		204,214		(6,539	)		-3.10	%
100 basis point increase		207,483		(3,270	)		-1.55	%
100 basis point decrease		214,016		3,263			1.55	%
200 basis point decrease		217,072		6,319			3.00	%
300 basis point decrease		217,828		7,075			3.36	%

Credit Risk

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.

The following table presents the composition of our fixed-maturity securities, by rating, at September 30, 2019 (amounts in thousands):

			% of Total				% of Total
	Amortized		Amortized		Estimated		Estimated
Comparable Rating	Cost		Cost		Fair Value		Fair Value
AA+, AA, AA-	$	46,494		23.0	$	46,850		23.0
A+, A, A-		120,163		58.0		121,453		58.0
BBB+, BBB, BBB-		29,018		14.0		30,100		14.0
BB+, BB, BB-		4,930		2.0		5,115		2.0
CCC+, CC and Not rated		7,378		3.0		7,235		3.0
Total	$	207,983		100.0	$	210,753		100.0

Equity Price Risk

Our equity investment portfolio at September 30, 2019 included common stocks, perpetual preferred stocks, mutual funds and exchange traded funds. We may incur losses due to adverse changes in equity security prices. We manage the risk primarily through industry and issuer diversification and asset mix.

The following table illustrates the composition of our equity securities at September 30, 2019 (amounts in thousands):

			% of Total
	Estimated		Estimated
	Fair Value		Fair Value
Stocks by sector:
Financial	$	16,558		51
Industrial		1,978		6
Energy		1,523		5
Technology		1,711		5
Other (1)		3,766		12
		25,536		79
Mutual funds and exchange traded funds by type:
Debt		4,897		14
Equity		2,010		7
Total	$	32,443		100

(1)

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At September 30, 2019, we did not have any material exposure to foreign currency related risk.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

With the exception of the items described below, there have been no material changes from the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 8, 2019.

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

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

•

incur additional indebtedness;

•

declare or make any restricted payments;

•

create liens on any of our assets now owned or hereafter acquired;

•

consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets now owned or hereafter acquired; and

•

enter into certain transactions with our affiliates.

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

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

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

(a)

Sales of Unregistered Securities and Use of Proceeds

None

(b)

Repurchases of Securities

The table below summarizes the number of common shares repurchased during the three months ended September 30, 2019 under the repurchase plan approved by our Board of Directors in December 2018 (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		or Programs (a)
July 31, 2019		63,569	$	40.54		63,569	$	9,423
August 31, 2019		68,458	$	40.64		68,458	$	6,641
September 30, 2019		43,133	$	42.21		43,133	$	4,821
		175,160	$	40.99		175,160

(a)

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 subsidiaries, however, are subject to restrictions on the dividends they may pay. Those restrictions could impact HCI’s ability to pay future dividends.

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

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Office of Insurance Regulation (1) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (2) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (3) the insurer files a notice of the dividend or distribution with the Florida Office of Insurance Regulation at least ten business days prior to the dividend payment or distribution and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (1) subject to prior approval by the Florida Office of Insurance Regulation or (2) 30 days after the Florida Office of Insurance Regulation has received notice of such dividend or distribution and has not disapproved it within such time.

During the nine months ended September 30, 2019, our insurance subsidiaries paid dividends of $14,000,000 to HCI.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

The following documents are filed as part of this report:

EXHIBIT
NUMBER		DESCRIPTION
3.1		Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.

3.1.1		Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed October 18, 2013.

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

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

4.8		Indenture, dated December 11, 2013, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. (including Global Note). Incorporated by reference to Exhibit 4.1 to our Form 8-K filed December 12, 2013.

4.9		See Exhibits 3.1, 3.1.1 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining certain rights of security holders.

4.10		Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.

4.11		Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.

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

10.6**		HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 29, 2008.

10.7**		Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.

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

10.17		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. Incorporated by reference to the corresponding number exhibit to our Form 10-Q filed August 3, 2017.

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. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.

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. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.

10.20		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.21		Property Catastrophe Fifth Excess of Loss Reinsurance Contract (Odyssey Re) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.22		Property Catastrophe First Excess of Loss Reinsurance Contract (Endurance) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

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.

10.24		Assumption Agreement effective November 9, 2017 by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and Citizens Property Insurance Corporation. Incorporated by reference to Exhibit 10.24 of our Form 8-K filed December 21, 2017.

10.25		Property Catastrophe First Excess of Loss Reinsurance Contract (Ren Re) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.


10.26		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat U8GR0006) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.27		Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat U8GR0008) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.28		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.29		Working Layer Catastrophe Excess of Loss Reinsurance Contract (Endurance) effective June 1, 2018 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.30		Reimbursement Contract effective June 1, 2018 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2018.

10.31		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.32		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.33		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.40		Top Layer Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.41		Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.42		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.43		Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR000D) effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.44		Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR0008) effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.45		Reimbursement Contract effective June 1, 2019 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019.

10.46**		Written Description of Non-Employee Director Compensation Arrangement adopted September 9, 2019 establishing compensation of our non-employee directors.

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

10.57		Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 of our Form 10-Q for the quarter ended March 31, 2014 filed May 1, 2014.

10.58		Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc., as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed February 28, 2017.

10.59		Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed March 3, 2017.

10.60		Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank. Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018.

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

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

10.97**		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 between Mark Harmsworth and HCI Group, Inc. dated December 5, 2016. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.

10.101**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.1 to our Form 8-K filed February 14, 2018.

10.102**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.2 to our Form 8-K filed February 14, 2018.

10.103**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.1 to our Form 8-K filed January 22, 2019.

10.104**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.2 to our Form 8-K filed January 22, 2019.

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.

November 6, 2019	By:	/s/ Paresh Patel
		Paresh Patel
		Chief Executive Officer
		(Principal Executive Officer)

November 6, 2019	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 10.46

Description of Non-Employee Director Compensation Arrangement

On September 9, 2019, our compensation committee, under the guidance of Pearl Meyer & Partners, LLC, a leading compensation consulting firm, established a compensation plan for the company’s non-employee directors. Under the plan, each director is to receive $125,000 annually, of which $100,000 is to be paid in cash and the remainder in restricted common shares based on the market value on the date of the grant. The shares will be subject to restrictions on transfer for one year after the grant date. During the period of restriction, the directors will be entitled to dividends and all other rights of ownership.

Exhibit 31.1

Certification of Chief Executive Officer

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

I, Paresh Patel, certify that:

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

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

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

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

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

/s/ Paresh Patel

November 6, 2019

Paresh Patel

Chief Executive Officer

(Principal Executive Officer)

A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 31.2

Certification of Chief Financial Officer

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

I, James Mark Harmsworth, certify that:

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

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

/s/ James Mark Harmsworth

November 6, 2019

James Mark Harmsworth

Chief Financial Officer

(Principal Financial and Accounting Officer)

A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.1

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of HCI Group, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on November 6, 2019 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paresh Patel

Paresh Patel

Chief Executive Officer

November 6, 2019

A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of HCI Group, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on November 6, 2019 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James Mark Harmsworth

James Mark Harmsworth

Chief Financial Officer

November 6, 2019

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.