HCI Group, Inc. 10-Q

Item 1 – Financial Statements HCI GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar amounts in thousands) June 30, December 31, 2020 2019 (Unaudited) Assets Fixed-maturity securities, available for sale, at fair value (amortized cost: $ 98,669 and $ 199,954 , respectively and allowance for credit losses: $ 526 and $ 0 , respectively) $ 99,993 $ 202,839 Equity securities, at fair value (cost: $ 37,808 and $ 31,863 , respectively) 39,309 35,285 Short-term investments, at fair value — 491 Limited partnership investments 26,177 28,346 Investment in unconsolidated joint venture, at equity 734 762 Assets held for sale 4,519 — Real estate investments 70,908 73,763 Total investments 241,640 341,486 Cash and cash equivalents 422,464 229,218 Restricted cash 700 700 Accrued interest and dividends receivable 913 1,616 Income taxes receivable 3,150 1,040 Premiums receivable 27,925 20,255 Prepaid reinsurance premiums 27,150 17,983 Reinsurance recoverable, net of allowance for credit losses: Paid losses and loss adjustment expenses (allowance: $ 0 and $ 0 , respectively) 12,397 16,155 Unpaid losses and loss adjustment expenses (allowance: $ 104 and $ 0 , respectively) 87,929 116,523 Deferred policy acquisition costs 29,190 21,663 Property and equipment, net 19,085 14,698 Intangible assets, net 3,877 4,192 Other assets 11,965 17,080 Total assets $ 888,385 $ 802,609 (continued) 1 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets - continued (Dollar amounts in thousands) June 30, December 31, 2020 2019 (Unaudited) Liabilities and Stockholders’ Equity Losses and loss adjustment expenses $ 211,162 $ 214,697 Unearned premiums 229,234 181,163 Advance premiums 19,208 5,589 Assumed reinsurance balances payable 79 76 Accrued expenses 12,457 10,059 Deferred income taxes, net 5,282 4,008 Revolving credit facility 23,750 9,750 Long-term debt 161,839 163,695 Other liabilities 40,289 28,029 Total liabilities 703,300 617,066 Commitments and contingencies (Note 21) Stockholders' equity: 7% Series A cumulative convertible preferred stock ( no par value, none and 1,500,000 shares authorized at June 30, 2020 and December 31, 2019, respectively, no shares issued or outstanding) — — Series B junior participating preferred stock ( no par value, none and 400,000 shares authorized at June 30, 2020 and December 31, 2019, respectively, no shares issued or outstanding) — — Preferred stock ( no par value, 20,000,000 and 18,100,000 shares authorized at June 30, 2020 and December 31, 2019, respectively, no shares issued or outstanding) — — Common stock ( no par value, 40,000,000 shares authorized, 7,794,048 and 7,764,564 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively) — — Additional paid-in capital — — Retained income 183,689 183,365 Accumulated other comprehensive income, net of taxes 1,396 2,178 Total stockholders’ equity 185,085 185,543 Total liabilities and stockholders’ equity $ 888,385 $ 802,609 See accompanying Notes to Consolidated Financial Statements 2 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (Dollar amounts in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue Gross premiums earned $ 107,803 $ 83,315 $ 200,168 $ 165,912 Premiums ceded ( 34,354 ) ( 31,317 ) ( 65,073 ) ( 62,730 ) Net premiums earned 73,449 51,998 135,095 103,182 Net investment income 1,604 4,226 1,412 7,504 Net realized investment gains (losses) 1,435 ( 133 ) ( 809 ) ( 505 ) Net unrealized investment gains (losses) 2,884 1,326 ( 1,921 ) 6,619 Credit losses on investments ( 87 ) — ( 526 ) — Policy fee income 847 800 1,676 1,595 Other 585 413 1,170 869 Total revenue 80,717 58,630 136,097 119,264 Expenses Losses and loss adjustment expenses 39,843 24,293 67,921 51,289 Policy acquisition and other underwriting expenses 12,991 10,077 24,817 19,750 General and administrative personnel expenses 9,731 7,998 18,098 15,362 Interest expense 3,020 2,884 5,990 7,221 Loss on repurchases of convertible senior notes 150 — 150 — Other operating expenses 3,159 3,063 6,641 6,044 Total expenses 68,894 48,315 123,617 99,666 Income before income taxes 11,823 10,315 12,480 19,598 Income tax expense 2,887 2,762 2,997 5,307 Net income $ 8,936 $ 7,553 $ 9,483 $ 14,291 Basic earnings per share $ 1.16 $ 0.93 $ 1.23 $ 1.75 Diluted earnings per share $ 1.08 $ 0.90 $ 1.23 $ 1.72 See accompanying Notes to Consolidated Financial Statements. 3 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) (Amounts in thousands) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income $ 8,936 $ 7,553 $ 9,483 $ 14,291 Other comprehensive income (loss): Change in unrealized gain (loss) on investments: Net unrealized gains (losses) arising during the period 3,280 1,626 ( 191 ) 4,330 Credit losses charged to income 87 — 526 — Call and repayment (gains) losses charged to investment income ( 150 ) 1 ( 216 ) 1 Reclassification adjustment for net realized gains ( 1,427 ) — ( 1,154 ) ( 33 ) Net change in unrealized gains (losses) 1,790 1,627 ( 1,035 ) 4,298 Deferred income taxes on above change ( 440 ) ( 413 ) 253 ( 1,090 ) Total other comprehensive income (loss), net of income taxes 1,350 1,214 ( 782 ) 3,208 Comprehensive income $ 10,286 $ 8,767 $ 8,701 $ 17,499 See accompanying Notes to Consolidated Financial Statements. 4 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Three Months Ended June 30, 2020 (Unaudited) (Dollar amounts in thousands, except per share amount) Common Stock Additional Paid-In Retained Accumulated Other Comprehensive Income, Total Stockholders’ Shares Amount Capital Income Net of Tax Equity Balance at March 31, 2020 7,735,204 $ — $ — $ 179,210 $ 46 $ 179,256 Net income — — — 8,936 — 8,936 Total other comprehensive income, net of income taxes — — — — 1,350 1,350 Issuance of restricted stock 145,000 — — — — — Forfeiture of restricted stock ( 5,220 ) — — — — — Repurchase and retirement of common stock ( 29,102 ) — ( 1,309 ) — — ( 1,309 ) Repurchase and retirement of common stock under share repurchase plan ( 51,834 ) — ( 2,100 ) — — ( 2,100 ) Common stock dividends ($ 0.40 per share) — — — ( 3,067 ) — ( 3,067 ) Stock-based compensation — — 2,019 — — 2,019 Additional paid-in capital shortfall allocated to retained income — — 1,390 ( 1,390 ) — — Balance at June 30, 2020 7,794,048 $ — $ — $ 183,689 $ 1,396 $ 185,085 See accompanying Notes to Consolidated Financial Statements. 5 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Three Months Ended June 30, 2019 (Unaudited) (Dollar amounts in thousands, except per share amount) Common Stock Additional Paid-In Retained Accumulated Other Comprehensive Income, Total Stockholders’ Shares Amount Capital Income Net of Tax Equity Balance at March 31, 2019 8,359,889 $ — $ 103 $ 186,396 $ 541 $ 187,040 Net income — — — 7,553 — 7,553 Total other comprehensive income, net of income taxes — — — — 1,214 1,214 Exercise of common stock options 10,000 — 63 — — 63 Issuance of restricted stock 133,160 — — — — — Forfeiture of restricted stock ( 264,211 ) — — — — — Repurchase and retirement of common stock ( 24,478 ) — ( 1,005 ) — — ( 1,005 ) Repurchase and retirement of common stock under share repurchase plan ( 160,787 ) — ( 6,668 ) — — ( 6,668 ) Common stock dividends ($ 0.40 per share) — — — ( 3,192 ) — ( 3,192 ) Stock-based compensation — — 1,489 — — 1,489 Additional paid-in capital shortfall allocated to retained income — — 6,018 ( 6,018 ) — — Balance at June 30, 2019 8,053,573 $ — $ — $ 184,739 $ 1,755 $ 186,494 See accompanying Notes to Consolidated Financial Statements. 6 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Six Months Ended June 30, 2020 (Unaudited) (Dollar amounts in thousands, except per share amount) Common Stock Additional Paid-In Retained Accumulated Other Comprehensive (Loss) Income, Total Stockholders’ Shares Amount Capital Income Net of Tax Equity Balance at December 31, 2019 7,764,564 $ — $ — $ 183,365 $ 2,178 $ 185,543 Net income — — — 9,483 — 9,483 Total other comprehensive loss, net of income taxes — — — — ( 782 ) ( 782 ) Cumulative effect on adoption of credit loss standard — — — ( 453 ) — ( 453 ) Exercise of common stock options 10,000 — 63 — — 63 Issuance of restricted stock 190,000 — — — — — Forfeiture of restricted stock ( 12,358 ) — — — — — Repurchase and retirement of common stock ( 29,473 ) — ( 1,326 ) — — ( 1,326 ) Repurchase and retirement of common stock under share repurchase plan ( 128,685 ) — ( 5,141 ) — — ( 5,141 ) Common stock dividends ($ 0.80 per share) — — — ( 6,162 ) — ( 6,162 ) Stock-based compensation — — 3,860 — — 3,860 Additional paid-in capital shortfall allocated to retained income — — 2,544 ( 2,544 ) — — Balance at June 30, 2020 7,794,048 $ — $ — $ 183,689 $ 1,396 $ 185,085 See accompanying Notes to Consolidated Financial Statements. 7 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Six Months Ended June 30, 2019 (Unaudited) (Dollar amounts in thousands, except per share amount) Common Stock Additional Paid-In Retained Accumulated Other Comprehensive (Loss) Income, Total Stockholders’ Shares Amount Capital Income Net of Tax Equity Balance at December 31, 2018 8,356,730 $ — $ — $ 182,894 $ ( 1,453 ) $ 181,441 Net income — — — 14,291 — 14,291 Total other comprehensive income, net of income taxes — — — — 3,208 3,208 Exercise of common stock options 10,000 — 63 — — 63 Issuance of restricted stock 173,160 — — — — — Forfeiture of restricted stock ( 268,892 ) — — — — — Repurchase and retirement of common stock ( 24,849 ) — ( 1,023 ) — — ( 1,023 ) Repurchase and retirement of common stock under share repurchase plan ( 192,576 ) — ( 8,006 ) — — ( 8,006 ) Common stock dividends ($ 0.80 per share) — — — ( 6,428 ) — ( 6,428 ) Stock-based compensation — — 2,948 — — 2,948 Additional paid-in capital shortfall allocated to retained income — — 6,018 ( 6,018 ) — — Balance at June 30, 2019 8,053,573 $ — $ — $ 184,739 $ 1,755 $ 186,494 See accompanying Notes to Consolidated Financial Statements. 