What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 447 added, 636 removed, 683 unchanged (61% of the section changed)

4 unchanged sentences

(Dollar amounts in thousands)

September 30,

Fixed-maturity securities, available for sale, at fair value (amortized cost:

$ 199,954 , respectively and allowance for credit losses:

and $ 70,265 , respectively and allowance for credit losses:

$ 579 and $ 588 , respectively)

1 unchanged sentence

$ 45,968 and $ 47,029 , respectively)

Short-term investments, at fair value

Limited partnership investments

Investment in unconsolidated joint venture, at equity

Assets held for sale

Real estate investments

4 unchanged sentences

Income taxes receivable

Premiums receivable

Premiums receivable, net

Prepaid reinsurance premiums

6 unchanged sentences

Property and equipment, net

Right-of-use assets - operating leases

Intangible assets, net

3 unchanged sentences

(Dollar amounts in thousands)

September 30,

Liabilities and Stockholders’ Equity

Liabilities and Equity

Losses and loss adjustment expenses

2 unchanged sentences

Assumed reinsurance balances payable

Reinsurance payable on paid losses and loss adjustment expenses

Accrued expenses

2 unchanged sentences

Long-term debt

Lease liabilities - operating leases

Other liabilities

1 unchanged sentence

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 September 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 September 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 September 30, 2020 and December 31, 2019, respectively, no shares issued

or outstanding)

Redeemable noncontrolling interest (Note 18)

Common stock ( no par value, 40,000,000 shares authorized, 8,289,682 and 7,785,617

7,764,564 shares issued and outstanding at September 30, 2020 and

December 31, 2019, respectively)

shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)

Additional paid-in capital

2 unchanged sentences

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying Notes to Consolidated Financial Statements

Noncontrolling interests

Total liabilities, redeemable noncontrolling interest and equity

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Gross premiums earned

1 unchanged sentence

Net premiums earned

Net investment income

Net investment income (loss)

Net realized investment gains (losses)

Net unrealized investment gains (losses)

Net unrealized investment losses

Credit losses on investments

Policy fee income

Gain on involuntary conversion

Total revenue

3 unchanged sentences

Interest expense

Loss on repurchases of convertible senior notes

Loss on extinguishment of debt

Other operating expenses

2 unchanged sentences

Income tax expense

Net income attributable to redeemable noncontrolling interest (Note 18)

Net loss attributable to noncontrolling interests

Net income attributable to HCI

Basic earnings per share

Diluted earnings per share

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

Three Months Ended

Nine Months Ended

September 30,

Other comprehensive income:

Change in unrealized gain (loss) on investments:

Net unrealized gains arising during the period

Other comprehensive loss:

Change in unrealized loss on investments:

Net unrealized losses arising during the period

Credit losses charged to income

Call and repayment gains charged to investment income

Reclassification adjustment for net realized losses (gains)

Net change in unrealized gains (losses)

Reclassification adjustment for net realized (gains) losses

Net change in unrealized losses

Deferred income taxes on above change

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

Comprehensive income

See accompanying Notes to Consolidated Financial Statements.

Total other comprehensive loss, net of income taxes

Comprehensive income (loss)

Comprehensive loss attributable to noncontrolling interests

Comprehensive income (loss) attributable to HCI

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended September 30, 2020

Consolidated Statement of Equity

For the Three Months Ended March 31, 2021

(Dollar amounts in thousands, except per share amount)

1 unchanged sentence

Stockholders’

Balance at June 30, 2020

Total other comprehensive income, net of

Noncontrolling

Balance at December 31, 2020

Net income (loss)

Cumulative effect of change in accounting

Total other comprehensive loss, net of

Issuance of restricted stock

Forfeiture of restricted stock

Cancellation of restricted stock

Repurchase and retirement of common stock

Repurchase and retirement of common stock under

share repurchase plan

Common stock dividends ($ 0.40 per share)

Stock-based compensation

Additional paid-in capital shortfall allocated

to retained income

Balance at September 30, 2020

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC.

AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended September 30, 2019

(Dollar amounts in thousands, except per share amount)

Comprehensive

Stockholders’

Balance at June 30, 2019

Total other comprehensive income, net of

Issuance of restricted stock

Forfeiture of restricted stock

Repurchase and retirement of common stock under

share repurchase plan

Issuance of common stock

Dilution from subsidiary stock-based

Issuance of warrants, net of issuance costs (Note 18)

Common stock dividends ($ 0.40 per share)

Stock-based compensation

Tax basis adjustment on equity method investment

Additional paid-in capital shortfall allocated

to retained income

Balance at September 30, 2019

See accompanying Notes to Consolidated Financial Statements.

Additional paid-in capital shortfall

adjustment allocated to retained income

Balance at March 31, 2021

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

1 unchanged sentence

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2020

(Dollar amounts in thousands, except per share amount)

Comprehensive

Income (Loss),

Stockholders’

12 unchanged sentences

to retained income

Balance at September 30, 2020

See accompanying Notes to Consolidated Financial Statements.

HCI GROUP, INC.

AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2019

(Dollar amounts in thousands, except per share amount)

Comprehensive

(Loss) Income,

Stockholders’

Balance at December 31, 2018

Total other comprehensive income, net of income

Exercise of common stock options

Issuance of restricted stock

Forfeiture of restricted stock

Repurchase and retirement of common stock

under share repurchase plan

Common stock dividends ($ 1.20 per share)

Stock-based compensation

Tax basis adjustment on equity method investment

Additional paid-in capital shortfall allocated

to retained income

Balance at September 30, 2019

See accompanying Notes to Consolidated Financial Statements.

