Table of Contents

 

 

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 March 31, 2019

OR

 

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

Commission File Number

001-34126

 

 

HCI Group, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

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

5300 West Cypress Street, Suite 100

Tampa, FL 33607

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

(813) 849-9500

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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, or a smaller reporting 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  ☑

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

The aggregate number of shares of the Registrant’s Common Stock, no par value, outstanding on April 26, 2019 was 8,502,724.

 

 

 

 


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page  
  PART I – FINANCIAL INFORMATION   

Item 1

  Financial Statements   
 

Consolidated Balance Sheets:
March  31, 2019 (unaudited) and December 31, 2018

     1-2  
 

Consolidated Statements of Income:
Three months ended March  31, 2019 and 2018 (unaudited)

     3  
 

Consolidated Statements of Comprehensive Income:
Three months ended March 31, 2019 and 2018 (unaudited)

     4  
 

Consolidated Statements of Stockholders’ Equity:
Three months ended March 31, 2019 and 2018 (unaudited)

     5-6  
 

Consolidated Statements of Cash Flows:
Three months ended March  31, 2019 and 2018 (unaudited)

     7-8  
  Notes to Consolidated Financial Statements (unaudited)      9-36  
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37-48  
Item 3   Quantitative and Qualitative Disclosures about Market Risk      49-50  
Item 4   Controls and Procedures      51  
  PART II – OTHER INFORMATION   
Item 1   Legal Proceedings      52  
Item 1A   Risk Factors      52  
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds      53-54  
Item 3   Defaults upon Senior Securities      54  
Item 4   Mine Safety Disclosures      54  
Item 5   Other Information      54  
Item 6   Exhibits      55  

Signatures

     62  

Certifications

  


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

 

     March 31,
2019
     December 31,
2018
 
     (Unaudited)         

Assets

     

Fixed-maturity securities, available for sale, at fair value (amortized cost: $210,004 and $184,670, respectively)

   $ 210,728      $ 182,723  

Equity securities, at fair value (cost: $29,463 and $45,671, respectively)

     30,228        41,143  

Short-term investments

     31,075        66,479  

Limited partnership investments, at equity

     31,830        32,293  

Investment in unconsolidated joint venture, at equity

     812        845  

Assets held for sale

     9,810        9,810  

Real estate investments

     63,309        54,490  
  

 

 

    

 

 

 

Total investments

     377,792        387,783  

Cash and cash equivalents

     177,965        239,458  

Restricted cash

     700        700  

Accrued interest and dividends receivable

     2,456        1,792  

Income taxes receivable

     —          971  

Premiums receivable

     16,888        16,667  

Prepaid reinsurance premiums

     7,364        17,932  

Reinsurance recoverable:

     

Paid losses and loss adjustment expenses

     19,432        11,151  

Unpaid losses and loss adjustment expenses

     86,208        112,760  

Deferred policy acquisition costs

     15,171        16,507  

Property and equipment, net

     13,584        13,338  

Intangible assets, net

     4,649        4,800  

Other assets

     11,198        9,004  
  

 

 

    

 

 

 

Total assets

   $ 733,407      $ 832,863  
  

 

 

    

 

 

 

 

(continued)

 

1


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets - continued

(Dollar amounts in thousands)

 

     March 31,
2019
     December 31,
2018
 
     (Unaudited)         

Liabilities and Stockholders’ Equity

     

Losses and loss adjustment expenses

   $ 184,661      $ 207,586  

Unearned premiums

     143,300        157,729  

Advance premiums

     16,160        6,192  

Assumed reinsurance balances payable

     4        14  

Accrued expenses

     8,586        6,483  

Income taxes payable

     1,429        —    

Deferred income taxes, net

     1,857        1,068  

Revolving credit facility

     8,000        —    

Long-term debt

     161,623        250,150  

Other liabilities

     20,747        22,200  
  

 

 

    

 

 

 

Total liabilities

     546,367        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, 8,359,889 and 8,356,730 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

     —          —    

Additional paid-in capital

     103        —    

Retained income

     186,396        182,894  

Accumulated other comprehensive income (loss), net of taxes

     541        (1,453
  

 

 

    

 

 

 

Total stockholders’ equity

     187,040        181,441  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 733,407      $ 832,863  
  

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

2


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

     Three Months Ended  
     March 31,  
     2019     2018  

Revenue

    

Gross premiums earned

   $ 82,597     $ 85,772  

Premiums ceded

     (31,413     (32,250
  

 

 

   

 

 

 

Net premiums earned

     51,184       53,522  

Net investment income

     3,278       3,218  

Net realized investment (losses) gains

     (372     2,232  

Net unrealized investment gains (losses)

     5,293       (2,600

Net other-than-temporary impairment losses

     —         (40

Policy fee income

     795       865  

Other

     456       542  
  

 

 

   

 

 

 

Total revenue

     60,634       57,739  
  

 

 

   

 

 

 

Expenses

    

Losses and loss adjustment expenses

     26,996       19,655  

Policy acquisition and other underwriting expenses

     9,673       9,360  

General and administrative personnel expenses

     7,364       6,283  

Interest expense

     4,337       4,470  

Other operating expenses

     2,981       3,167  
  

 

 

   

 

 

 

Total expenses

     51,351       42,935  
  

 

 

   

 

 

 

Income before income taxes

     9,283       14,804  

Income tax expense

     2,545       4,013  
  

 

 

   

 

 

 

Net income

   $ 6,738     $ 10,791  
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.82     $ 1.25  
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.82     $ 1.11  
  

 

 

   

 

 

 

Dividends per share

   $ 0.40     $ 0.35  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Net income

   $ 6,738     $ 10,791  
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Change in unrealized gain (loss) on investments:

    

Net unrealized gain (loss) arising during the period

     2,704       (2,628

Other-than-temporary impairment loss charged to income

     —         40  

Call and repayment losses charged to investment income

     —         1  

Reclassification adjustment for net realized gains

     (33     (696
  

 

 

   

 

 

 

Net change in unrealized gain (loss)

     2,671       (3,283

Deferred income taxes on above change

     (677     832  
  

 

 

   

 

 

 

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

     1,994       (2,451
  

 

 

   

 

 

 

Comprehensive income

   $ 8,732     $ 8,340  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For Three Months Ended March 31, 2019

(Unaudited)

(Dollar amounts in thousands)

 