8 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) Six Months Ended June 30, 2020 2019 Cash flows from operating activities: Net income $ 9,483 $ 14,291 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 3,860 2,948 Net (accretion of discounts) amortization of premiums on investments in fixed-maturity securities ( 60 ) 127 Depreciation and amortization 4,359 4,702 Deferred income tax expense 1,527 592 Net realized investment losses 809 505 Net unrealized investment losses (gains) 1,921 ( 6,619 ) Credit loss expense 177 — Loss from unconsolidated joint venture 28 54 Net loss (income) from limited partnership interests 2,747 ( 832 ) Distributions received from limited partnership interests 578 3,616 Loss on repurchases of convertible senior notes 150 — Foreign currency remeasurement loss (gain) 84 ( 5 ) Other non-cash items 31 271 Changes in operating assets and liabilities: Accrued interest and dividends receivable 703 110 Income taxes ( 2,110 ) ( 540 ) Premiums receivable ( 7,670 ) ( 9,731 ) Prepaid reinsurance premiums ( 9,167 ) ( 11,611 ) Reinsurance recoverable 32,248 45,831 Deferred policy acquisition costs ( 7,527 ) ( 4,344 ) Other assets 5,235 ( 1,393 ) Losses and loss adjustment expenses ( 3,535 ) ( 53,344 ) Unearned premiums 48,071 35,697 Advance premiums 13,619 7,460 Assumed reinsurance balances payable 3 ( 14 ) Accrued expenses and other liabilities 14,424 1,063 Net cash provided by operating activities 109,988 28,834 9 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued (Unaudited) (Amounts in thousands) Six Months Ended June 30, 2020 2019 Cash flows from investing activities: Investments in limited partnership interests $ ( 1,470 ) $ ( 1,751 ) Distributions received from limited partnership interests 314 470 Purchase of property and equipment ( 5,349 ) ( 1,313 ) Purchase of real estate investments ( 2,522 ) ( 9,892 ) Purchase of fixed-maturity securities ( 28,281 ) ( 75,727 ) Purchase of equity securities ( 20,392 ) ( 15,778 ) Purchase of short-term and other investments — ( 684 ) Proceeds from sales of fixed-maturity securities 78,186 2,985 Proceeds from calls, repayments and maturities of fixed-maturity securities 52,594 47,788 Proceeds from sales of equity securities 12,455 32,841 Proceeds from sales, redemptions and maturities of short-term and other investments 460 66,897 Net cash provided by investing activities 85,995 45,836 Cash flows from financing activities: Cash dividends paid ( 6,315 ) ( 6,581 ) Cash dividends received under share repurchase forward contract 153 153 Proceeds from revolving credit facility 14,000 9,500 Proceeds from exercise of common stock options 63 63 Proceeds from issuance of long-term debt 10,000 — Repayment of long-term debt ( 9,496 ) ( 90,647 ) Repurchases of convertible senior notes ( 4,459 ) — Repurchases of common stock ( 1,326 ) ( 1,023 ) Repurchases of common stock under share repurchase plan ( 5,141 ) ( 8,006 ) Debt issuance costs ( 165 ) ( 459 ) Net cash used in financing activities ( 2,686 ) ( 97,000 ) Effect of exchange rate changes on cash ( 51 ) 25 Net increase (decrease) in cash, cash equivalents, and restricted cash 193,246 ( 22,305 ) Cash, cash equivalents, and restricted cash at beginning of period 229,918 240,158 Cash, cash equivalents, and restricted cash at end of period $ 423,164 $ 217,853 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 3,902 $ 5,254 Cash paid for interest $ 3,737 $ 5,453 Non-cash investing and financing activities: Unrealized (loss) gain on investments in available-for-sale securities, net of tax $ ( 782 ) $ 3,208 Receivable from sales of equity securities $ 232 $ — Receivable from maturities of fixed-maturity securities $ — $ 2,000 Payable on purchases of equity securities $ 203 $ — See accompanying Notes to Consolidated Financial Statements. 10 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 1 -- Nature of Operations HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). HCPCI is authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsed and wind-only policies to Florida customers and has regulatory approval to underwrite residential property and casualty insurance in the states of Arkansas, California, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. However, Florida is still HCPCI’s primary market. TypTap offers standalone flood and homeowners multi-peril policies. The operations of both insurance subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. In particular, the Company is developing technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries. In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities and one restaurant. On February 5, 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”). Under the agreement, Anchor cancelled all its policies as of April 1, 2020 and HCPCI offered short-term replacement policies to those policyholders, who are under no obligation to accept them. The replacement policies had substantially the same terms and rates as the cancelled polices and would expire on the same dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI will offer, but is not obligated to offer, renewals to those policyholders at its own rates and terms. Total replacement policies issued by the Company on April 1, 2020 approximated 40,000 . Risks and Uncertainties Caused by Novel Coronavirus (“COVID-19”) On March 11, 2020, the World Health Organization (“WHO”) declared the outbreak of COVID-19 a pandemic. COVID-19 is a respiratory illness caused by a virus that can spread from person to person. To contain the spread of COVID-19, measures have been undertaken in the United States of America and elsewhere around the world. These measures include, but are not limited to, domestic and international travel restrictions, temporary closure of nonessential businesses, cessation of public activity, and work-from-home orders, which has led to significantly reduced economic activity. To prevent the U.S. economy from further deterioration, several state and local governments have relaxed or lifted some of these measures even though infection rates remain above five percent, the level at which the WHO recommends rates fall below for at least 14 days before reopening. In Florida where the Company’s headquarters is located, a statewide stay-at-home order was issued and later lifted in May 2020. In response to the pandemic, the Company temporarily closed its offices in Florida and asked employees to work from home. The Company also closed temporarily its restaurant. Since then, some employees who have gone through the Company’s health safety training are allowed to alternate their work location between home and office. The Company quickly adjusted its technologies and infrastructure to support a remote workforce and maintain business continuity. As a provider of homeowners insurance, the Company continually prepares for disasters and catastrophic events, including events that could disrupt business continuity. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is intended to provide fast and direct economic assistance for American workers and families, small businesses, and to preserve jobs in American industries. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. 11 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) The Company qualifies as a small business under the CARES Act but d id not apply for any of the government loan programs . At present, the Company’s insurance subsidiaries do not foresee a direct material impact from the outbreak of COVID-19 in terms of increased claims and losses. However, the resulting economic uncertainty is adversely affecting the results of the Company’s investment portfolios (See Note 5 -- Investments). The Company generally holds or invests premiums collected from policyholders in the financial markets in order to earn income before claims need to be paid. Since the economic outlook started to deteriorate, the Company’s investments in limited partnerships, equity and fixed-maturity securities have decreased in value. In addition, the Company’s insurance subsidiaries may experience difficulties collecting premiums from some policyholders. Policyholders with financial difficulties may decide not to renew insurance policies with the Company. Reinsurance companies with which the Company has contracted may also face liquidity issues and may not timely settle reinsurance balances that become due. Reinsurance costs have increased as reinsurers pay COVID-19 related claims worldwide and face the possibility of increases in the cost of capital needed to fund their operations. Furthermore, due to the impact of the COVID-19 outbreak on retail business activities, rent payments due from the Company’s lessees may be delayed or not received. Some lessees, with the exception of all anchor tenants, have sought rent concessions in order to stay in business. In the near term, the Company determined there is no impairment to its real estate investments or intangible assets as the real estate market is inherently slower moving than equity and debt security markets. For other auxiliary operations such as restaurant and marina business, the temporary closure of these operations has no material impact on the Company’s results of operations. It is too early to gauge the effectiveness of the CARES Act and any upcoming stimulus package in assisting targeted individuals and businesses and preventing further economic downturn. As of the date of issuance of these interim unaudited consolidated financial statements, the extent to which the COVID-19 pandemic may materially affect the Company's financial condition, liquidity, or results of operations in the medium and long-term future remains uncertain and unquantifiable. Note 2 -- Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited, consolidated financial statements for HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2020 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, 2020. 