Balance at March 31, 2020

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

2 unchanged sentences

(Amounts in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

Net income attributable to HCI

Net income attributable to noncontrolling interests

Adjustments to reconcile net income to net cash provided by operating

Stock-based compensation

Net (accretion of discounts) amortization of premiums on investments

Net amortization of premiums (accretion of discounts) on investments

in fixed-maturity securities

Depreciation and amortization

Deferred income tax expense

Net realized investment losses

Net unrealized investment losses (gains)

Credit loss expense

Deferred income tax benefit

Net realized investment (gains) losses

Net unrealized investment losses

Credit loss expense - investments

Credit loss expense - reinsurance recoverable

Loss from unconsolidated joint venture

Net loss (income) from limited partnership interests

Net (income) loss from limited partnership interests

Distributions received from limited partnership interests

Loss on repurchases of convertible senior notes

Loss on extinguishment of debt

Gain on involuntary conversion

Foreign currency remeasurement loss

2 unchanged sentences

Accrued interest and dividends receivable

Premiums receivable

Premiums receivable, net

Prepaid reinsurance premiums

5 unchanged sentences

Assumed reinsurance balances payable

Reinsurance payable on paid losses and loss adjustment expenses

Accrued expenses and other liabilities

4 unchanged sentences

(Amounts in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from investing activities:

6 unchanged sentences

Purchase of short-term and other investments

Compensation received for property condemned through eminent domain

Proceeds from sales of fixed-maturity securities

8 unchanged sentences

Proceeds from exercise of common stock options

Proceeds from issuance of redeemable noncontrolling interest

Issuance costs - redeemable noncontrolling interest

Proceeds from issuance of long-term debt

Repayment of long-term debt

Repurchases of convertible senior notes

Repurchases of common stock

1 unchanged sentence

Debt issuance costs

Net cash used in financing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash, cash equivalents, and restricted cash

Net increase in cash, cash equivalents, and restricted cash

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

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

HCI GROUP, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Amounts in thousands)

Three Months Ended

Supplemental disclosure of cash flow information:

2 unchanged sentences

Non-cash investing and financing activities:

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

Addition to property and equipment under capital lease

See accompanying Notes to Consolidated Financial Statements.

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

Receivable from sales of equity securities

Receivable from maturities of fixed-maturity securities

Payable on purchases of equity securities

Payable on purchases of fixed-maturity securities

Warrants issued in Centerbridge transaction

Acquisition of intangibles:

Common stock issued

Contingent consideration payable

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC.

5 unchanged sentences

(“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.

In October 2020, TypTap began applying to offer homeowners coverage in 20 states outside of Florida.

Both HCPCI and TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida and in several other states.

The operations of both insurance subsidiaries are supported by HCI Group, Inc.

and certain HCI subsidiaries.

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 were 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, but later decided to exit the business permanently in October 2020.

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

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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.

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.

The Company emphasizes the use of internally developed technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries.

Effective December 31, 2020, United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), ceded a portion of its personal lines insurance business in the states of Connecticut, New Jersey, Massachusetts, and Rhode Island to HCPCI.

Under the reinsurance agreement, HCPCI provides 69.5 % quota share reinsurance on all of United’s in-force, new and renewal policies in those states from December 31, 2020 through May 31, 2021.

In exchange, HCPCI paid United an allowance of $ 4,400 towards already purchased catastrophe reinsurance and a provisional ceding commission of 25 % of premium.

That percentage could increase up to 31.5 % depending on the direct loss ratio results from the reinsured business.

On January 18, 2021, the Company entered into a renewal rights agreement with United in connection with the assumed business.

Under the agreement, the Company acquired all rights to renew and/or replace United’s homeowners insurance policies at the end of their respective policy periods in the states of Connecticut, Massachusetts, New Jersey and Rhode Island.

The policy replacement date is June 1, 2021 or such other date as mutually agreed by both parties.

The agreement also contains a non-compete clause that does not permit United to engage in marketing, selling, writing, renewing, or servicing any homeowners insurance contracts in these states until July 1, 2024.

In return, United received 100,000 shares of HCI’s common stock and will receive a 6 % commission on any replacement premium in excess of $ 80,000 .

The total commission will not exceed $ 3,100 .

In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TypTap Insurance Group, Inc.

(“TTIG”) with a separate workforce, board of directors and financial reporting structure.

In February 2021, TTIG received a capital investment from a third party representing a minority interest as described in Note 18 -- “Redeemable Noncontrolling Interest.” Companies under TTIG include TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company, Inc., the parent company of an India company, Exzeo Software Private Limited.

TTIG and its subsidiaries are considered a new reporting segment known as TypTap Group.

The Company’s reportable segments now include HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other.

Real estate operations are conducted by Greenleaf Capital, LLC, the Company’s real estate subsidiary, which is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities.

Note 2 -- Summary of Significant Accounting Policies

2 unchanged sentences

and its majority-owned and controlled subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S.

GAAP have been omitted pursuant to such rules and regulations.

However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 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

GAAP”) for interim financial

HCI GROUP, INC.

2 unchanged sentences

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

notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 201 9 included in the Company’s Form 10-K, which was filed with the SEC on March 6 , 20 20 .

information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S.

GAAP have been omitted pursuant to such rules and regulations.

However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31 , 20 2 1 and the results of operations and cash flows for the interim periods presented.

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, 20 20 included in the Company’s Form 10-K, which was filed with the SEC on March 12 , 20 2 1 .

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.

2 unchanged sentences

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.

In addition, accounting policies specific to reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments, warrants, redeemable noncontrolling interest, intangible assets acquired from United, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements.

All significant intercompany balances and transactions have been eliminated.

Adoption of New Accounting Standards

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.

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

Accounting Standards Update No.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.

2020-06 (“ASU 2020-06”) Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40).

ASU 2020-06 removes certain bifurcation models for convertible debt instruments and convertible preferred stock.

Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital.

The amendments also remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amend the derivative scope exception guidance for contracts in an entity’s own equity.

In addition, the amendments expand disclosure requirements for convertible instruments and simplify areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments.

The Company elected to early adopt this update on January 1, 2021 using the modified retrospective method.

The adoption of this update increased long-term debt by $ 4,000 and simultaneously decreased beginning retained income and deferred income tax liabilities by $ 3,018 and $ 982 , respectively.

The if-converted method will be the only permissible method for computing the dilutive effect of a convertible debt instrument.