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

Balance at December 31, 2018

     8,356,730     $ —        $ —       $ 182,894     $ (1,453   $ 181,441  

Net income

     —         —          —         6,738       —         6,738  

Total other comprehensive income, net of income taxes

     —         —          —         —         1,994       1,994  

Issuance of restricted stock

     40,000       —          —         —         —         —    

Forfeiture of restricted stock

     (4,681     —          —         —         —         —    

Repurchase and retirement of common stock

     (371     —          (18     —         —         (18

Repurchase and retirement of common stock under share repurchase plan

     (31,789     —          (1,338     —         —         (1,338

Common stock dividends

     —         —          —         (3,236     —         (3,236

Stock-based compensation

     —         —          1,459       —         —         1,459  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     8,359,889     $ —        $ 103     $ 186,396     $ 541     $ 187,040  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

5


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity – (Continued)

For Three Months Ended March 31, 2018

(Unaudited)

(Dollar amounts in thousands)

 

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

Balance at December 31, 2017

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

Net income

     —         —          —         10,791       —         10,791  

Total other comprehensive loss, net of income taxes

     —         —          —         —         (2,451     (2,451

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

     40,000       —          —         —         —         —    

Forfeiture of restricted stock

     (17,905     —          —         —         —         —    

Repurchase and retirement of common stock

     (6,090     —          (211     —         —         (211

Repurchase and retirement of common stock under share repurchase plan

     (184,571     —          (6,537     —         —         (6,537

Purchase of noncontrolling interest

     —         —          (539     —         —         (539

Common stock dividends

     —         —          —         (2,998     —         (2,998

Stock-based compensation

     —         —          872       —         —         872  

Additional paid-in capital shortfall allocated to retained income

     —         —          6,415       (6,415     —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     8,593,850     $ —        $ —       $ 193,971     $ (1,069   $ 192,902  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

6


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows from operating activities:

    

Net income

   $ 6,738     $ 10,791  

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

    

Stock-based compensation

     1,459       872  

Net amortization of premiums on investments in fixed-maturity securities

     90       223  

Depreciation and amortization

     2,707       2,700  

Deferred income tax expense (benefit)

     112       (15

Net realized investment losses (gains)

     372       (2,232

Net unrealized investment (gains) losses

     (5,293     2,600  

Other-than-temporary impairment losses

     —         40  

Loss from unconsolidated joint venture

     33       51  

Net loss (income) from limited partnership interests

     211       (605

Distributions received from limited partnership interests

     1,013       128  

Foreign currency remeasurement loss

     1       35  

Other

     48       —    

Changes in operating assets and liabilities:

    

Accrued interest and dividends receivable

     (664     395  

Income taxes

     2,400       5,178  

Premiums receivable

     (221     877  

Prepaid reinsurance premiums

     10,568       14,186  

Reinsurance recoverable

     18,271       17,161  

Deferred policy acquisition costs

     1,336       1,378  

Other assets

     (1,821     948  

Losses and loss adjustment expenses

     (22,925     (49,992

Unearned premiums

     (14,429     (16,210

Advance premiums

     9,968       10,940  

Assumed reinsurance balances payable

     (10     99  

Reinsurance recovered in advance on unpaid losses

     —         (13,885

Accrued expenses and other liabilities

     631       (256
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     10,595       (14,593
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investments in limited partnership interests

     (761     (1,586

Purchase of property and equipment

     (634     (471

Purchase of real estate investments

     (9,133     (67

Purchase of fixed-maturity securities

     (69,672     (44,474

Purchase of equity securities

     (12,371     (10,309

Purchase of short-term and other investments

     (182     (55,433

Proceeds from sales of fixed-maturity securities

     2,911       77,210  

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

     41,403       6,195  

Proceeds from sales of equity securities

     27,874       24,433  

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

     35,854       —    
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     15,289       (4,502
  

 

 

   

 

 

 

 

7


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows from financing activities:

    

Cash dividends paid

     (3,313     (3,283

Cash dividends received under share repurchase forward contract

     77       285  

Proceeds from revolving credit facility

     8,000       —    

Repayment of long-term debt

     (90,318     (260

Repurchases of common stock

     (18     (211

Repurchases of common stock under share repurchase plan

     (1,338     (6,537

Purchase of non-controlling interest

     —         (539

Debt issuance costs

     (459     —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (87,369     (10,545
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (8     (34
  

 

 

   

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

     (61,493     (29,674

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

     240,158       256,693  
  

 

 

   

 

 

 

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

   $ 178,665     $ 227,019  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes

   $ 33     $ 28  
  

 

 

   

 

 

 

Cash paid for interest

   $ 5,111     $ 5,054  
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

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

   $ 1,994     $ (2,451
  

 

 

   

 

 

 

Receivable from sales of equity securities

   $ —       $ 43  
  

 

 

   

 

 

 

Payable on purchases of equity securities

   $ —       $ 633  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

8


Table of Contents

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 March 31, 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 Standard

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.

 

9


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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 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 $770 and lease liabilities of approximately $811 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. The 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.

 

10


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 2 — 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.

 

11


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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.

 

     March 31,
2019
     December 31,
2018
 

Cash and cash equivalents

   $ 177,965      $ 239,458  

Restricted cash

     700        700  
  

 

 

    

 

 

 

Total

   $ 178,665      $ 240,158  
  

 

 

    

 

 

 

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

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 March 31, 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
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair

Value
 

As of March 31, 2019

           

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

   $ 28,569      $ 24      $ (79    $ 28,514  

Corporate bonds

     162,836        1,129        (750      163,215  

State, municipalities, and political subdivisions

     10,544        155        (1      10,698  

Exchange-traded debt

     7,937        255        (11      8,181  

Redeemable preferred stock

     118        2        —          120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,004      $ 1,565      $ (841    $ 210,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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

 

     Amortized
Cost
     Estimated
Fair Value
 

As of March 31, 2019

     

Due in one year or less

   $ 34,499      $ 34,500  

Due after one year through five years

     162,684        163,160  

Due after five years through ten years

     8,265        8,328  

Due after ten years

     4,556        4,740  
  

 

 

    

 

 

 
   $ 210,004      $ 210,728  
  

 

 

    

 

 

 

 

     Amortized
Cost
     Estimated
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  
  

 

 

    

 

 

 

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the three months ended March 31, 2019 and 2018 were as follows:

 

     Proceeds      Gross
Realized
Gains
     Gross
Realized
Losses
 

Three months ended March 31, 2019

   $ 2,911      $ 34      $ (1
  

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2018

   $ 77,210      $ 1,161      $ (465
  

 

 

    

 

 

    

 

 

 

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.