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, 2019 included in the Company’s Form 10-K, which was filed with the SEC on March 6, 2020. 12 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) In preparing the interim unaudited consolidated financial statements, management was required to make certain judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term are related to the Company’s losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies specific to reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements. All significant intercompany balances and transactions have been eliminated. Adoption of New Accounting Standards In June 2016, the Financial Accounting Standards Board 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. Effective January 1, 2020, the Company used a modified retrospective method for transition to the CECL model. The Company recognized a cumulative-effect adjustment of $ 453 related to reinsurance recoverable to beginning retained income with a corresponding entry to an allowance for credit losses account. Any subsequent changes to the expected credit losses will be recognized in the Company’s consolidated statement of income. 13 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Allowance for Credit Losses Allowance for credit losses represents an estimation of potential losses that the Company may experience due to credit risk. The allowance for credit losses account is a contra account of a financial asset to reflect the net amount expected to be collected. Any increase or decrease in the allowance for credit losses related to investments is recognized and reflected as credit losses on investments in the Company’s consolidated statement of income. For all other financial assets, credit loss expense is included in other operating expenses. When the risk of credit loss becomes certain, the allowance for credit losses account will be written off against the financial asset. Under the CECL model, the Company measures all expected credit losses related to relevant financial assets based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. The Company primarily uses a discounted cash flow method and a rating-based method in estimating credit losses at a reporting date for financial assets under the scope of the CECL model. The discounted cash flow method is a valuation method used to estimate the value of a financial asset based on its future cash flows. The Company uses this method to determine the expected credit losses for available-for-sale fixed-maturity securities. In addition, the Company elects not to measure an allowance for credit losses for accrued interest receivable as any uncollectible amount is adjusted to interest income on a monthly basis. For certain financial assets related to insurance business such as reinsurance recoverable and reinsurance receivable for premium refund, the Company uses a rating-based method, which is a modified version of the probability of default method. It requires two key inputs: a) the liquidation rate and b) the amount of loss exposure. The liquidation rate, which is published annually, is the ratio of impaired insurance companies that were eventually liquidated to the group of insurance companies considered by A.M. Best in its study. The amount of loss exposure represents the future billing balance, net of any collateral, spread over the projected periods that are based on the Company’s historical claim payment pattern. The rating-based method measures credit losses by multiplying the future billings grouped by insurance rating over the projected periods by their corresponding liquidation rates by insurance rating. At present, the exposure to credit losses for certain financial assets related to non-insurance business is considered immaterial to the Company’s financial position. Limited Partnership Investments The Company has interests in limited partnerships that are not registered under the United Stated Securities Act of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public market and any withdrawal is subject to the terms and conditions of the partnership agreement. The Company has no influence over partnership operating and financial policies. The Company uses the equity method to account for the investments with ownership interest greater than five percent. For the investments with ownership interest at five percent or less, the Company uses the net asset value method to estimate the fair value of these investments. The Company generally recognizes its share of the limited partnership’s earnings or losses on a three-month lag. Due to the lag, the Company may record an adjustment to the Company’s most recent share of net asset value when the amount can be reasonably estimated and a significant adverse impact on the net asset value is expected as a result of a major economic event. Net investment income or loss from limited partnerships represents a net aggregate amount of operating results allocated to the Company based on the percentage of ownership interest in each limited partnership. 14 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Pursuant to U.S. GAAP, these limited partnerships which are private equity funds must measure their investments at fair value and reflect the unrealized gains and losses in the fair value of their investments on their statement of income. As a result, the carrying value of limited partnership investments at each reporting date approximates their estimated fair value. Premium Receivable Premium receivable represents the amount of premiums due from policyholders for insurance coverage. Premiums are recorded as receivable in the Company’s general ledger on the effective date of the policy. Premiums are billed to the policyholder 45-60 days in advance of the effective date. The policyholder is given a 30-day grace period after the effective date to pay the premium before the insurance coverage is cancelled. If the policyholder does not pay the premium, the Company can cancel the policy and has no obligation to provide insurance coverage. Unpaid renewal policies are cancelled at midnight on the last day of the period for which the policyholder has paid. The unearned premium liability for the cancelled policy is reversed along with the premium receivable balance. Therefore, there is no unpaid earned premium and credit loss associated with the cancelled policy. However, when the 30-day grace period falls between two reporting periods, the premium receivable balance at the end of the first reporting period may potentially be overstated for not considering the policy that is subsequently cancelled during the following reporting period. To mitigate the overstatement issue, the Company estimates the monetary impact from the subsequent policy cancellation by multiplying the historical cancellation rate to the premium receivable balance at the reporting date. The premium receivable balance, together with the unearned premium liability is then reduced by the computed amount. At June 30, 2020 and December 31, 2019, allowances for uncollectible premiums were $ 1,034 and $ 528 , respectively. Deferred Policy Acquisition Costs Deferred policy acquisition costs (“DAC”) represent direct costs to acquire insurance contracts and consist of premium taxes and commissions paid to outside agents at the time of collection of the policy premium. DAC also includes a cash bonus and other related expenses in association with the successful transition of policies from Anchor for the replacement policies and issuance of renewal policies under the Company’s own rates and terms. DAC is amortized over the life of the related policy in relation to the amount of gross premiums earned. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned. DAC is reviewed to determine if it is recoverable from future premium income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of the disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised. 15 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 -- Recent Accounting Pronouncements Accounting Standards Update No. 2020-01. In January 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-01 (“ASU 2020-01”) Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This update, among others, clarifies the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 when there is a change in level of ownership or degree of influence. ASU 2020-01 is effective for the Company beginning with the first quarter of 2021 and will be applied prospectively. Early adoption is permitted. This guidance will not have a material impact on the Company’s consolidated financial statements. Note 4 -- Cash, Cash Equivalents, and Restricted Cash The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows. June 30, December 31, 2020 2019 Cash and cash equivalents $ 422,464 $ 229,218 Restricted cash 700 700 Total $ 423,164 $ 229,918 Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements. 