Interest expense no longer includes amortization of debt discount.

HCI GROUP, INC.

2 unchanged sentences

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

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 States 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.

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

Redeemable Noncontrolling Interest

Redeemable noncontrolling interest represents an economic interest in TTIG and is presented in the temporary equity (mezzanine) section of the consolidated balance sheet.

The interest contains rights in dividends, voting, conversion, participation, liquidation preference and redemption.

The redemption feature is not solely within the control of TTIG (See Note 18 -- “Redeemable Noncontrolling Interest”).

The redeemable noncontrolling interest is initially recorded at fair value and is decreased by related issuance costs.

The fair value is estimated using a residual fair value approach.

The effect of increasing dividend rates is accreted to the redeemable noncontrolling interest with a corresponding debit to retained income.

The effective interest method is used for accretion over the period of the increasing dividend rates.

The carrying value of the interest is also subsequently adjusted for accrued dividends and dividend payments.

The Company has an option to pay the dividends in cash or make a payment in kind.

The dividends are accrued monthly assuming that they will be settled in cash.

When the redemption is probable, the Company elects to recognize changes in the redemption value immediately as it occurs and adjust the carrying value of the interest to the maximum redemption value which is the higher of the redemption price or fair market value at the reporting date.

Such changes in the redemption value are treated as dividends when calculating income available to common stockholders.

Noncontrolling Interests

The Company has noncontrolling interests attributable to TTIG.

A noncontrolling interest arises when the Company has less than 100 % of the voting rights and economic interests in a subsidiary.

The noncontrolling interest is periodically adjusted for the expensing of TTIG’s restricted stock awards granted to its employees, the interest’s share of TTIG’s net income or loss to common stockholders and change in other comprehensive income or loss.

Stock-Based Compensation

The Company accounts for stock-based compensation under the fair value recognition provisions of U.S.

GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors based on estimated fair values.

In accordance with U.S.

GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is defined as the period during which a recipient is required to provide service in exchange for an award.

Forfeitures of the Company’s stock-based awards are accounted for as they occur.

The Company uses a straight-line attribution method for all grants that include only a service condition.

Restricted stock grants with market conditions are expensed over the derived service period.

Expensing market-based awards may be expedited if the conditions are met sooner than anticipated.

The Company’s outstanding stock-based awards include stock options and restricted stock awards with service and market conditions.

Compensation expense related to all awards is included in general and administrative personnel expenses.

The Company receives a windfall tax benefit for certain stock option exercises and for restricted stock awards if these awards vest at a higher value than the value used to recognize compensation expense.

In the event the restricted stock awards vest at a lower value than the value used to recognize compensation expense, the Company experiences a tax shortfall.

The Company recognizes tax windfalls and shortfalls in the consolidated statements of income.

HCI GROUP, INC.

2 unchanged sentences

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

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 September 30, 2020 and December 31, 2019, allowances for uncollectible premiums were $ 2,369 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.

Reclassification

In response to the new reporting segment described in Note 1 -- “Nature of Operations,” the prior period segment information has been reclassified to conform with the current period presentation.

TypTap and TypTap Management Company were removed from the segment previously referred to as Insurance Operations to form the new TypTap Group segment.

The information technology companies which had previously been presented in the Corporate and Other segment were also added to the TypTap Group segment.

Note 3 -- Recent Accounting Pronouncements

Accounting Standards Update No.

In January 2020, the Financial Accounting Standards Board (“FASB”) 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.

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Accounting Standards Update No.

In August 2020, the FASB issued A ccounting S tandards U pdate No.

2020-06 (“ASU 2020-06”) Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).

ASU 2020-06 remove s certain bifurcation models for convertible debt instruments and convertible preferred stock.

In addition , the amendments expand disclosure requirements for convertible instruments and simplif y areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments.

ASU 2020-06 is effective for the Company beginning with the first quarter of 2022 and will be applied prospectively.

Early adoption is permitted.

The Company is evaluating the impact of this update on its financial position.

In January 2021, the FASB issued Accounting Standards Update No.

2021-01 (“ASU 2021-01”) Reference Rate Reform (Topic 848).

This update refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities.

ASU 2021-01 permits entities to apply certain optional expedients to modifications of interest rate indexes used for margining, discounting or contract price alignment of certain derivatives in connection with reference rate reform activities under way in global financial markets.

It also extends optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition.

ASU 2021-01 is effective immediately and does not have any material impact on the Company’s consolidated financial statements.

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

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

September 30,

Cash and cash equivalents

1 unchanged sentence

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

To facilitate TypTap’s expansion plan to other states, the Company increased its funds held at the State of Florida by $ 1,700 during the third quarter of 2020.

HCI GROUP, INC.

5 unchanged sentences

The Company holds investments in fixed-maturity securities that are classified as available-for-sale.

At September 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:

Allowance for Credit

As of September 30, 2020

At March 31, 2021 and December 31, 2020, the cost or amortized cost, allowance for credit loss, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:

As of March 31, 2021

Treasury and U.S.

1 unchanged sentence

Corporate bonds

State, municipalities, and political subdivisions

States, municipalities, and political subdivisions

Exchange-traded debt

4 unchanged sentences

Corporate bonds

State, municipalities, and political subdivisions

States, municipalities, and political subdivisions

Exchange-traded debt

1 unchanged sentence

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties.

The scheduled contractual maturities of fixed-maturity securities as of September 30, 2020 and December 31, 2019 are as follows:

As of September 30, 2020

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

As of December 31, 2019

The scheduled contractual maturities of fixed-maturity securities as of March 31, 2021 and December 31, 2020 are as follows:

Amortized Cost

Available-for-sale

Due in one year or less

7 unchanged sentences

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three months ended September 30, 2020

Three months ended September 30, 2019

Nine months ended September 30, 2020

Nine months ended September 30, 2019

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31, 2021

Three months ended March 31, 2020

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

Securities with gross unrealized loss positions at September 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:

Securities with gross unrealized loss positions at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

Less Than Twelve Months

Twelve Months or Longer

As of September 30, 2020

As of March 31, 2021

Treasury and U.S.

government agencies

Corporate bonds

Exchange-traded debt

Redeemable preferred stock

At September 30, 2020, there were 13 securities in an unrealized loss position.