 

13


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

There was no impairment loss recognized for the three months ended March 31, 2019. For the three months ended March 31, 2018, the Company recognized $40 of impairment loss on one fixed-maturity security.

Securities with gross unrealized loss positions at March 31, 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  
As of March 31, 2019    Gross
Unrealized
Loss
    Estimated
Fair

Value
     Gross
Unrealized
Loss
    Estimated
Fair

Value
     Gross
Unrealized
Loss
    Estimated
Fair
Value
 

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

   $ (2   $ 1,691      $ (77   $ 14,197      $ (79   $ 15,888  

Corporate bonds

     (1     297        (749     38,581        (750     38,878  

State, municipalities, and political subdivisions

     (1     511        —         —          (1     511  

Exchange-traded debt

     (11     1,208        —         —          (11     1,208  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ (15   $ 3,707      $ (826   $ 52,778      $ (841   $ 56,485  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At March 31, 2019, there were 44 securities in an unrealized loss position. Of these securities, 35 securities had been in an unrealized loss position for 12 months or longer.

 

                                                                                                                                   
     Less Than Twelve Months      Twelve Months or Longer      Total  
As of December 31, 2018    Gross
Unrealized
Loss
    Estimated
Fair

Value
     Gross
Unrealized
Loss
    Estimated
Fair

Value
     Gross
Unrealized
Loss
    Estimated
Fair

Value
 

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

   $ (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 available-for-sale securities

   $ (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.

 

14


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At March 31, 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:

 

     Cost      Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Estimated
Fair
Value
 

March 31, 2019

   $ 29,463      $ 1,527      $ (762    $ 30,228  

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 period related to equity securities still held.

 

     Three Months Ended
March 31,
 
     2019      2018  

Net gains (losses) recognized

   $ 4,837      $ (1,064

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

     (456      1,536  
  

 

 

    

 

 

 

Net unrealized gains (losses) recognized

   $ 5,293      $ (2,600
  

 

 

    

 

 

 

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three months ended March 31, 2019 and 2018 were as follows:

 

     Proceeds      Gross
Realized
Gains
     Gross
Realized
Losses
 

Three months ended March 31, 2019

   $ 27,874      $ 2,074      $ (2,530
  

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2018

   $ 24,433      $ 2,177      $ (641)  
  

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

c) Limited Partnership Investments

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

 

     March 31, 2019      December 31, 2018  
Investment Strategy    Carrying
Value
     Unfunded
Balance
     (%)(a)      Carrying
Value
     Unfunded
Balance
     (%)(a)  

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

   $ 10,229      $ 2,577        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)

     8,062        —          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)

     9,609        1,568        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)

     1,095        3,706        0.47        1,156        3,706        0.47  

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

     2,835        7,692        3.28        2,726        7,692        3.28  
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 31,830      $ 15,543         $ 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 and the capital commitment is expected to expire on September 3, 2019.

(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.

 

16


Table of Contents

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 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
March 31,
 
     2019      2018  

Operating results:

     

Total income

   $ (90,513    $ 157,956  

Total expenses

     (49,033      (57,744
  

 

 

    

 

 

 

Net (loss) income

   $ (139,546    $ 100,212  
  

 

 

    

 

 

 
     March 31,
2019
     December 31,
2018
 

Balance Sheet:

     

Total assets

   $ 6,626,806      $ 6,689,792  

Total liabilities

   $ 547,975      $ 394,029  

For the three months ended March 31, 2019, the Company recognized net investment loss of $211 for these investments as opposed to net investment income of $605 for the three months ended March 31, 2018. During the first quarter of 2019, the Company received total cash distributions of $1,013, representing a return on investment. During the first quarter of 2018, the Company received total cash distributions of $128, representing a return on investment. At March 31, 2019 and December 31, 2018, the Company’s cumulative contributed capital to the partnerships at each respective balance sheet date totaled $29,115 and $28,354, respectively, and the Company’s maximum exposure to loss aggregated $31,830 and $32,293, respectively.

 

17


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

d) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At March 31, 2019 and December 31, 2018, the Company’s maximum exposure to loss relating to the variable interest entity was $812 and $845, respectively, representing the carrying value of the investment. There was no cash distribution during the first quarter of 2019 nor 2018. At March 31, 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
March 31,
 
     2019      2018  

Operating results:

     

Total revenues

   $ 2      $ —    

Total expenses

     (38      (57
  

 

 

    

 

 

 

Net loss

   $ (36    $ (57
  

 

 

    

 

 

 

The Company’s share of net loss*

   $ (33    $ (51

 

*

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

 

     March 31,
2019
     December 31,
2018
 

Balance Sheet:

     

Property and equipment, net

   $ 779      $ 787  

Cash

     142        149  

Other

     —          5  
  

 

 

    

 

 

 

Total assets

   $ 921      $ 941  
  

 

 

    

 

 

 

Accounts payable

   $ 14      $ —    

Other liabilities

     5        3  

Members’ capital

     902        938  
  

 

 

    

 

 

 

Total liabilities and members’ capital

   $ 921      $ 941  
  

 

 

    

 

 

 

Investment in unconsolidated joint venture, at equity*

   $ 812      $ 845  

 

*

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

 

18


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

e) Real Estate Investments

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

 

     March 31,
2019
     December 31,
2018
 

Land

   $ 32,384      $ 23,884  

Land improvements

     8,818        8,717  

Buildings

     19,207        19,201  

Tenant and leasehold improvements

     1,323        1,261  

Other

     5,748        5,266  
  

 

 

    

 

 

 

Total, at cost

     67,480        58,329  

Less: accumulated depreciation and amortization

     (4,171      (3,839
  

 

 

    

 

 

 

Real estate investments

   $ 63,309      $ 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 $332 and $394 for the three months ended March 31, 2019 and 2018, respectively.

f) Net Investment Income

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

 

     Three Months Ended
March 31,
 
     2019      2018  

Available-for-sale fixed-maturity securities

   $ 1,535      $ 1,139  

Equity securities

     381        621  

Investment expense

     (129      (170

Limited partnership investments

     (211      605  

Real estate investments

     306        203  

Loss from unconsolidated joint venture

     (33      (51

Cash and cash equivalents

     1,076        824  

Short-term investments

     353        47  
  

 

 

    

 

 

 

Net investment income

   $ 3,278      $ 3,218  
  

 

 

    

 

 

 

 

19


Table of Contents

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 March 31, 2019  
     Before
Tax
     Income Tax
Expense
(Benefit)
     Net of
Tax
 

Unrealized gain arising during the period

   $ 2,704      $ 685      $ 2,019  

Reclassification adjustment for realized gains

     (33      (8      (25
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

   $ 2,671      $ 677      $ 1,994  
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended March 31, 2018  
     Before
Tax
     Income Tax
Expense
(Benefit)
     Net of
Tax
 

Unrealized loss arising during the period

   $ (2,628    $ (666    $ (1,962

Other-than-temporary impairment loss

     40        10        30  

Call and repayment losses charged to investment income

     1        —          1  

Reclassification adjustment for realized gains

     (696      (176      (520
  

 

 

    

 

 

    

 

 

 

Total other comprehensive loss

   $ (3,283    $ (832    $ (2,451
  

 

 

    

 

 

    

 

 

 

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.