16 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 5 -- Investments a) Available-for-Sale Fixed-Maturity Securities The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At June 30, 2020 and December 31, 2019, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows: Cost or Amortized Allowance for Credit Gross Unrealized Gross Unrealized Estimated Fair Cost Loss Gain Loss Value As of June 30, 2020 U.S. Treasury and U.S. government agencies $ 12,146 $ — $ 296 $ — $ 12,442 Corporate bonds 73,662 ( 526 ) 1,664 ( 392 ) 74,408 State, municipalities, and political subdivisions 5,832 — 89 ( 12 ) 5,909 Exchange-traded debt 6,994 — 280 ( 74 ) 7,200 Redeemable preferred stock 35 — — ( 1 ) 34 Total $ 98,669 $ ( 526 ) $ 2,329 $ ( 479 ) $ 99,993 As of December 31, 2019 U.S. Treasury and U.S. government agencies $ 26,220 $ — $ 78 $ ( 3 ) $ 26,295 Corporate bonds 157,155 — 2,212 ( 3 ) 159,364 State, municipalities, and political subdivisions 7,763 — 149 — 7,912 Exchange-traded debt 8,698 — 462 ( 15 ) 9,145 Redeemable preferred stock 118 — 5 — 123 Total $ 199,954 $ — $ 2,906 $ ( 21 ) $ 202,839 Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of June 30, 2020 and December 31, 2019 are as follows: Amortized Estimated Cost Fair Value As of June 30, 2020 Due in one year or less $ 40,293 $ 40,672 Due after one year through five years 50,879 51,423 Due after five years through ten years 2,590 2,874 Due after ten years 4,907 5,024 $ 98,669 $ 99,993 Amortized Estimated Cost Fair Value As of December 31, 2019 Due in one year or less $ 63,135 $ 63,429 Due after one year through five years 125,833 127,660 Due after five years through ten years 6,896 7,350 Due after ten years 4,090 4,400 $ 199,954 $ 202,839 17 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Sales of Available-for-Sale Fixed-Maturity Securities Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and six months ended June 30, 2020 and 2019 were as follows: Gross Realized Gross Realized Proceeds Gains Losses Three months ended June 30, 2020 $ 74,137 $ 1,653 $ ( 226 ) Three months ended June 30, 2019 $ 74 $ — $ — Six months ended June 30, 2020 $ 78,186 $ 1,730 $ ( 576 ) Six months ended June 30, 2019 $ 2,985 $ 34 $ ( 1 ) Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities Securities with gross unrealized loss positions at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows: Less Than Twelve Months Twelve Months or Longer Total Gross Estimated Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Unrealized Fair As of June 30, 2020 Loss Value Loss Value Loss Value Corporate bonds $ ( 392 ) $ 7,785 $ — $ — $ ( 392 ) $ 7,785 State, municipalities, and political subdivisions ( 12 ) 1,270 — — ( 12 ) 1,270 Exchange-traded debt ( 74 ) 1,481 — — ( 74 ) 1,481 Redeemable preferred stock ( 1 ) 35 — — ( 1 ) 35 Total $ ( 479 ) $ 10,571 $ — $ — $ ( 479 ) $ 10,571 At June 30, 2020, there were 25 securities in an unrealized loss position. Of these securities, none had been in an unrealized loss position for 12 months or longer. Less Than Twelve Months Twelve Months or Longer Total Gross Estimated Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Unrealized Fair As of December 31, 2019 Loss Value Loss Value Loss Value U.S. Treasury and U.S. government agencies $ ( 3 ) $ 2,292 $ — $ — $ ( 3 ) $ 2,292 Corporate bonds ( 3 ) 4,597 — — ( 3 ) 4,597 Exchange-traded debt ( 15 ) 345 — — ( 15 ) 345 Total $ ( 21 ) $ 7,234 $ — $ — $ ( 21 ) $ 7,234 At December 31, 2019, there were eight securities in an unrealized loss position. Of these securities, none had been in an unrealized loss position for 12 months or longer. 18 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities The Company regularly reviews its individual investment securities for credit impairment. The Company considers various factors in determining whether each individual security is impaired, including- • the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; • the extent to which the market value of the security has been below its cost or amortized cost; • general market conditions and industry or sector specific factors and other qualitative factors; • nonpayment by the issuer of its contractually obligated interest and principal payments; and • the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs. The table below summarized the activity in the allowance for credit losses of available-for-sale securities for the three and six months ended on June 30, 2020: 2020 Balance at January 1 $ — Credit loss expense 439 Balance at March 31 $ 439 Credit loss expense 87 Balance at June 30 $ 526 b) Equity Securities The Company holds investments in equity securities measured at fair values which are readily determinable. At June 30, 2020 and December 31, 2019, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows: Gross Unrealized Gross Unrealized Estimated Fair Cost Gain Loss Value June 30, 2020 $ 37,808 $ 2,707 $ ( 1,206 ) $ 39,309 December 31, 2019 $ 31,863 $ 3,652 $ ( 230 ) $ 35,285 The table below presents the portion of unrealized gains and losses in the Company’s consolidated statement of income for the periods related to equity securities still held. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net gains (losses) recognized $ 2,892 $ 1,193 $ ( 3,884 ) $ 6,030 Exclude: Net realized gains (losses) recognized for securities sold 8 ( 133 ) ( 1,963 ) ( 589 ) Net unrealized gains (losses) recognized $ 2,884 $ 1,326 $ ( 1,921 ) $ 6,619 19 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Sales of Equity Securities Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and six months ended June 30, 2020 and 2019 were as follows: Gross Realized Gross Realized Proceeds Gains Losses Three months ended June 30, 2020 $ 3,448 $ 184 $ ( 176 ) Three months ended June 30, 2019 $ 4,967 $ 113 $ ( 246 ) Six months ended June 30, 2020 $ 12,455 $ 969 $ ( 2,932 ) Six months ended June 30, 2019 $ 32,841 $ 2,187 $ ( 2,776 ) 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: June 30, 2020 December 31, 2019 Carrying Unfunded Carrying Unfunded Investment Strategy Value Balance (%)(a) Value Balance (%)(a) Primarily in senior secured loans and, to a limited extent, in other debt and equity securities of private U.S. lower-middle-market companies. (b)(c)(e) $ 9,394 $ 2,085 15.37 $ 9,659 $ 2,085 15.37 Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e) 5,691 — 1.76 5,985 — 1.76 High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g) 6,289 1,401 0.18 9,188 1,391 0.18 Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i) 3,071 1,542 0.47 1,602 3,106 0.47 Value-oriented investments in mature real estate private equity funds and portfolio globally. (b)(j) 1,732 8,632 2.24 1,912 8,548 2.24 Total $ 26,177 $ 13,660 $ 28,346 $ 15,130 (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. 20 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) (c) Expected to have a ten-year term . A lthough the capital commitment period has expired, there are still follow-on in vest ments and pending commitments that require additional fundings. (d) Expected to have a three-year term from June 30, 2018. Although the capital commitment period has ended, the general partner could still request an additional funding of approximately $ 843 under certain circumstances. (e) At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods. (f) Expected to have a ten-year term. The capital commitment period has expired but the general partner may request additional funding for follow-on investment. (g) With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods. (h) Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners. (i) The capital commitment was extended and is now expected to expire on December 1, 2020 . (j) Expected to have an eight-year term from November 27, 2019. The following is the summary of aggregated unaudited financial information of limited partnerships included in the investment strategy table above, which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. The financial statements of these limited partnerships are audited annually. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Operating results: Total income $ ( 1,230,124 ) $ 338,414 $ ( 1,681,016 ) $ 247,901 Total expenses ( 25,708 ) ( 32,140 ) ( 80,520 ) ( 81,173 ) Net (loss) income $ ( 1,255,832 ) $ 306,274 $ ( 1,761,536 ) $ 166,728 June 30, December 31, 2020 2019 Balance Sheet: Total assets $ 5,101,450 $ 6,850,913 Total liabilities $ 641,725 $ 549,562 For the three and six months ended June 30, 2020, the Company recognized net investment income of $ 188 and net investment loss of $ 2,747 , respectively. During the three and six months ended June 30, 2020, the Company received total cash distributions of $ 196 and $ 892 , respectively, including returns on investment of $ 196 and $ 578 , respectively. For the three and six months ended June 30, 2019, the Company recognized net investment income of $ 1,043 and $ 832 , respectively, for these investments. During the three and six months ended June 30, 2019, the Company received total cash distributions of $ 3,073 and $ 4,086 , respectively. Cash distributions representing return on investment were $ 2,603 and $ 3,616 for the three and six months ended June 30, 2019, respectively. At June 30, 2020 and December 31, 2019, the Company’s cumulative contributed capital to the partnerships at each respective balance sheet date totaled $ 30,998 and $ 29,528 , respectively, and the Company’s maximum exposure to loss aggregated $ 26,177 and $ 28,346 , respectively. 