Of these securities, none had been in an unrealized loss position for 12 months or longer.

Total available-for-sale securities

Less Than Twelve Months

4 unchanged sentences

Corporate bonds

States, municipalities, and political subdivisions

Exchange-traded debt

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.

Total available-for-sale securities

At March 31, 2021 and December 31, 2020, there were 17 and 12 securities, respectively, in an unrealized loss position.

HCI GROUP, INC.

4 unchanged sentences

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 Company considers various factors in determining whether a credit loss exists for each individual security, including-

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

3 unchanged sentences

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 nine months ended on September 30, 2020:

The table below summarized the activity in the allowance for credit losses of available-for-sale securities for the three months ended March 31, 2021 and 2020:

Balance at January 1

Credit loss expense

Reductions for securities sold

Balance at March 31

Credit loss expense

Balance at June 30

Credit loss expense

Balance at September 30

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable.

At September 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:

September 30, 2020

At March 31, 2021 and December 31, 2020, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

March 31, 2021

December 31, 2020

3 unchanged sentences

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

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

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

Three Months Ended

Nine Months Ended

September 30,

Net gains (losses) recognized

1 unchanged sentence

securities sold

Net unrealized gains (losses) recognized

Net unrealized losses recognized

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three months ended September 30, 2020

Three months ended September 30, 2019

Nine months ended September 30, 2020

Nine months ended September 30, 2019

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31, 2021

Three months ended March 31, 2020

HCI GROUP, INC.

7 unchanged sentences

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

September 30, 2020

March 31, 2021

December 31, 2020

29 unchanged sentences

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.

The capital commitment was extended and is now expected to expire on December 1, 2020 .

The capital commitment period has ended but an additional funding may be requested.

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

6 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Operating results:

1 unchanged sentence

Net (loss) income

September 30,

Balance sheet:

Total liabilities

For the three and nine months ended September 30, 2020, the Company recognized net investment income of $ 689 and net investment loss of $ 2,058 , respectively, for these investments.

During the three and nine months ended September 30, 2020, the Company received total cash distributions of $ 850 and $ 1,742 , respectively, including returns on investment of $ 72 and $ 650 , respectively.

For the three and nine months ended September 30, 2019, the Company recognized net investment income of $ 476 and $ 1,308 , respectively.

During the three and nine months ended September 30, 2019, the Company received total cash distributions of $ 724 and $ 4,810 , respectively.

Cash distributions representing return on investment were $ 31 and $ 3,647 for the three and nine months ended September 30, 2019, respectively.

At September 30, 2020 and December 31, 2019, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $ 28,976 and $ 27,117 , respectively, and the Company’s maximum exposure to loss aggregated $ 27,497 and $ 28,346 , respectively.

For the three months ended March 31, 2021, the Company recognized net investment income of $ 787 versus net investment loss of $ 2,935 for the three months ended March 31, 2020.

Included in the net investment loss for the three months ended March 31, 2020 was $ 2,968 of an estimated unfavorable change in net asset value due to the impact of COVID-19.

During the three months ended March 31, 2021 and 2020, the Company received total cash distributions of $ 2,024 and $ 696 , respectively, including returns on investment of $ 478 and $ 382 , respectively.

At March 31, 2021 and December 31, 2020, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $ 27,998 and $ 29,272 , respectively, and the Company’s maximum exposure to loss aggregated $ 26,726 and $ 27,691 , respectively.

d) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S.

At September 30, 2020 and December 31, 2019, the Company’s maximum exposure to loss relating to the variable interest entity was $ 716 and $ 762 , respectively, representing the carrying value of the investment.

There were no cash distributions during the nine months ended September 30, 2020 and 2019.

At September 30, 2020 and December 31, 2019, there was no undistributed income from this equity method investment.

At March 31, 2021 and December 31, 2020, the Company’s maximum exposure to loss relating to the variable interest entity was $ 680 and $ 705 , respectively, representing the carrying value of the investment.

There were no cash distributions during the three months ended March 31, 2021 and 2020.

At March 31, 2021 and December 31, 2020, there was no undistributed income from this equity method investment.

The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:

Three Months Ended

Nine Months Ended

September 30,

Operating results:

Total revenues and gain

Total revenues

Total expenses

Net income (loss)

The Company’s share of net loss*

4 unchanged sentences

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

September 30,

Balance sheet:

5 unchanged sentences

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.

f) Real Estate Investments

Real estate investments consist of the following as of September 30, 2020 and December 31, 2019.

September 30,

e) Real Estate Investments

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

Land improvements

3 unchanged sentences

Real estate investments

In July 2020, a portion of undeveloped land with a carrying value of $ 443 was acquired by the Florida Department of Transportation (“FDOT”) as part of the agreement described in Note 9 – “Property and Equipment, Net.”

For the three months ended March 31, 2021, the Company incurred a $ 21 loss on disposal of assets related to a closure of a restaurant.

Depreciation and amortization expense related to real estate investments was $ 491 and $ 455 for the three months ended March 31, 2021 and 2020, respectively.

HCI GROUP, INC.

2 unchanged sentences

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

Depreciation and amortization expense related to real estate investments was $ 431 and $ 379 for the three months ended September 30, 2020 and 2019 , respectively , and $ 1,318 and $ 1,133 for the nine months ended September 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 Income (Loss)

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Available-for-sale fixed-maturity securities

6 unchanged sentences

Short-term investments

Net investment income

Net investment income (loss)

For the three months ended March 31, 2021, income from real estate investments included a net gain of $ 2,790 resulting from a legal settlement with The Kroger Co.

in a lawsuit filed by a real estate subsidiary of the Company to enforce a guaranty of a commercial lease.