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.

 

20


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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.

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

 

21


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Assets Measured at Estimated Fair Value on a Recurring Basis

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

 

     Fair Value Measurements Using         
     (Level 1)      (Level 2)      (Level 3)      Total  

As of March 31, 2019

                           

Financial Assets:

           

Cash and cash equivalents

   $ 177,965      $ —        $ —        $ 177,965  

Restricted cash

   $ 700      $ —        $ —        $ 700  

Short-term investments

   $ 31,075      $ —        $ —        $ 31,075  

Fixed-maturity securities:

           

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

   $ 27,014      $ 1,500      $ —        $ 28,514  

Corporate bonds

     163,215        —          —          163,215  

State, municipalities, and political subdivisions

     —          10,698        —          10,698  

Exchange-traded debt

     8,181        —          —          8,181  

Redeemable preferred stock

     120        —          —          120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 198,530      $ 12,198      $ —        $ 210,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 30,228      $ —        $ —        $ 30,228  

 

     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  

 

22


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Assets and Liabilities Carried at Other Than Fair Value

The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of March 31, 2019 and December 31, 2018:

 

     Carrying      Fair Value Measurements Using      Estimated  
     Value      (Level 1)      (Level 2)      (Level 3)      Fair Value  

As of March 31, 2019

                                  

Financial Assets:

              

Limited partnership investments

   $ 31,830      $ —        $ —        $ 31,830      $ 31,830  

Financial Liabilities:

              

Revolving credit facility

   $ 8,000      $ 8,000      $ —        $ —        $ 8,000  

Long-term debt:

              

4.25% Convertible senior notes

   $ 131,081      $ —        $ 142,313      $ —        $ 142,313  

3.95% Promissory note

     9,026        —          —          9,073        9,073  

4% Promissory note

     7,610        —          —          7,515        7,515  

3.75% Callable promissory note

     8,080        —          —          7,588        7,588  

4.55% Promissory note

     5,773        —          —          5,679        5,679  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 161,570      $ —        $ 142,313      $ 29,855      $ 172,168  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 7 — Other Assets

The following table summarizes the Company’s other assets.

 

     March 31,
2019
     December 31,
2018
 

Benefits receivable related to retrospective reinsurance contracts

   $ 3,414      $ 3,136  

Prepaid expenses

     1,958        2,069  

Deposits

     2,558        1,413  

Lease acquisition costs, net

     595        620  

Right-of-use assets – operating leases

     700        —    

Other

     1,973        1,766  
  

 

 

    

 

 

 

Total other assets

   $ 11,198      $ 9,004  
  

 

 

    

 

 

 

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. For the three months ended March 31, 2019, interest expense, including amortization of issuance costs of $39, was $69. At March 31, 2019, the Company was in compliance with all required covenants, and there were $8,000 of borrowings outstanding.

Note 9 — Long-Term Debt

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

 

     March 31,
2019
     December 31,
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

     9,064        9,125  

4% Promissory note, due through February 1, 2031

     7,730        7,857  

3.75% Promissory note, due through September 1, 2036

     8,207        8,290  

4.55% Promissory note, due through August 1, 2036

     5,873        5,928  

Finance lease liability, due through August 15, 2023

     53        55  
  

 

 

    

 

 

 

Total principal amount

     174,677        264,995  

Less: unamortized discount and issuance costs

     (13,054      (14,845
  

 

 

    

 

 

 

Total long-term debt

   $ 161,623      $ 250,150  
  

 

 

    

 

 

 

 

24


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

The following table summarizes future maturities of long-term debt as of March 31, 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 March 31,

  

2019

   $ 10,156  

2020

     1,137  

2021

     144,934  

2022

     1,233  

2023

     1,277  

Thereafter

     15,940  
  

 

 

 

Total

   $ 174,677  
  

 

 

 

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

 

     Three Months Ended
March 31,
 
     2019      2018  

Interest Expense:

     

Contractual interest

   $ 2,557      $ 2,654  

Non-cash expense (a)

     1,790        1,816  

Capitalized interest (b)

     (79      —    
  

 

 

    

 

 

 
   $ 4,268      $ 4,470  
  

 

 

    

 

 

 

 

(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 March 31, 2019, the conversion rate of the Company’s 4.25% Convertible Notes was 16.3086 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.32 per share.

As of March 31, 2019, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 2.9 years.

 

25


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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 agreements. The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.

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

 

     Three Months Ended
March 31,
 
     2019      2018  

Premiums Written:

     

Direct

   $ 67,612      $ 70,225  

Assumed

     (2      (78
  

 

 

    

 

 

 

Gross written

     67,610        70,147  

Ceded

     (31,413      (32,250
  

 

 

    

 

 

 

Net premiums written

   $ 36,197      $ 37,897  
  

 

 

    

 

 

 

Premiums Earned:

     

Direct

   $ 82,599      $ 84,829  

Assumed

     (2      943  
  

 

 

    

 

 

 

Gross earned

     82,597        85,772  

Ceded

     (31,413      (32,250
  

 

 

    

 

 

 

Net premiums earned

   $ 51,184      $ 53,522  
  

 

 

    

 

 

 

During the three months ended March 31, 2019 and 2018, ceded losses of $0 and $205, respectively, were recognized as a reduction in losses and loss adjustment expenses. At March 31, 2019 and December 31, 2018, there were 38 reinsurers participating in the Company’s reinsurance program. Amounts receivable with respect to reinsurers at March 31, 2019 and December 31, 2018 were $105,640 and $123,911, respectively. Approximately 33.8% of the reinsurance recoverable balance at March 31, 2019 was concentrated in three 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 March 31, 2019.