21 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 June 30, 2020 and December 31, 2019, the Company’s maximum exposure to loss relating to the variable interest entity was $ 734 and $ 762 , respectively, representing the carrying value of the investment. There were no cash distributions during the six months ended June 30, 2020 and 2019. At June 30, 2020 and December 31, 2019, 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 Six Months Ended June 30, June 30, 2020 2019 2020 2019 Operating results: Total revenues and gain $ — $ — $ — $ 2 Total expenses ( 13 ) ( 24 ) ( 32 ) ( 62 ) Net loss $ ( 13 ) $ ( 24 ) $ ( 32 ) $ ( 60 ) The Company’s share of net loss* $ ( 12 ) $ ( 21 ) $ ( 28 ) $ ( 54 ) * Included in net investment income in the Company’s consolidated statements of income. June 30, December 31, 2020 2019 Balance Sheet: Property and equipment, net $ 723 $ 741 Cash 96 102 Other 4 4 Total assets $ 823 $ 847 Other liabilities $ 8 $ — Members’ capital 815 847 Total liabilities and members’ capital $ 823 $ 847 Investment in unconsolidated joint venture, at equity** $ 734 $ 762 * * Includes the 90 % share of FMKT Mel JV’s operating results. e) Assets Held for Sale On April 9, 2020, Greenleaf Capital, LLC decided to offer for sale its investment property in Riverview, Florida. The proceeds from the sale are expected to exceed the property’s carrying value of $ 4,519 and, accordingly, no impairment loss was recognized on the classification of this property as held for sale. 22 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) f ) Real Estate Investments Real estate investments consist of the following as of June 30, 2020 and December 31, 2019. June 30, December 31, 2020 2019 Land $ 36,681 $ 39,511 Land improvements 11,422 11,907 Buildings 23,006 24,086 Tenant and leasehold improvements 1,246 1,487 Other 5,928 3,489 Total, at cost 78,283 80,480 Less: accumulated depreciation and amortization ( 7,375 ) ( 6,717 ) Real estate investments $ 70,908 $ 73,763 Depreciation and amortization expense related to real estate investments was $ 432 and $ 422 for the three months ended June 30, 2020 and 2019, respectively, and $ 887 and $ 754 for the six months ended June 30, 2020 and 2019, respectively. During the second quarter of 2020, the Company classified the investment property as described earlier to assets held for sale. g) Net Investment (Loss) Income Net investment (loss) income, by source, is summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Available-for-sale fixed-maturity securities $ 1,243 $ 1,622 $ 2,758 $ 3,157 Equity securities 299 293 634 674 Investment expense ( 124 ) ( 106 ) ( 242 ) ( 235 ) Limited partnership investments 188 1,043 ( 2,747 ) 832 Real estate investments ( 346 ) ( 105 ) ( 265 ) 201 Loss from unconsolidated joint venture ( 12 ) ( 21 ) ( 28 ) ( 54 ) Cash and cash equivalents 362 1,484 1,301 2,554 Short-term investments ( 6 ) 16 1 375 Net investment income $ 1,604 $ 4,226 $ 1,412 $ 7,504 23 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 6 -- Comprehensive Income (Loss) Comprehensive income (loss) includes net income and other comprehensive income or loss, which for the Company includes changes in unrealized gains or losses of investments carried at fair value and changes in the allowance for credit losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows: Three Months Ended Three Months Ended June 30, 2020 June 30, 2019 Income Tax Income Tax Before Expense Net of Before Expense Net of Tax (Benefit) Tax Tax (Benefit) Tax Unrealized gains arising during the period $ 3,280 $ 805 $ 2,475 $ 1,626 $ 413 $ 1,213 Change in allowance for credit losses 87 21 66 — — — Call and repayment (gains) losses charged to investment income ( 150 ) ( 37 ) ( 113 ) 1 — 1 Reclassification adjustment for realized gains ( 1,427 ) ( 349 ) ( 1,078 ) — — — Total other comprehensive gains $ 1,790 $ 440 $ 1,350 $ 1,627 $ 413 $ 1,214 Six Months Ended Six Months Ended June 30, 2020 June 30, 2019 Income Tax Income Tax Before Expense Net of Before Expense Net of Tax (Benefit) Tax Tax (Benefit) Tax Unrealized (losses) gains arising during the period $ ( 191 ) $ ( 46 ) $ ( 145 ) $ 4,330 $ 1,098 $ 3,232 Change in allowance for credit losses 526 129 397 — — — Call and repayment gains charged to investment income ( 216 ) ( 53 ) ( 163 ) 1 — 1 Reclassification adjustment for realized gains ( 1,154 ) ( 283 ) ( 871 ) ( 33 ) ( 8 ) ( 25 ) Total other comprehensive (losses) gains $ ( 1,035 ) $ ( 253 ) $ ( 782 ) $ 4,298 $ 1,090 $ 3,208 Note 7 -- 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. 24 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Valuation Methodology Cash and cash equivalents Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds. Short-term investments Short-term investments consist of certificates of deposit with maturities of 91 to 365 days . Due to their short maturity, the carrying value approximates fair value. Fixed-maturity and equity securities Estimated fair values of the Company’s fixed-maturity and equity securities are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not available, fair values are measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values. 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. 25 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Long-term debt The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values: Maturity Date Valuation Methodology 4.25 % Convertible senior notes 2037 Quoted price 3.90 % Promissory note 2032 Discounted cash flow method/Level 3 inputs 4 % Promissory note 2031 Discounted cash flow method/Level 3 inputs 3.75 % Callable promissory note 2036 Discounted cash flow method/Level 3 inputs 4.55 % Promissory note 2036 Discounted cash flow method/Level 3 inputs Assets Measured at Estimated Fair Value on a Recurring Basis The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of June 30, 2020 and December 31, 2019: Fair Value Measurements Using (Level 1) (Level 2) (Level 3) Total As of June 30, 2020 Financial Assets: Cash and cash equivalents $ 424,464 $ — $ — $ 424,464 Restricted cash $ 700 $ — $ — $ 700 Fixed-maturity securities: U.S. Treasury and U.S. government agencies $ 10,899 $ 1,543 $ — $ 12,442 Corporate bonds 74,409 — — 74,409 State, municipalities, and political subdivisions — 5,909 — 5,909 Exchange-traded debt 7,200 — — 7,200 Redeemable preferred stock 33 — — 33 Total available-for-sale securities $ 92,541 $ 7,452 $ — $ 99,993 Equity securities $ 39,309 $ — $ — $ 39,309 Fair Value Measurements Using (Level 1) (Level 2) (Level 3) Total As of December 31, 2019 Financial Assets: Cash and cash equivalents $ 229,218 $ — $ — $ 229,218 Restricted cash $ 700 $ — $ — $ 700 Short-term investments $ 491 $ — $ — $ 491 Fixed-maturity securities: U.S. Treasury and U.S. government agencies $ 25,294 $ 1,001 $ — $ 26,295 Corporate bonds 159,364 — — 159,364 State, municipalities, and political subdivisions — 7,912 — 7,912 Exchange-traded debt 9,145 — — 9,145 Redeemable preferred stock 123 — — 123 Total available-for-sale securities $ 193,926 $ 8,913 $ — $ 202,839 Equity securities $ 35,285 $ — $ — $ 35,285 26 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Assets and Liabilities Carried at Other Than Estimated Fair Value The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of June 30, 2020 and December 31, 2019: Carrying Fair Value Measurements Using Estimated Value (Level 1) (Level 2) (Level 3) Fair Value As of June 30, 2020 Financial Liabilities: Revolving credit facility $ 23,750 $ — $ 23,750 $ — $ 23,750 Long-term debt: 4.25 % Convertible senior notes $ 131,858 $ — $ 137,460 $ — $ 137,460 3.90 % Promissory note 9,777 — — 10,565 10,565 4 % Promissory note 6,982 — — 7,421 7,421 3.75 % Callable promissory note 7,671 — — 8,100 8,100 4.55 % Promissory note 5,499 — — 5,971 5,971 Total long-term debt $ 161,787 $ — $ 137,460 $ 32,057 $ 169,517 Carrying Fair Value Measurements Using Estimated Value (Level 1) (Level 2) (Level 3) Fair Value As of December 31, 2019 Financial Liabilities: Revolving credit facility $ 9,750 $ — $ 9,750 $ — $ 9,750 Long-term debt: 4.25 % Convertible senior notes $ 134,075 $ — $ 147,375 $ — $ 147,375 3.95 % Promissory note 8,875 — — 8,887 8,887 4 % Promissory note 7,237 — — 7,409 7,409 3.75 % Callable promissory note 7,837 — — 7,861 7,861 4.55 % Promissory note 5,611 — — 5,802 5,802 Total long-term debt $ 163,635 $ — $ 147,375 $ 29,959 $ 177,334 Note 8 -- Deferred Policy Acquisition Costs In connection with the transition of insurance policies from Anchor described in Note 1 -- “Nature of Operations,” the Company incurred $ 3,023 of direct costs, consisting of a bonus to Anchor of $ 2,898 and other related expenses of $ 125 . The Company agreed to pay Anchor a cash bonus of $ 50 per $1,000 of premium for all policies in forces at June 1, 2020 that were in compliance with the conditions stated in the agreement. At June 30, 2020, other liabilities included $ 1,653 representing the remaining bonus payable to Anchor. Note 9 -- Property and Equipment, Net On April 2, 2020, Greenleaf Capital, LLC entered into a purchase and sale agreement with Tampa-Coconut Palms Office Building Exchange, LLC to acquire an office building in Tampa, Florida for a purchase price of $ 4,000 in cash. The building will be used as the Company’s secondary site in the Tampa Bay area. The transaction was completed on May 18, 2020 and accounted for as an asset acquisition. 