Note 6 -- Comprehensive Income (Loss)

4 unchanged sentences

Three Months Ended

September 30, 2020

September 30, 2019

Unrealized gains arising during the period

Change in allowance for credit losses

Call and repayment (gains) losses charged to

March 31, 2021

March 31, 2020

Unrealized losses arising during the period

Credit losses on investments

Call and repayment gains charged to

investment income

Reclassification adjustment for realized

Total other comprehensive gains

(gains) losses

Total other comprehensive loss

HCI GROUP, INC.

2 unchanged sentences

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

Nine Months Ended

September 30, 2020

September 30, 2019

Unrealized (losses) gains arising during the

Change in allowance for credit losses

Call and repayment gains charged to

investment income

Reclassification adjustment for

realized gains

Total other comprehensive (losses) gains

Note 7 -- Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair value.

The Company records and discloses certain financial assets at their estimated fair values.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Unadjusted quoted prices in active markets for identical assets or liabilities.

Unadjusted quoted prices in active markets for identical assets.

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.

6 unchanged sentences

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

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

2 unchanged sentences

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

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

measured using unobservable inputs.

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.

4 unchanged sentences

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

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Revolving C redit F acility

The Company’s revolving credit facility is a variable-rate loan.

7 unchanged sentences

Discounted cash flow method/Level 3 inputs

4 % Promissory note

Discounted cash flow method/Level 3 inputs

3.75 % Callable promissory note

2 unchanged sentences

Discounted cash flow method/Level 3 inputs

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Assets Measured at Estimated Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis.

The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2020 and December 31, 2019:

The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of March 31, 2021 and December 31, 2020:

Fair Value Measurements Using

As of September 30, 2020

As of March 31, 2021

Financial Assets:

10 unchanged sentences

Equity securities

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Fair Value Measurements Using

3 unchanged sentences

Restricted cash

Short-term investments

Fixed-maturity securities:

7 unchanged sentences

Equity securities

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Assets and Liabilities Carried at Other Than Estimated Fair Value

The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of September 30, 2020 and December 31, 2019:

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

Fair Value Measurements Using

As of September 30, 2020

As of March 31, 2021

Financial Liabilities:

Revolving credit facility

Long-term debt:

11 unchanged sentences

3.90 % Promissory note

4 % Promissory note

3.75 % Callable promissory note

1 unchanged sentence

Total long-term debt

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.

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.

On July 24, 2020, the 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 $ 44,000 , net of $ 3,500 in legal and related expenses.

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

HCI GROUP, INC.

2 unchanged sentences

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

July 24, 2023 to vacate the property.

In connection with this transaction, the Company recognized a gain from involuntary conversion of $ 36,969 .

In addition, the Company used a portion of the proceeds to repay the 4 % Promissory Note as described in Note 12 – “Long-Term Debt.”

Note 8 -- Intangible Assets

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

Anchor tenant relationships*

In-place leases

Policy renewal rights - United

Non-compete agreement - United

Total, at cost

accumulated amortization

Intangible assets, net

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

The remaining weighted-average amortization periods for the intangible assets at March 31, 2021 are summarized in the table below:

Anchor tenant relationships*

In-place leases

Policy renewal rights - United

Non-compete agreement - United

(a) The amortization period has not been determined as the attrition rate in those states needs further observation.

The Company recorded intangible assets of $ 7,829 representing the renewal rights and non-compete agreement described in Note 1 -- “Nature of Operations” in exchange for 100,000 shares of HCI’s common stock and contingent consideration which is a 6 % commission on any replacement premium in excess of $ 80,000 .

The contingent consideration was estimated at $ 2,419 which was included in other liabilities on the consolidated balance sheet.

Amortization of the intangible assets was expected to begin June 1, 2021 .

The renewal rights and non-compete intangible assets acquired do not meet the definition of a business as substantially all of the fair value of the intangible assets acquired are concentrated in a group of similar assets.

Therefore, the Company accounted for the purchase of the renewal rights and non-compete intangibles assets as an asset acquisition.

Total consideration paid consisted of $ 5,410 worth of HCI’s common stock plus a contingent liability of $ 2,419 .

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 9 -- Other Assets

The following table summarizes the Company’s other assets.

September 30,

Benefits receivable related to retrospective

reinsurance contract

Funds held in a trust account*

Benefits receivable related to retrospective reinsurance

Prepaid expenses

Lease acquisition costs, net

Right-of-use assets – operating leases

Total other assets

* Represents a balance of unearned written premium, net of provisional commission and catastrophe cost allowance under the reinsurance contract between HCPCI and United.

Note 10 -- Revolving Credit Facility

During the first quarter of 2020, the Company borrowed an additional amount of $ 14,000 for general business purposes.

On August 11, 2020, the Company repaid the amount of $ 15,000 of its outstanding balance.

For the three months ended September 30, 2020 and 2019, interest expense was $ 108 and $ 132 , respectively, including $ 39 of amortization of issuance costs in each of the periods.

For the nine months ended September 30, 2020 and 2019, interest expense was $ 423 and $ 328 , respectively, including $ 118 of amortization of issuance costs in each of the periods.

At September 30, 2020, the Company was in compliance with all required covenants, and there were $ 8,750 of borrowings outstanding.

In March 2021, the Company repaid the entire credit facility balance of $ 23,750 .

For the three months ended March 31, 2021 and 2020, interest expense was $ 104 and $ 153 , respectively, including $ 25 and $ 39 of amortization of issuance costs, respectively.

At March 31, 2021, the Company was in compliance with all required covenants with no borrowings outstanding.

The borrowing capacity of the facility is now $ 65,000 .

Note 11 -- Long-Term Debt

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

September 30,

4.25 % Convertible senior notes, due March 1, 2037

3.95 % Promissory note, due through February 17, 2020

4 % Promissory note, due through July 29, 2020

3.75 % Callable promissory note, due through September 1, 2036

4.55 % Promissory note, due through August 1, 2036

3.90 % Promissory note, due through April 1, 2032

3.75 % Callable promissory note, due through

September 1, 2036

4.55 % Promissory note, due through August 1, 2036

Finance lease liabilities, due through August 15, 2023

2 unchanged sentences

Total long-term debt

* Effective January 1, 2021, the balance includes only unamortized issuance costs.