Certain of the reinsurance contracts include retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three months ended March 31, 2019, the Company recognized a reduction in premiums ceded of $512 related to these adjustments. In contrast, these adjustments were reflected in the consolidated statement of income as a net increase in premiums ceded of $337 for the three months ended March 31, 2018, of which $48 was attributable to the Company’s contract with Oxbridge Reinsurance Limited, a related party.

 

26


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

In addition, adjustments related to retrospective provisions are reflected in other assets. At March 31, 2019 and December 31, 2018, other assets included $3,414 and $3,136, 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.

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 writes insurance primarily 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. 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
March 31,
 
     2019      2018  

Net balance, beginning of period*

   $ 94,826      $ 97,818  

Incurred, net of reinsurance, related to:

     

Current period

     24,321        19,490  

Prior period

     2,675        165  
  

 

 

    

 

 

 

Total incurred, net of reinsurance

     26,996        19,655  
  

 

 

    

 

 

 

Paid, net of reinsurance, related to:

     

Current period

     (19,439      (4,447

Prior period

     (3,930      (21,623
  

 

 

    

 

 

 

Total paid, net of reinsurance

     (23,369      (26,070
  

 

 

    

 

 

 

Net balance, end of period

     98,453        91,403  

Add: reinsurance recoverable

     86,208        57,183  
  

 

 

    

 

 

 

Gross balance, end of period

   $ 184,661      $ 148,586  
  

 

 

    

 

 

 

 

*

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 months ended March 31, 2019, the Company recognized losses related to prior periods of $2,675 which primarily pertains to $1,657 of unfavorable development in the 2018 loss year resulting from litigation and adverse development of approximately $810 related to Hurricane Matthew. Losses for the 2019 loss year included estimated losses of $5,000 related to one severe storm event during the quarter.

 

27


Table of Contents

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 March 31, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 94.5% and 94.8%, respectively, of total revenues of all operating segments. At March 31, 2019 and December 31, 2018, insurance operations’ total assets represented 84.2% and 85.9%, 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.

 

28


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Three Months Ended March 31, 2019    Insurance
Operations
     Real
Estate(a)
     Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

            

Net premiums earned

   $ 51,184      $ —        $ —       $ —       $ 51,184  

Net investment income

     2,628        —          507       143       3,278  

Net realized investment gains (losses)

     198        —          (570     —         (372

Net unrealized investment gains

     4,310        —          983       —         5,293  

Policy fee income

     795        —          —         —         795  

Other

     176        2,312        1,551       (3,583     456  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     59,291        2,312        2,471       (3,440     60,634  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

            

Losses and loss adjustment expenses

     26,996        —          —         —         26,996  

Amortization of deferred policy acquisition costs

     8,656        —          —         —         8,656  

Interest expense

     1        383        4,083       (130     4,337  

Depreciation and amortization

     27        583        268       (484     394  

Other

     7,090        1,108        5,596       (2,826     10,968  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     42,770        2,074        9,947       (3,440     51,351  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 16,521      $ 238      $ (7,476   $ —       $ 9,283  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 59,291      $ 1,903      $ 2,060      

 

(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.

 

29


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Three Months Ended March 31, 2018    Insurance
Operations
    Real
Estate(a)
     Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

           

Net premiums earned

   $ 53,522     $ —        $ —       $ —       $ 53,522  

Net investment income

     2,357       1        827       33       3,218  

Net realized investment gains

     2,205       —          27       —         2,232  

Net unrealized investment losses

     (2,411     —          (189     —         (2,600

Net other-than-temporary impairment losses

     —         —          (40     —         (40

Policy fee income

     865       —          —         —         865  

Other

     199       2,302        1,278       (3,237     542  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     56,737       2,303        1,903       (3,204     57,739  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

           

Losses and loss adjustment expenses

     19,655       —          —         —         19,655  

Amortization of deferred policy acquisition costs

     8,814       —          —         —         8,814  

Interest expense

     —         392        4,197       (119     4,470  

Depreciation and amortization

     34       590        259       (545     338  

Other

     6,305       1,121        4,772       (2,540     9,658  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     34,808       2,103        9,228       (3,204     42,935  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 21,929     $ 200      $ (7,325   $ —       $ 14,804  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 56,737     $ 1,920      $ 1,620      

 

(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.

 

30


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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

 

     March 31,
2019
     December 31,
2018
 

Segment:

     

Insurance Operations

   $ 586,887      $ 615,983  

Real Estate Operations

     92,597        83,828  

Corporate and Other

     71,102        146,651  

Consolidation and Elimination

     (17,179      (13,599
  

 

 

    

 

 

 

Total assets

   $ 733,407      $ 832,863  
  

 

 

    

 

 

 

Note 13 — Leases

At March 31, 2019, the Company had operating leases’ ROU assets and corresponding liabilities of $700 and $742, respectively. In addition, the Company has one finance lease with a ROU asset of $61 and a corresponding lease liability of $53 at March 31, 2019. The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:

 

Class of Assets

   Initial Term    Renewal
Option
   Other Terms and
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

   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 March 31, 2019, maturities of lease liabilities were as follows:

 

     Leases  
     Operating      Finance  

Due in 12 months following March 31,

     

2019

   $ 334      $ 13  

2020

     329        13  

2021

     135        13  

2022

     12        13  

2023

     —          6  
  

 

 

    

 

 

 

Total lease payments

     810        58  

Less: interest and foreign taxes

     68        5  
  

 

 

    

 

 

 

Total lease obligations

   $ 742      $ 53  
  

 

 

    

 

 

 

 

31


Table of Contents

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 for the three months ended March 31, 2019.

 

     Three Months Ended
March 31, 2019
 

Lease costs:

  

Finance lease costs:

  

Amortization – ROU assets*

   $ 3  

Interest expense

     1  

Operating lease costs*

     81  

Short-term lease costs*

     45  
  

 

 

 

Total lease costs

   $ 130  
  

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows – finance leases

   $ 1  

Operating cash flows – operating leases

   $ 78  

Financing cash flows – finance leases

   $ 2  

Weighted-average remaining lease term:

  

Finance leases (in years)

     3.3  

Operating leases (in years)

     2.4  

Weighted-average discount rate:

  

Finance leases

     3.8

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:

 

Class of Assets

  

Initial Term

   Renewal
Option
     Other Terms and
Conditions
 

Operating lease:

        

Office space

   1 to 3 years      Yes        (e)  

Retail space

   3 to 20 years      Yes        (e)  

Boat docks/wet slips

   1 to 12 months      Yes        (e)  

 

(e)

There are no purchase options.