27 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 -- Other Assets The following table summarizes the Company’s other assets. June 30, December 31, 2020 2019 Benefits receivable related to retrospective reinsurance contract $ 1,560 $ 9,480 Prepaid expenses 2,373 2,107 Deposits 3,352 1,678 Lease acquisition costs, net 516 566 Other 4,164 3,249 Total other assets $ 11,965 $ 17,080 Note 11 -- Revolving Credit Facility During the first quarter of 2020, the Company borrowed an additional amount of $ 14,000 for general business purposes. For the three months ended June 30, 2020 and 2019, interest expense was $ 162 and $ 127 , respectively, including $ 40 of amortization of issuance costs in each of the periods. For the six months ended June 30, 2020 and 2019, interest expense was $ 315 and $ 196 , respectively, including $ 79 of amortization of issuance costs in each of the periods. At June 30, 2020, the Company was in compliance with all required covenants, and there were $ 23,750 of borrowings outstanding. Note 12 -- Long-Term Debt The following table summarizes the Company’s long-term debt. June 30, December 31, 2020 2019 4.25 % Convertible senior notes, due March 1, 2037 $ 139,200 $ 143,750 3.95 % Promissory note, due through February 17, 2020 — 8,881 4 % Promissory note, due through February 1, 2031 7,081 7,345 3.75 % Callable promissory note, due through September 1, 2036 7,783 7,955 4.55 % Promissory note, due through August 1, 2036 5,588 5,704 3.90 % Promissory note, due through April 1, 2032 9,945 — Finance lease liabilities, due through August 15, 2023 52 60 Total principal amount 169,649 173,695 Less: unamortized discount and issuance costs ( 7,810 ) ( 10,000 ) Total long-term debt $ 161,839 $ 163,695 28 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 June 30, 2020, which takes into consideration the assumption that the 4.25 % Convertible Senior Notes are repurchased at the earliest call date. Due in 12 months following June 30, 2020 $ 1,494 2021 140,755 2022 1,612 2023 1,668 2024 1,733 Thereafter 22,387 Total $ 169,649 Information with respect to interest expense related to long-term debt is as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Interest Expense: Contractual interest $ 1,832 $ 1,837 $ 3,638 $ 4,394 Non-cash expense (a) 1,068 999 2,120 2,789 Capitalized interest (b) ( 42 ) ( 79 ) ( 83 ) ( 158 ) $ 2,858 $ 2,757 $ 5,675 $ 7,025 (a) Includes amortization of debt discount and issuance costs. (b) Interest was capitalized for a construction project. Convertible Senior Notes 4.25% Convertible Notes . The Company’s recent cash dividends on common stock have exceeded $ 0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of June 30, 2020, the conversion rate of the Company’s 4.25 % Convertible Notes was 16.4039 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $ 60.96 per share. In June 2020, the Company repurchased an aggregate of $ 4,550 in principal of the 4.25% Convertible Notes and recognized a $ 150 loss from the repurchases. As of June 30, 2020, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 1.7 years. 3.95% Promissory Note In February 2020, the Company repaid its 3.95 % Promissory Note . 29 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) 3.90% Promissory Note On February 28, 2020, the Company entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of $ 10,000 . The agreement bears interest at a fixed rate of 3.90 % and is secured by the Company’s shopping center property in Melbourne, Florida and the assignment of associated lease agreements. Approximately $ 60 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of $ 5,007 including principal and unpaid interest payable on March 1, 2032 . The promissory note may be repaid in full at any time as long as the Company provides at least 60 days’ written notice and pays a prepayment premium and processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due in February 2020. On March 19, 2020, the loan agreement was modified to revise the due dates for the first and last installments to May 1, 2020 and April 1, 2032 , respectively, while other terms and conditions remain intact. Note 13 -- Reinsurance The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30 % ceding commission on ceded premiums written. The reinsurance premiums under one flood catastrophe excess of loss reinsurance contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter. 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. 30 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) The impact of the reinsurance contracts on premiums written and earned is as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Premiums Written: Direct $ 171,906 $ 133,441 $ 248,478 $ 201,053 Assumed ( 25 ) — ( 79 ) ( 2 ) Gross written 171,881 133,441 248,399 201,051 Ceded ( 34,354 ) ( 31,317 ) ( 65,073 ) ( 62,730 ) Net premiums written $ 137,527 $ 102,124 $ 183,326 $ 138,321 Premiums Earned: Direct $ 106,852 $ 83,315 $ 197,619 $ 165,914 Assumed 951 — 2,549 ( 2 ) Gross earned 107,803 83,315 200,168 165,912 Ceded ( 34,354 ) ( 31,317 ) ( 65,073 ) ( 62,730 ) Net premiums earned $ 73,449 $ 51,998 $ 135,095 $ 103,182 During the three and six months ended June 30, 2020, ceded losses of $ 11 and $ 349 , respectively, were recognized as a reduction in losses and loss adjustment expenses. There were no ceded losses recognized during the three and six months ended June 30, 2019. At June 30, 2020 and December 31, 2019, there were 40 and 31 reinsurers, respectively, participating in the Company’s reinsurance program. Total gross amounts recoverable and receivable from reinsurers at June 30, 2020 and December 31, 2019 were $ 100,430 and $ 132,678 , respectively. Approximately 47.3 % of the reinsurance recoverable balance at June 30, 2020 was receivable from the Florida Hurricane Catastrophe Fund, a state trust fund. Based on all available information considered in the rating-based method described in Note 2 -- “Summary of Significant Accounting Policies,” the Company recognized a decrease in credit loss expense of $ 325 and $ 349 for the three and six months ended June 30, 2020, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $ 104 and $ 0 at June 30, 2020 and December 31, 2019, respectively. One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three and six months ended June 30, 2020, the Company recognized reductions in premiums ceded of $ 3,240 and $ 5,760 , respectively, related to these adjustments in the consolidated statement of income. For the three and six months ended June 30, 2019, the Company recognized net reductions in premiums ceded of $ 1,226 and $ 1,738 , respectively, related to these adjustments. Amounts receivable pursuant to retrospective provisions are reflected in other assets. At June 30, 2020 and December 31, 2019, other assets included $ 1,560 and $ 9,480 related to these adjustments, respectively. In June 2020, the Company received $ 13,680 of premium refund under the retrospective reinsurance contract that ended May 31, 2020. 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. 31 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 14 -- Losses and Loss Adjustment Expenses The liability for losses and loss adjustment expenses is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred but not reported. The Company primarily writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. The occurrence of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter. Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net balance, beginning of period* $ 105,876 $ 98,453 $ 98,174 $ 94,826 Incurred, net of reinsurance, related to: Current period 40,493 21,416 66,296 45,737 Prior period ( 650 ) 2,877 1,625 5,552 Total incurred, net of reinsurance 39,843 24,293 67,921 51,289 Paid, net of reinsurance, related to: Current period ( 11,329 ) ( 13,778 ) ( 15,813 ) ( 17,708 ) Prior period ( 11,261 ) ( 13,623 ) ( 27,153 ) ( 33,062 ) Total paid, net of reinsurance ( 22,590 ) ( 27,401 ) ( 42,966 ) ( 50,770 ) Net balance, end of period 123,129 95,345 123,129 95,345 Add: reinsurance recoverable before allowance for credit losses 88,033 58,897 88,033 58,897 Gross balance, end of period $ 211,162 $ 154,242 $ 211,162 $ 154,242 *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 during which such estimates are adjusted. During the three months ended June 30, 2020, the Company derecognized losses related to prior periods of $ 650 primarily to decrease the reserve for 2019 loss year. For the six months ended June 30, 2020, the Company recognized losses related to prior periods of $ 1,625 for unfavorable development for 2019 resulting from litigation. 32 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 -- 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 June 30, 2020 and 2019, revenues from the Company’s insurance operations before intracompany elimination represented 96.2 % and 95.2 %, respectively, of total revenues of all operating segments. For the six months ended June 30, 2020 and 2019, revenues from the Company’s insurance operations before intracompany elimination represented 96.0 % and 94.9 %, respectively, of total revenues of all operating segments. At June 30, 2020 and December 31, 2019, insurance operations’ total assets represented 85.9 % and 85.5 %, respectively, of the combined assets of all operating segments. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below. Insurance Real Corporate/ Reclassification/ For Three Months Ended June 30, 2020 Operations Estate(a) Other(b) Elimination Consolidated Revenue: Net premiums earned $ 73,449 $ — $ — $ — $ 73,449 Net investment income (loss) 2,076 2 104 ( 578 ) 1,604 Net realized investment gains (losses) 1,483 — ( 48 ) — 1,435 Net unrealized investment gains 2,473 — 411 — 2,884 Credit losses on investments ( 87 ) — — — ( 87 ) Policy fee income 847 — — — 847 Other 320 2,419 518 ( 2,672 ) 585 Total revenue 80,561 2,421 985 ( 3,250 ) 80,717 Expenses: Losses and loss adjustment expenses 39,843 — — — 39,843 Amortization of deferred policy acquisition costs 12,511 — — — 12,511 Interest expense 1 498 2,742 ( 221 ) 3,020 Depreciation and amortization 27 640 409 ( 596 ) 480 Other 7,607 1,406 6,460 ( 2,433 ) 13,040 Total expenses 59,989 2,544 9,611 ( 3,250 ) 68,894 Income (loss) before income taxes $ 20,572 $ ( 123 ) $ ( 8,626 ) $ — $ 11,823 Total revenue from non-affiliates(c) $ 80,561 $ 1,954 $ 444 (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 of certain revenue and expenses to conform with an insurance company’s presentation. 33 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Insurance Real Corporate/ Reclassification/ For Three Months Ended June 30, 2019 Operations Estate(a) Other(b) Elimination Consolidated Revenue: Net premiums earned $ 51,998 $ — $ — $ — $ 51,998 Net investment income (loss) 3,388 — 1,096 ( 258 ) 4,226 Net realized investment losses ( 132 ) — ( 1 ) — ( 133 ) Net unrealized investment gains 1,108 — 218 — 1,326 Policy fee income 800 — — — 800 Other 162 2,380 1,698 ( 3,827 ) 413 Total revenue 57,324 2,380 3,011 ( 4,085 ) 58,630 Expenses: Losses and loss adjustment expenses 24,293 — — — 24,293 Amortization of deferred policy acquisition costs 8,770 — — — 8,770 Interest expense — 382 2,632 ( 130 ) 2,884 Depreciation and amortization 26 668 262 ( 572 ) 384 Other 7,774 1,466 6,127 ( 3,383 ) 11,984 Total expenses 40,863 2,516 9,021 ( 4,085 ) 48,315 Income (loss) before income taxes $ 16,461 $ ( 136 ) $ ( 6,010 ) $ — $ 10,315 Total revenue from non-affiliates(c) $ 57,324 $ 1,974 $ 2,562 (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 of certain revenue and expenses to conform with an insurance company’s presentation. Insurance Real Corporate/ Reclassification/ For Six Months Ended June 30, 2020 Operations Estate(a) Other(b) Elimination Consolidated Revenue: Net premiums earned $ 135,095 $ — $ — $ — $ 135,095 Net investment income (loss) 4,409 3 ( 2,266 ) ( 734 ) 1,412 Net realized investment losses ( 339 ) — ( 470 ) — ( 809 ) Net unrealized investment losses ( 1,624 ) — ( 297 ) — ( 1,921 ) Credit losses on investments ( 526 ) ( 526 ) Policy fee income 1,676 — — — 1,676 Other 595 4,978 1,890 ( 6,293 ) 1,170 Total revenue 139,286 4,981 ( 1,143 ) ( 7,027 ) 136,097 Expenses: Losses and loss adjustment expenses 67,921 — — — 67,921 Amortization of deferred policy acquisition costs 23,368 — — — 23,368 Interest expense 1 971 5,459 ( 441 ) 5,990 Depreciation and amortization 58 1,296 811 ( 1,208 ) 957 Other 15,682 2,657 12,420 ( 5,378 ) 25,381 Total expenses 107,030 4,924 18,690 ( 7,027 ) 123,617 Income (loss) before income taxes $ 32,256 $ 57 $ ( 19,833 ) $ — $ 12,480 Total revenue (investment loss) from non-affiliates(c) $ 139,286 $ 4,048 $ ( 2,182 ) (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 of certain revenue and expenses to conform with an insurance company’s presentation. 34 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Insurance Real Corporate/ Reclassification/ For Six Months Ended June 30, 2019 Operations Estate(a) Other(b) Elimination Consolidated Revenue: Net premiums earned $ 103,182 $ — $ — $ — $ 103,182 Net investment income (loss) 6,016 — 1,603 ( 115 ) 7,504 Net realized investment gains (losses) 66 — ( 571 ) — ( 505 ) Net unrealized investment gains 5,418 — 1,201 — 6,619 Policy fee income 1,595 — — — 1,595 Other 338 4,692 3,249 ( 7,410 ) 869 Total revenue 116,615 4,692 5,482 ( 7,525 ) 119,264 Expenses: Losses and loss adjustment expenses 51,289 — — — 51,289 Amortization of deferred policy acquisition costs 17,426 — — — 17,426 Interest expense 1 765 6,715 ( 260 ) 7,221 Depreciation and amortization 53 1,251 530 ( 1,056 ) 778 Other 14,864 2,574 11,723 ( 6,209 ) 22,952 Total expenses 83,633 4,590 18,968 ( 7,525 ) 99,666 Income (loss) before income taxes $ 32,982 $ 102 $ ( 13,486 ) $ — $ 19,598 Total revenue from non-affiliates(c) $ 116,615 $ 3,877 $ 4,622 (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 of certain revenue and expenses to conform with an insurance company’s presentation. The following table presents segment assets reconciled to the Company’s total assets in the consolidated balance sheets. June 30, December 31, 2020 2019 Segment: Insurance Operations $ 734,614 $ 663,280 Real Estate Operations 96,831 93,727 Corporate and Other 87,521 60,662 Consolidation and Elimination ( 30,581 ) ( 15,060 ) Total assets $ 888,385 $ 802,609 Note 16 -- Leases The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases: June 30, December 31, 2020 2019 Operating leases: ROU Assets $ 337 $ 484 Liabilities $ 350 $ 513 Finance leases: ROU Assets $ 79 $ 79 Liabilities $ 52 $ 60 35 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) The following table summarizes the Company’s operating and finance leases in which the Company is a lessee: Renewal Other Terms and Class of Assets Initial Term Option Conditions Operating lease: Office equipment 1 to 63 months Yes (a), (b) Storage units (e) 2 years Yes (b) Office space 3 to 10 years Yes (b), (c) Finance lease: Office equipment 3 to 5 years Not applicable (d) (a) At the end of the lease term, the Company can purchase the equipment at fair market value. (b) There are no variable lease payments. (c) Rent escalation provisions exist. (d) There is a bargain purchase option. (e) The initial lease term has expired in May 2020 . The lease was renewed for one year . As of June 30, 2020, maturities of lease liabilities were as follows: Leases Operating Finance Due in 12 months following June 30, 2020 $ 272 $ 19 2021 91 19 2022 12 14 2023 — 3 Total lease payments 375 55 Less: interest and foreign taxes 25 3 Total lease obligations $ 350 $ 52 36 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) The following table provides quantitative information with regard to the Company’s operating and finance leases. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Lease costs: Finance lease costs: Amortization – ROU assets* $ 5 $ 3 $ 9 $ 6 Interest expense 1 — 1 1 Operating lease costs* 78 73 156 154 Short-term lease costs* 42 59 91 104 Total lease costs $ 126 $ 135 $ 257 $ 265 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows – finance leases $ 1 $ 1 Operating cash flows – operating leases $ 159 $ 159 Financing cash flows – finance leases $ 8 $ 5 June 30, 2020 Weighted-average remaining lease term: Finance leases (in years) 3.0 Operating leases (in years) 1.4 Weighted-average discount rate: Finance leases 3.7 % Operating leases 4.0 % * Included in other operating expenses of the consolidated statement of income. The following table summarizes the Company’s operating leases in which the Company is a lessor: Renewal Other Terms and Class of Assets Initial Term Option Conditions Operating lease: Office space 1 to 3 years Yes (f) Retail space 3 to 20 years Yes (f) Boat docks/wet slips 1 to 12 months Yes (f) (f) There are no purchase options. Note 17 -- Income Taxes During the three months ended June 30, 2020 and 2019, the Company recorded approximately $ 2,887 and $ 2,762 respectively, of income taxes, which resulted in effective tax rates of 24.4 % and 26.8 %, respectively. The decrease in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the recognition of a refund from the State of Florida for 2018 income taxes. Furthermore, the Florida corporate income tax rate was reduced from 5.5 % to 4.458 % in September 2019. During the six months ended June 30, 2020 and 2019, the Company recorded approximately $ 2,997 and $ 5,307 , respectively, of income taxes, which resulted in effective tax rates of 24.0 % and 27.1 %, respectively. The decrease in the effective tax rate in 2020 as compared with the corresponding period in the prior year was 37 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) primarily attributable to the recognition of the tax refund, the recognition of windfall tax benefits related to share-based awards, and the reduction in state corporate income tax rate. The Company’s estimated annual effective tax rate differs from the statutory federal tax rate due to state and foreign income taxes as well as certain nondeductible and tax-exempt items. In addition, the Company determined there w ere no significant tax implications as a result of the CARES Act. Note 18 -- Earnings Per Share U.S. GAAP requires the Company to use the two-class method in computing basic earnings per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings per share during periods of net income or loss. A summary of the numerator and denominator of the basic and diluted earnings per common share is presented below. Three Months Ended Three Months Ended June 30, 2020 June 30, 2019 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net income $ 8,936 $ 7,553 Less: Income attributable to participating securities ( 465 ) ( 405 ) Basic Earnings Per Share: Income allocated to common stockholders 8,471 7,324 $ 1.16 7,148 7,666 $ 0.93 Effect of Dilutive Securities: Stock options — 4 — 15 Convertible senior notes 1,948 2,357 1,871 2,346 Diluted Earnings Per Share: Income available to common stockholders and assumed conversions $ 10,419 9,685 $ 1.08 $ 9,019 10,027 $ 0.90 Six Months Ended Six Months Ended June 30, 2020 June 30, 2019 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net income $ 9,483 $ 14,291 Less: Income attributable to participating securities ( 472 ) ( 821 ) Basic Earnings Per Share: Income allocated to common stockholders 9,011 7,347 $ 1.23 13,470 7,701 $ 1.75 Effect of Dilutive Securities: Stock options — 6 — 16 Convertible senior notes* — — 4,868 2,947 Diluted Earnings Per Share: Income available to common stockholders and assumed conversions $ 9,011 7,353 $ 1.23 $ 18,338 10,664 $ 1.72 * For the six months ended June 30, 2020, convertible senior notes were excluded due to anti-dilutive effect. 