See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies.”

HCI GROUP, INC.

2 unchanged sentences

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

The following table summarizes future maturities of long-term debt as of September 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 September 30,

The following table summarizes future maturities of long-term debt as of March 31, 2021, which takes into consideration the assumption that the 4.25 % Convertible Senior Notes are repurchased at the earliest call date.

Due in 12 months following March 31,

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

Three Months Ended

Nine Months Ended

September 30,

Interest Expense:

3 unchanged sentences

Includes amortization of debt discount and issuance costs.

Amortization of debt discount discontinued effective January 1, 2021.

See Adoption of New Accounting Standards in Note 2 -- “Summary of Significant Accounting Policies” for additional information.

Interest was capitalized for a construction project.

2 unchanged sentences

The Company’s recent cash dividends on common stock have exceeded $ 0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes.

Accordingly, as of September 30, 2020, the conversion rate of the Company’s 4.25 % Convertible Notes was 16.42 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $ 60.91 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 September 30, 2020, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 1.4 years.

4% Promissory Note

On July 29, 2020, the Company made an early repayment of its 4 % Promissory Note totaling $ 7,062 in principal plus accrued interest.

As a result, the Company incurred $ 98 of loss on extinguishment of debt.

The note was collateralized by the Company’s Tampa, Florida headquarters which was acquired by the FDOT in the eminent domain proceedings as described in Note 9 – “Property and Equipment, Net.”

3.95% Promissory Note

In February 2020, the Company repaid its 3.95 % Promissory Note for $ 8,891 including principal and unpaid interest payable at maturity date .

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.

Accordingly, as of March 31, 2021, the conversion rate of the Company’s 4.25 % Convertible Notes was 16.45 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $ 60.80 per share.

As of March 31, 2021, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 1 year.

Note 12 -- Reinsurance

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The reinsurance premiums under one flood catastrophe excess of loss reinsurance contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter.

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements.

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Three Months Ended

Nine Months Ended

September 30,

Premiums Written:

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Net premiums earned

During the three months ended March 31, 2021 and 2020, the Company recognized ceded losses of $ 107 and $ 338 , respectively, as a reduction in losses and loss adjustment expenses.

At March 31, 2021 and December 31, 2020, there were 38 reinsurers participating in the Company’s reinsurance program.

Total gross amounts recoverable and receivable from reinsurers at March 31, 2021 and December 31, 2020 were $ 71,722 and $ 85,146 , respectively.

Approximately 61.3 % of the reinsurance recoverable balance at March 31, 2021 was receivable from two reinsurers, including the Florida Hurricane Catastrophe Fund, a state trust fund.

Based on all available information considered in the rating-based method, the Company recognized decreases in credit loss expense of $ 12 and $ 24 for the three months ended March 31, 2021 and 2020, respectively.

Allowances for credit losses related to the reinsurance recoverable balance were $ 73 and $ 85 at March 31, 2021 and December 31, 2020, respectively.

One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero.

For the three months ended March 31, 2021 and 2020, the Company recognized reductions in premiums ceded of $ 4,680 and $ 2,520 , respectively, related to these adjustments in the consolidated statements of income.

Amounts receivable pursuant to retrospective provisions are reflected in other assets.

At March 31, 2021 and December 31, 2020, other assets included $ 15,600 and $ 10,920 , respectively.

Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.

HCI GROUP, INC.

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

During the three and nine months ended September 30, 2020, the Company recognized ceded losses of $ 1,871 and $ 2,220 , respectively, as a reduction in losses and loss adjustment expenses, and ceded losses of $ 113,888 were recognized in each of the three and nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019, there were 38 and 31 reinsurers, respectively, participating in the Company’s reinsurance program.

Total gross amounts recoverable and receivable from reinsurers at September 30, 2020 and December 31, 2019 were $ 95,274 and $ 132,678 , respectively.

Approximately 58.6 % of the reinsurance recoverable balance at September 30, 2020 was receivable from three reinsurers, including the Florida Hurricane Catastrophe Fund, a state trust fund.

Based on all available information considered in the rating-based method described in Note 2 – “Summary of Significant Accounting Policies,” the Company recognized a decrease in credit loss expense of $ 14 and $ 363 for the three and nine months ended September 30, 2020, respectively.

Allowances for credit losses related to the reinsurance recoverable balance were $ 90 and $ 0 at September 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 nine months ended September 30, 2020, the Company recognized reductions in premiums ceded of $ 4,680 and $ 10,440 , respectively, related to these adjustments in the consolidated statement of income.

For the three and nine months ended September 30, 2019, the Company recognized net reductions in premiums ceded of $ 2,520 and $ 4,258 , respectively, related to these adjustments.

Amounts receivable pursuant to retrospective provisions are reflected in other assets.

At September 30, 2020 and December 31, 2019, other assets included $ 6,240 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.

Effective January 2021, the Company began providing 69.5 % quota share reinsurance on all in-force, new and renewal policies issued by United.

The policies were issued in the states of Connecticut, New Jersey, Massachusetts and Rhode Island.

For the three months ended March 31, 2021, assumed premiums written related to United were $ 15,717 .

At March 31, 2021, the Company had a net balance of $ 2,024 due from United, consisting of premiums receivable of $ 5,788 offset by ceding commission payable of $ 1,447 and payable on paid losses and loss adjustment expenses of $ 2,317 .

Note 13 -- 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 for losses and loss adjustment expenses (“LAE”) is determined on an individual case basis for all claims reported.

The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred but not reported.

The Company primarily writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes.

The Company primarily writes insurance in the states, which could be exposed to hurricanes or other natural catastrophes.

The occurrence of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the Company.

However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

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

Three Months Ended

Nine Months Ended

September 30,

Net balance, beginning of period*

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Gross balance, end of period

*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.

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

The establishment of loss and LAE reserves is an inherently uncertain process and changes in loss and LAE reserve estimates are expected as these estimates are subject to the outcome of future events.

Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such estimates are adjusted.

During the three months ended September 30, 2020, the Company recognized losses related to prior periods of $ 1,200 primarily to increase the reserve for 2017, 2015 and prior loss years.

For the nine months ended September 30, 2020, the Company recognized losses related to prior periods of $ 2,825 for unfavorable development for 2019 and prior loss years resulting from litigation.

Estimated losses of $ 17,700 , net of reinsurance, related to Hurricane Sally are included in the 2020 loss year.

During the three months ended March 31, 2021, the Company recognized losses related to prior periods of $ 3,831 primarily to increase the reserve for the 2020 loss year.

Losses and LAE for the three months ended March 31, 2021 included estimated losses, net of reinsurance, of approximately $ 11,000 related to policies assumed from United and approximately $ 12,299 related to TypTap.

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 14 -- Segment Information

The Company identifies its operating divisions 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 Company identifies its operating divisions or segments based on managerial emphasis, organizational structure and revenue source.

In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TTIG with a separate workforce, board of directors and financial reporting structure.

Companies under TTIG include TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company, Inc., the parent company of an India company, Exzeo Software Private Limited.

TTIG and its subsidiaries are considered a new reporting segment known as TypTap Group.

The Company now has four reportable segments:

HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other.

Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance operations, excluding the insurance operations under TypTap Group, are grouped together into one reportable segment under HCPCI insurance operations.

The TypTap Group segment includes its property and casualty insurance operations, information technology operations and its management company’s activities.

The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations.

The corporate and other segment represents the activities of the holding companies, the information technology division, and other companies that do not meet the quantitative and qualitative thresholds for a reportable segment.

The corporate and other segment represents the activities of the holding companies and any other companies that do not meet the quantitative and qualitative thresholds for a reportable segment.

The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations.

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

For the three months ended September 30, 2020 and 2019, revenues from the Company’s insurance operations before intracompany elimination represented 71.1 % and 95.2 %, respectively, of total revenues of all operating segments.

For the nine months ended September 30, 2020 and 2019, revenues from the Company’s insurance operations before intracompany elimination represented 86.2 % and 95.0 %, respectively, of total revenues of all operating segments.

At September 30, 2020 and December 31, 2019, insurance operations’ total assets represented 83.0 % and 85.5 %, respectively, of the combined assets of all operating segments.

For the three months ended March 31, 2021 and 2020, revenues from the HCPCI insurance operations segment before intracompany elimination represented 77.7 % and 79.3 %, respectively, and revenues from the TypTap Group segment represented 17.2 % and 15.6 %, respectively, of total revenues of all operating segments.

At March 31, 2021 and December 31, 2020, HCPCI insurance operations’ total assets represented 62.2 % and 68.9 %, respectively, and TypTap Group’s total assets represented 23.9 % and 16.7 %, respectively, of the combined assets of all operating segments.

The following tables present segment information reconciled to the Company’s consolidated statements of income.

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Reclassification/

For Three Months Ended September 30, 2020

Net premiums earned

Net investment income (loss)

Net realized investment gains

Net unrealized investment gains

Credit losses on investments

Policy fee income

Gain on involuntary conversion

Total revenue

Losses and loss adjustment expenses

Amortization of deferred policy acquisition costs

Interest expense

Depreciation and amortization

Total expenses

(Loss) income before income taxes

Total revenue from non-affiliates(c)

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

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

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

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Reclassification/

For Three Months Ended September 30, 2019

Net premiums earned

Net investment income (loss)

Net realized investment (loss) gains

Net unrealized investment gains

Policy fee income

Total revenue

Losses and loss adjustment expenses

Amortization of deferred policy acquisition costs

Interest expense

Depreciation and amortization

Total expenses

Income (loss) before income taxes

Total revenue from non-affiliates(c)

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

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

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

Reclassification/

For Nine Months Ended September 30, 2020

For Three Months Ended March 31, 2021

Gross premiums earned (c)

Premiums ceded

Net premiums earned

Net investment income (loss)

Net realized investment losses

Net unrealized investment losses

Credit losses on investments

Net income from investment portfolio

Policy fee income

Gain on involuntary conversion

Total revenue

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Amortization of deferred policy acquisition costs

Other policy acquisition expenses

Interest expense

Depreciation and amortization

Personnel and other operating expenses

Total expenses

Income (loss) before income taxes

Total revenue (investment loss) from non-affiliates(c)

Total revenue from non-affiliates(d)

Gross premiums written

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

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

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

Gross premiums earned consist of $ 102,131 from HCPCI and $ 2,390 from a reinsurance company.

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

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Reclassification/

For Nine Months Ended September 30, 2019

For Three Months Ended March 31, 2020

Gross premiums earned

Premiums ceded

Net premiums earned

Net investment income (loss)

Net realized investment gains (losses)

Net unrealized investment gains

Net (loss) income from investment portfolio

Policy fee income

2 unchanged sentences

Amortization of deferred policy acquisition costs

Other policy acquisition expenses

Interest expense

Depreciation and amortization

Personnel and other operating expenses

Total expenses

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Total revenue from non-affiliates(c)

Gross premiums written

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

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

September 30,

Insurance Operations

HCPCI Insurance Operations

Real Estate Operations

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Consolidation and Elimination

Note 16 -- Leases

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

September 30,

Operating leases:

Finance leases:

HCI GROUP, INC.

2 unchanged sentences

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

As a result of the change in ownership of the Company’s headquarters building through the eminent domain proceeding described in Note 9 -- “Property and Equipment, Net,” all existing intercompany operating leases related to this building that were previously eliminated on consolidation are now reflected on the balance sheet.

These leases were determined to be at market rates on the date of the ownership change.

Note 15 -- Leases

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

Operating leases:

Finance leases:

The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:

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There is a bargain purchase option.

As of September 30, 2020, maturities of lease liabilities were as follows:

Due in 12 months following September 30,

As of March 31, 2021, maturities of lease liabilities were as follows:

Due in 12 months following March 31,

Total lease payments

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(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.