Note 14 — Income Taxes

During the three months ended March 31, 2019 and 2018, the Company recorded approximately $2,545 and $4,013, respectively, of income taxes, which resulted in effective tax rates of 27.4% and 27.1%, respectively. 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.

 

32


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 15 — 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
March 31, 2019
     Three Months Ended
March 31, 2018
 
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Net income

   $ 6,738           $ 10,791       

Less: Income attributable to participating securities

     (408           (701     
  

 

 

         

 

 

      

Basic Earnings Per Share:

               

Income allocated to common stockholders

     6,330       7,736      $ 0.82        10,090       8,082      $ 1.25  
       

 

 

         

 

 

 

Effect of Dilutive Securities:

               

Stock options

     —         19           —         17     

Convertible senior notes*

     —         —             3,133       3,799     
  

 

 

   

 

 

       

 

 

   

 

 

    

Diluted Earnings Per Share:

               

Income available to common stockholders and assumed conversions

   $ 6,330       7,755      $ 0.82      $ 13,223       11,898      $ 1.11  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

*

For the three months ended March 31, 2019, convertible senior notes were excluded due to anti-dilutive effect.

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 March 31, 2019, the Company repurchased and retired a total of 31,789 shares at a weighted average price per share of $42.06 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended March 31, 2019 was $1,338, or $42.09 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 March 31, 2018, the Company repurchased and retired a total of 184,571 shares at a weighted average price per share of $35.39 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended March 31, 2018 was $6,537, or $35.42 per share.

 

33


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

On January 14, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on March 15, 2019 to stockholders of record on February 15, 2019.

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 March 31, 2019, there were 1,607,113 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 months ended March 31, 2019 and 2018 is as follows (option amounts not in thousands):

 

     Number of
Options
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 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  
  

 

 

          

Exercisable at March 31, 2019

     102,500      $ 33.42        7.0 years      $ 954  
  

 

 

          

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  
  

 

 

          

Exercisable at March 31, 2018

     47,500      $ 25.81        6.5 years      $ 637  
  

 

 

          

There were no options exercised during the three months ended March 31, 2019 and 2018. For the three months ended March 31, 2019 and 2018, the Company recognized $205 and $110, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options for each of the three months ended March 31, 2019 and 2018 were $19. At March 31, 2019 and December 31, 2018, there was $2,500 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 3.1 years.

 

34


Table of Contents

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:

 

     Three Months Ended
March 31,
 
     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.

Information with respect to the activity of unvested restricted stock awards during the three months ended March 31, 2019 and 2018 is as follows:

 

     Number of
Restricted
Stock
Awards
     Weighted
Average
Grant Date
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  
  

 

 

    

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  
  

 

 

    

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $1,254 and $762 for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019 and December 31, 2018, there was approximately $11,662 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 2.6 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 months ended March 31, 2019 and 2018.

 

35


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

     Three Months Ended
March 31,
 
     2019      2018  

Deferred tax benefits recognized

   $ 246      $ 156  

Tax benefits realized for restricted stock and paid dividends

   $ 61      $ 196  

Fair value of vested restricted stock

   $ 801      $ 1,294  

Certain of the Company’s restricted stock awards granted to employee and nonemployee directors have market based vesting conditions that will not be met prior to their expiry dates in May and November 2019. Any dividend payment associated with these awards was expensed when declared. As a result, for the three months ended March 31, 2019, the Company recognized dividends of $114 related to these awards in general and administrative personnel expenses for $85 and in other operating expenses for $29. There was no such recognition during the three months ended March 31, 2018.

Note 18 — Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contract

As of March 31, 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 table below presents the future minimum aggregate premium amounts payable to the reinsurer.

 

Due in 12 months following March 31,

  

2019*

   $ 3,668  

2020*

     917  
  

 

 

 

Total

   $ 4,585  
  

 

 

 

 

*

Premiums payable after June 30, 2019 under one contract are estimated.

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 March 31, 2019, there was an aggregate unfunded balance of $15,543.

Note 19 — Subsequent Events

On April 8, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on June 21, 2019 to stockholders of record on May 17, 2019.

 

36


Table of Contents
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 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:

 

  a)

Insurance Operations

 

   

Property and casualty insurance

 

   

Reinsurance

 

  b)

Real Estate Operations

 

  c)

Other Operations

 

   

Information technology

 

   

Other auxiliary operations

 

37


Table of Contents

For the three months ended March 31, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 94.5% and 94.8%, respectively, of total revenues of all operating segments. At March 31, 2019 and December 31, 2018, insurance operations’ total assets represented 84.2% and 85.9%, respectively, of the combined assets of all operating segments. See Note 11 — “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Insurance Operations

Property and Casualty Insurance

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.

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 recently acquired. 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 TypTapTM, SAMSTM, Harmony, CasaClueTM, Exzeo®, and Atlas ViewerTM.

Recent Events

On April 8, 2019, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on June 21, 2019 to stockholders of record on May 17, 2019.

 

38


Table of Contents

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018 (dollar amounts in thousands, except per share amounts):

 

     Three Months Ended
March 31,
 
     2019     2018  

Operating Revenue

    

Gross premiums earned

   $ 82,597     $ 85,772  

Premiums ceded

     (31,413     (32,250
  

 

 

   

 

 

 

Net premiums earned

     51,184       53,522  

Net investment income

     3,278       3,218  

Net realized investment (losses) gains

     (372     2,232  

Net unrealized investment gains (losses)

     5,293       (2,600

Net other-than-temporary impairment losses

     —         (40

Policy fee income

     795       865  

Other income

     456       542  
  

 

 

   

 

 

 

Total revenue

     60,634       57,739  
  

 

 

   

 

 

 

Operating Expenses

    

Losses and loss adjustment expenses

     26,996       19,655  

Policy acquisition and other underwriting expenses

     9,673       9,360  

General and administrative personnel expenses

     7,364       6,283  

Interest expense

     4,337       4,470  

Other operating expenses

     2,981       3,167  
  

 

 

   

 

 

 

Total operating expenses

     51,351       42,935  
  

 

 

   

 

 

 

Income before income taxes

     9,283       14,804  

Income tax expense

     2,545       4,013  
  

 

 

   

 

 

 

Net income

   $ 6,738     $ 10,791  
  

 

 

   

 

 

 

Ratios to Net Premiums Earned:

    

Loss Ratio

     52.74     36.72

Expense Ratio

     47.58     43.50
  

 

 

   

 

 

 

Combined Ratio

     100.32     80.22
  

 

 

   

 

 

 

Ratios to Gross Premiums Earned:

    

Loss Ratio

     32.68     22.92

Expense Ratio

     29.49     27.14
  

 

 

   

 

 

 

Combined Ratio

     62.17     50.06
  

 

 

   

 

 

 

Earnings Per Share Data:

    

Basic

   $ 0.82     $ 1.25  
  

 

 

   

 

 

 

Diluted

   $ 0.82     $ 1.11  
  

 

 

   

 

 

 

 

39


Table of Contents

Comparison of the Three Months ended March 31, 2019 to the Three Months ended March 31, 2018

Our results of operations for the three months ended March 31, 2019 reflect income available to common stockholders of approximately $6,738,000, or $0.82 earnings per diluted common share, compared with approximately $10,791,000, or $1.11 earnings per diluted common share, for the three months ended March 31, 2018. The quarter-over-quarter decrease was primarily due to a $7,341,000 increase in losses and loss adjustment expenses and a $2,338,000 decrease in net premiums earned, offset by a net $5,349,000 increase in income from investment activities.