38 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 19 -- Stockholders’ Equity Common Stock On December 19, 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020. On March 13, 2020, the Board approved a stock repurchase plan for 2020 to repurchase up to $ 20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2020, the Company repurchased and retired a total of 51,834 shares at a weighted average price per share of $ 40.48 under these authorized repurchase plans. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2020 was $ 2,100 or $ 40.51 per share. During the six months ended June 30, 2020, the Company repurchased and retired a total of 128,685 shares at a weighted average price per share of $ 39.92 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2020 was $ 5,141 , or $ 39.95 per share. In December 2018, the Company’s Board of Directors authorized a plan for 2019 to repurchase up to $ 20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2019, the Company repurchased and retired a total of 160,787 shares at a weighted average price per share of $ 41.44 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2019 was $ 6,668 , or $ 41.47 per share. During the six months ended June 30, 2019, the Company repurchased and retired a total of 192,576 shares at a weighted average price per share of $ 41.54 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2019 was $ 8,006 , or $ 41.57 per share On April 13, 2020, the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share. The dividends were paid on June 19, 2020 to stockholders of record on May 15, 2020 . Preferred Stock On May 15, 2020, the Company amended its Articles of Incorporation, effective on the same date, to cancel the designation of 1,500,000 shares of the Company’s authorized preferred stock as Series A Cumulative Redeemable Preferred Stock, and the designation of 400,000 shares of the Company’s authorized preferred stock as Series B Junior Participating Preferred Stock. As a result, all 20,000,000 authorized shares of the Company’s preferred stock are undesignated. Since the designation of these types of preferred stock, none have ever been issued by the Company. Note 20 -- 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 June 30, 2020, there were 1,474,162 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 . 39 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) A summary of the stock option activity for the three and six months ended June 30, 2020 and 2019 is as follows (option amounts not in thousands): Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Options Price Term Value Outstanding at January 1, 2020 340,000 $ 43.21 7.9 years $ 1,657 Granted 110,000 $ 48.00 Exercised ( 10,000 ) $ 6.30 Outstanding at March 31, 2020 440,000 $ 45.25 8.3 years $ — Outstanding at June 30, 2020 440,000 $ 45.25 8.1 years $ 1,184 Exercisable at June 30, 2020 165,000 $ 42.17 7.2 years $ 740 Outstanding at January 1, 2019 240,000 $ 37.19 8.8 years $ 3,278 Granted 110,000 $ 53.00 Outstanding at March 31, 2019 350,000 $ 42.16 8.5 years $ 1,329 Exercised ( 10,000 ) $ 6.30 Outstanding at June 30, 2019 340,000 $ 43.21 8.4 years $ 445 Exercisable at June 30, 2019 92,500 $ 36.36 7.3 years $ 380 The following table summarizes information about options exercised for the three and six months ended June 30, 2020 and 2019 (option amounts not in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Options exercised — 10,000 10,000 10,000 Total intrinsic value of exercised options $ — $ 547 $ 288 $ 547 Tax benefits realized $ — $ 88 $ 71 $ 88 For the three months ended June 30, 2020 and 2019, the Company recognized $ 297 and $ 200 , respectively, of compensation expense which was included in general and administrative personnel expenses. For the six months ended June 30, 2020 and 2019, the Company recognized $ 580 and $ 425 , respectively, of compensation expense. Deferred tax benefits related to stock options were $ 19 and $ 20 for the three months ended June 30, 2020 and 2019, respectively, and $ 38 and $ 39 for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, there was $ 2,488 and $ 1,835 , respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.7 years. The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the six months ended June 30, 2020 and 2019: 2020 2019 Expected dividend yield 3.48 % 3.34 % Expected volatility 38.68 % 40.17 % Risk-free interest rate 1.63 % 2.53 % Expected life (in years) 5 5 40 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Restricted Stock Awards From time to time, the Company has granted and may grant restricted stock awards to its executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, performance and market-based conditions. The determination of fair value with respect to the awards containing only service-based conditions is based on the market value of the Company’s common stock on the grant date. Information with respect to the activity of unvested restricted stock awards during the three and six months ended June 30, 2020 and 2019 is as follows: Number of Weighted Restricted Average Stock Grant Date Awards Fair Value Nonvested at January 1, 2020 396,760 $ 41.71 Granted 45,000 $ 44.97 Vested ( 31,250 ) $ 40.97 Forfeited ( 7,138 ) $ 42.60 Nonvested at March 31, 2020 403,372 $ 42.12 Granted 145,000 $ 45.59 Vested ( 104,926 ) $ 41.16 Forfeited ( 5,220 ) $ 43.75 Nonvested at June 30, 2020 438,226 $ 43.48 Nonvested at January 1, 2019 632,296 $ 33.33 Granted 40,000 $ 47.94 Vested ( 21,250 ) $ 37.69 Forfeited ( 4,681 ) $ 42.79 Nonvested at March 31, 2019 646,365 $ 34.03 Granted 133,160 $ 41.30 Vested ( 84,914 ) $ 41.58 Forfeited ( 264,211 ) $ 23.81 Nonvested at June 30, 2019 430,400 $ 41.06 41 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $ 1,722 and $ 1,269 for the three months ended June 30, 2020 and 2019, respectively, and $ 3,280 and $ 2,523 for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, there was approximately $ 17,483 and $ 12,661 , respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.9 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the three and six months ended June 30, 2020 and 2019. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Deferred tax benefits recognized $ 319 $ 244 $ 603 $ 490 Tax benefits realized for restricted stock and paid dividends $ 1,186 $ 924 $ 1,239 $ 985 Fair value of vested restricted stock $ 4,319 $ 3,530 $ 5,599 $ 4,331 During 2019, all shares of restricted stock awards granted to employee and nonemployee directors with market-based vesting conditions were forfeited due to not meeting the vesting conditions. The dividend payments associated with these awards were expensed when declared. As a result, for the three months ended June 30, 2019, the Company recognized dividends of $ 113 related to these awards in general and administrative personnel expenses for $ 85 and in other operating expenses for $ 28 . For the six months ended June 30, 2019, the Company recognized dividends of $ 227 in general and administrative personnel expenses for $ 170 and in other operating expenses for $ 57 . Note 21 -- Commitments and Contingencies Capital Commitment As described in Note 5 -- “Investments” under Limited Partnership Investments , the Company is contractually committed to capital contributions for limited partnership interests. At June 30, 2020, there was an aggregate unfunded balance of $ 13,660 . Litigation On April 1, 2020, Gulf to Bay LM, LLC, the Company’s wholly owned real estate subsidiary, sued Kroger Co. in federal district court to enforce a guaranty of a commercial lease executed between Gulf to Bay LM, LLC and Lucky’s Market Operating Company, LLC. Lucky’s filed for bankruptcy earlier this year. 42 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 22 -- Subsequent Events On July 2, 2020 , the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share. The dividends are payable on September 18, 2020 to stockholders of record on August 21, 2020 . On July 24, 2020, the Florida Department of Transportation (“FDOT”) exercised the power of eminent domain under the Florida Constitution in order to acquire for a highway expansion project the property in Tampa, Florida where the Company’s headquarters is located for compensation of $ 47,500 . Under the terms of the agreement, the FDOT assumed all contracts associated with this property, including the leases with existing tenants. In addition, the Company agreed to donate a small portion of a separate tract of nearby undeveloped land it owns to the FDOT for the same expansion project. The Company will have no later than July 24, 2023 to vacate the property. In connection with this transaction, the Company recognized a net gain from involuntary conversion of approximately $ 37,000 . On July 29, 2020, the Company made an early repayment of its 4 % Promissory Note totaling $ 7,062 in principal plus accrued interest. The note was collateralized by the Company’s Tampa, Florida headquarters which was acquired by the FDOT in the eminent domain proceedings . 43