Revenue

Gross Premiums Earned for the three months ended March 31, 2019 and 2018 were approximately $82,597,000 and $85,772,000, respectively. The decrease in 2019 compared with the first quarter of the prior year was primarily attributable to a net decrease in policies in force.

Premiums Ceded for the three months ended March 31, 2019 and 2018 were approximately $31,413,000 and $32,250,000, respectively, representing 38.0% and 37.6%, respectively, of gross premiums earned. The $837,000 decrease in 2019 was primarily attributable to an adjustment related to retrospective provisions.

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 March 31, 2019, premiums ceded reflected a reduction of approximately $512,000 related to retrospective provisions. For the three months ended March 31, 2018, premiums ceded included a net increase of approximately $337,000. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended March 31, 2019 and 2018 totaled approximately $36,197,000 and $37,897,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The $1,700,000 decrease in 2019 resulted from a decrease in gross premiums written during the period due to a net decrease in policies in force, offset by the decrease in premiums ceded as described above. We had approximately 125,000 policies in force at March 31, 2019 as compared with approximately 136,000 policies in force at March 31, 2018.

Net Premiums Earned for the three months ended March 31, 2019 and 2018 were approximately $51,184,000 and $53,522,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

 

40


Table of Contents

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended March 31, 2019 and 2018 (amounts in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Net Premiums Written

   $ 36,197      $ 37,897  

Decrease in Unearned Premiums

     14,987        15,625  
  

 

 

    

 

 

 

Net Premiums Earned

   $ 51,184      $ 53,522  
  

 

 

    

 

 

 

Net Realized Investment Losses for the three months ended March 31, 2019 were approximately $372,000 versus net realized investment gains of approximately $2,232,000 for the three months ended March 31, 2018. During the first quarter of 2019, we decreased our holdings in equity securities to minimize the impact from equity market volatility. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the impact from the 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 three months ended March 31, 2019 were approximately $5,293,000 versus approximately $2,600,000 of net unrealized investment losses for the three months ended March 31, 2018, reflecting a net favorable change in the fair value of equity securities.

Expenses

Our Losses and Loss Adjustment Expenses amounted to approximately $26,996,000 and $19,655,000 for the three months ended March 31, 2019 and 2018, respectively. During the first quarter of 2019, our losses and loss adjustment expenses included losses of approximately $1,717,000 resulting from litigation arising from non-catastrophic claims in 2018, approximately $810,000 attributable to Hurricane Matthew, and approximately $5,000,000 related to a severe storm event in March 2019. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

General and Administrative Personnel Expenses for the three months ended March 31, 2019 and 2018 were approximately $7,364,000 and $6,283,000, 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 quarter-over-quarter increase of $1,081,000 was primarily attributable to merit increases for non-executive employees effective in late March 2018, an increase in headcount, and higher share-based compensation expense.

Income Tax Expense for the three months ended March 31, 2019 and 2018 was approximately $2,545,000 and $4,013,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 27.4% for 2019 and 27.1% for 2018.

 

41


Table of Contents

Ratios:

The loss ratio applicable to the three months ended March 31, 2019 (losses and loss adjustment expenses incurred related to net premiums earned) was 52.7% compared with 36.7% for the three months ended March 31, 2018. The increase was primarily due to the increase in losses and loss adjustment expenses as described previously combined with a decrease in net premiums earned.

The expense ratio applicable to the three months ended March 31, 2019 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 47.6% compared with 43.5% for the three months ended March 31, 2018. The increase in our expense ratio was primarily attributable to the decrease in net premiums earned.

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 March 31, 2019 was 100.3% compared with 80.2% for the three months ended March 31, 2018. The increase was primarily attributable to the increase in losses and loss adjustment expenses and the decrease in net premiums earned.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the three months ended March 31, 2019 was 62.2% compared with 50.1% for the three months ended March 31, 2018. The increase in 2019 was attributable to the factors described above.

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.

 

42


Table of Contents

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. Recently, 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 $57,000,000 at March 31, 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 and developments.

Revolving Credit Facility, Senior Notes, and Promissory Notes

The following table summarizes the principal and interest payment obligations of our indebtedness at March 31, 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    1st day of each month
3.75% Callable Promissory Note    Through September 2036    1st day of each month
3.95% Promissory Note    Through February 2020    17th of each month
4.55% Promissory Note    Through August 2036    1st day of each month
Finance Lease    Through August 2023    February 15, May 15, August 15, November 15
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.

 

43


Table of Contents

Limited Partnership Investments

Our limited partnership investments consist of four private equity funds managed by their general partners. These funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. At March 31, 2019, there was an aggregate unfunded capital balance of $15,543,000. 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 March 31, 2019, there was approximately $18,663,000 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 Three months ended March 31, 2019

Net cash provided by operating activities for the three months ended March 31, 2019 was approximately $10,595,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $18,270,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $15,289,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $30,785,000, the proceeds from redemptions and maturities of fixed-maturity securities of $41,403,000, and the proceeds from sales and maturities of short-term and other investments of $35,854,000, offset by the purchases of fixed-maturity and equity securities of $82,043,000, the purchase of real estate investments of $9,133,000, and limited partnership investments of $761,000. Net cash used in financing activities totaled $87,369,000, which was primarily due to the repayments of long-term debt of $90,318,000, $3,236,000 of net cash dividend payments, and $1,356,000 used in our share repurchases, offset by $8,000,000 of borrowings from revolving credit facility.

Cash Flows for the Three months ended March 31, 2018

Net cash used in operating activities for the three months ended March 31, 2018 was approximately $14,593,000, which consisted primarily of cash received from net premiums written less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $4,502,000 was primarily due to the purchases of fixed-maturity and equity securities of $54,783,000, the purchases of short-term investments of $55,433,000, and the limited partnership investments of $1,586,000, offset by the proceeds from sales of fixed-maturity and equity securities of $101,643,000, and the proceeds from redemptions and maturities of fixed-maturity securities of $6,195,000. Net cash used in financing activities totaled $10,545,000, which was primarily due to $6,748,000 used in our share repurchases and $2,998,000 of net cash dividend payments.

 

44


Table of Contents

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 March 31, 2019, we had $240,956,000 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 March 31, 2019, we had unexpired capital commitments for four 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.

 

45


Table of Contents

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of March 31, 2019 (amounts in thousands):

 

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

Operating leases (1)

   $ 810        334        465        11        —    

Service agreement (1)

     71        25        46        —          —    

Reinsurance contracts (2)

     4,585        3,668        917        —          —    

Unfunded capital commitments (3)

     15,543        15,543        —          —          —    

Revolving credit facility

     8,000        8,000        —          —          —    

Long-term debt obligations (4)

     200,982        17,463        159,886        3,911        19,722  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 229,991        45,033        161,314        3,922        19,722  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 March 31, 2019 exchange rate.

(2)

Represents the minimum payment of reinsurance premiums under one multi-year reinsurance contract. Reinsurance premiums payable after June 30, 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.

 

46


Table of Contents

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 March 31, 2019, $140,544,000 of the total $184,661,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $44,117,000 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 March 31, 2019, $40,700,000 of the $44,117,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $207,586,000 at December 31, 2018 to $184,661,000 at March 31, 2019. The $22,925,000 decrease is comprised of reductions in our Reserves of $10,861,000 for 2018 and $32,454,000 for 2017 and prior loss years offset by $20,390,000 in reserves established for claims occurring in the 2019 loss year. The $20,390,000 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 March 31, 2019. The decrease of $43,315,000 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 March 31, 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 or increase the amount of future coverage in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience gives rise to an increase in future coverage or obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

For the three months ended March 31, 2019 and 2018, we accrued benefits of $278,000 and $429,000, respectively. For the three months ended March 31, 2019, we recognized a decrease in ceded premiums of $234,000 in contrast to an increase in ceded premiums of $766,000 for the three months ended March 31, 2018. In combination, for the three months ended March 31, 2019, we recognized a reduction in ceded premiums of $512,000 as opposed to a net increase in ceded premiums of $337,000 for the three months ended March 31, 2018. As of March 31, 2019, we had $3,414,000 of accrued

 

47


Table of Contents

benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limits provided under such agreements and in the period that the increased coverage is applicable, respectively. At December 31, 2018, we had $3,136,000 of accrued benefits related to these agreements.

We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the 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 three months ended March 31, 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.

 

48


Table of Contents

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolios at March 31, 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 March 31, 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

   $ 197,556      $ (13,172      (6.25 )% 

200 basis point increase

     201,945        (8,783      (4.17 )% 

100 basis point increase

     206,336        (4,392      (2.08 )% 

100 basis point decrease

     215,123        4,395        2.09

200 basis point decrease

     219,508        8,780        4.17

300 basis point decrease

     222,726        11,998        5.69

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.

 

49


Table of Contents

The following table presents the composition of our fixed-maturity securities, by rating, at March 31, 2019 (amounts in thousands):

 

Comparable Rating

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

AA+, AA, AA-

   $ 48,432        23.1      $ 48,403        23.0  

A+, A, A-

     120,212        57.2        120,466        57.2  

BBB+, BBB, BBB-

     30,447        14.5        30,843        14.6  

BB+, BB, BB-

     4,927        2.3        5,055        2.4  

CCC+, CC and Not rated

     5,986        2.9        5,961        2.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,004        100.0      $ 210,728        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Price Risk

Our equity investment portfolio at March 31, 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 March 31, 2019 (amounts in thousands):

 

     Estimated
Fair Value
     % of
Total
Estimated
Fair Value
 

Stocks by sector:

     

Financial

   $ 13,465        45  

Consumer

     3,207        11  

Energy

     2,471        8  

Industrial

     2,164        7  

Technology

     1,442        5  

Other (1)

     1,201        3  
  

 

 

    

 

 

 
     23,950        79  
  

 

 

    

 

 

 

Mutual funds and exchange traded funds by type:

     

Debt

     4,310        14  

Equity

     1,968        7  
  

 

 

    

 

 

 

Total

   $ 30,228        100  
  

 

 

    

 

 

 

 

(1)

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At March 31, 2019, we did not have any material exposure to foreign currency related risk.

 

50


Table of Contents

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 March 31, 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.

 

51


Table of Contents

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.

 

52


Table of Contents

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 March 31, 2019 under the repurchase plan approved by our Board of Directors in December 2018 and also the number of shares of common stock surrendered by employees to satisfy their minimum federal income tax liability associated with the vesting of restricted shares in February 2019 (dollar amounts in thousands, except share and per share amounts):

 

For the Month Ended

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

or Programs (a)
 

January 31, 2019

     —        $ —          —        $ 20,000  

February 28, 2019

     371      $ 47.95        —        $ 20,000  

March 31, 2019

     31,789      $ 42.06        31,789      $ 18,663  
  

 

 

       

 

 

    
     32,160      $ 42.13        31,789     
  

 

 

       

 

 

    

 

(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

 

53


Table of Contents

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 quarter ended March 31, 2019, our insurance subsidiaries paid dividends of $20,000,000 to HCI.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

None.

 

54


Table of Contents

ITEM 6 – EXHIBITS

The following documents are filed as part of this report:

 

EXHIBIT
NUMBER
   DESCRIPTION

  3.1

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

  3.1.1

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

  3.2

   Bylaws. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.

  4.1

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

  4.8

   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.

 

55


Table of Contents

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.

 

56


Table of Contents

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.

 

57


Table of Contents

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.

10.34**

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

10.35**

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

10.36**

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

10.37**

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

10.38**

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

10.39**

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

10.53**

   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

 

58


Table of Contents

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.

10.90**

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

10.91**

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

10.92**

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

10.93**

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

 

59


Table of Contents

10.94**

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

10.95**

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

10.97**

   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

 

60


Table of Contents

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.

 

61


Table of Contents

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.

May 3, 2019     By:  

/s/ Paresh Patel

      Paresh Patel
      Chief Executive Officer
      (Principal Executive Officer)
May 3, 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.

 

62