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

Three Months Ended

Nine Months Ended

September 30,

Finance lease costs:

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Total lease costs

Cash paid for amounts included in

the measurement of lease liabilities:

Cash paid for amounts included in the measurement of lease

Operating cash flows – finance leases

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Financing cash flows – finance leases

September 30, 2020

March 31, 2021

Weighted-average remaining lease term:

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Operating leases

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

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

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

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Note 16 -- Income Taxes

During the three months ended September 30, 2020 and 2019, the Company recorded approximately $ 6,146 and $ 1,866 respectively, of income taxes, which resulted in effective tax rates of 28.5 % and 24.2 %, respectively.

The increase in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the non-deductibility of certain executive compensation.

Furthermore, the Florida corporate income tax rate was reduced from 5.5 % to 4.458 % in September 2019.

During the nine months ended September 30, 2020 and 2019, the Company recorded approximately $ 9,143 and $ 7,173 , respectively, of income taxes, which resulted in effective tax rates of 26.9 % and 26.3 %, respectively.

The slight increase in the effective tax rate in 2020 as compared with the corresponding period in the prior year was primarily attributable

During the three months ended March 31, 2021 and 2020, the Company recorded approximately $ 3,257 and $ 110 respectively, of income taxes, which resulted in effective tax rates of 32.2 % and 16.7 %, respectively.

The increase in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to the derecognition of deferred tax assets attributable to unvested restricted stock that was cancelled in February 2021, offset by a slight decrease in non-deductibility of certain executive compensation.

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.

HCI GROUP, INC.

2 unchanged sentences

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

to the non-deductibility of executive compensation, offset by the recognition of the tax refund from the State of Florida for 2018 income taxes , and the recognition of windfall tax benefits related to share-based awards.

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 17 -- Earnings Per Share

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These participating securities affect the computation of both basic and diluted earnings per share during periods of net income or loss.

For a majority-owned subsidiary, its basic and diluted earnings per share are first computed separately.

Then, the Company’s proportionate share in that majority-owned subsidiary’s earnings is added to the computation of both basic and diluted earnings per share at a consolidated level.

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

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Three Months Ended

September 30, 2020

September 30, 2019

(Denominator)

Income attributable to participating

Basic Earnings Per Share:

Income allocated to common stockholders

Effect of Dilutive Securities:

Stock options

Convertible senior notes*

Diluted Earnings Per Share:

Income available to common stockholders and

assumed conversions

Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(Denominator)

Net income attributable to HCI

Income attributable to participating

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Stock options

Convertible senior notes

Convertible senior notes* (b)

Diluted Earnings Per Share:

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assumed conversions

For the three months ended September 30, 2019, convertible senior notes were excluded due to anti-dilutive effect.

Shares in thousands.

See Adoption of New Accounting Standards under Note 2 -- “Summary of Significant Accounting Policies” for additional information.

For the three months ended March 31, 2020, convertible senior notes were excluded due to anti-dilutive effect.

Note 18 -- Redeemable Noncontrolling Interest

On February 26, 2021, TTIG completed a capital investment transaction with a fund associated with Centerbridge Partners, L.P (collectively, the “Lead Investor”), a private investment management fund.

Under the investment agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $ 0.001 par value, at a price of $ 10 per share for total proceeds of $ 100,000 .

The proceeds will be used for TypTap’s operations and future expansion.

The Company incurred $ 6,262 of related issuance costs.

In connection with the transaction, the Lead Investor was granted by HCI warrants to purchase 750,000 shares of HCI’s common stock with an exercise price of $ 54.40 per share.

The warrants valued at $ 9,217 or $ 12.29 per warrant were immediately exercisable and will expire on the fourth anniversary of the date of issuance.

HCI GROUP, INC.

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

Note 19 -- Stockholders’ Equity

Dividends accrue and accumulate from the date of issuance.

Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option.

Cash dividend rates are $ 0.50 per share in Year 1, $ 0.60 per share in Year 2, $ 0.75 per share in Year 3, and $ 0.95 per share in Year 4 and thereafter.

The rates for paid-in-kind dividends are $ 0.60 per share in Year 1 and $ 0.70 per share in Year 2.

In addition, the Series A Preferred Stock will be paid dividends on an as-converted basis when and if TTIG declares common stock dividends.

Conversion Rights

The holders of TTIG’s Series A Preferred Stock have the right to convert the stock at any time into shares of TTIG’s common stock with an initial conversion rate of 1 to 1 .

The conversion rate will be adjusted under certain conditions.

Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon (1) a qualified public offering of TTIG’s common stock with gross proceeds of not less than $ 250,000 with a price per share at least equal to 150 % of the original purchase price of the Series A Preferred Stock, or (2) at the election of requisite holders of a majority of TTIG’s Series A Preferred Stock, whichever comes first.

Redemption Rights

On or after the fourth anniversary of the issuance date, TTIG’s Series A Preferred Stock is redeemable at the option of the holders at a price equal to the greater of (1) $ 10 per share plus any accrued but unpaid dividends and (2) a fair market value per share determined by an independent valuation firm selected by TTIG’s board of directors.

Management determined that the redemption was not probable at March 31, 2021.

Guaranty by HCI

All payment obligations to the holders of TTIG’s Series A Preferred Stock are fully guaranteed by HCI as long as TTIG’s Series A Preferred Stock is outstanding.

As the guarantor, HCI is subject to certain financial covenants.

Liquidation Preference

In the event of any liquidation, the Series A Preferred Stock ranks senior to TTIG’s common stock with respect to distribution rights.

Anti-Dilutive Protection

The holders of TTIG’s Series A Preferred Stock receive protection in form of a down-round feature which will be triggered in the event that TTIG issues additional common equivalent shares at an effective price per share less than $ 10 per share.

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The following table summarizes the activity of redeemable noncontrolling interest during the three months ended March 31, 2021:

Balance at January 1, 2021

Initial proceeds from Centerbridge

Increase (decrease):

Proceeds allocated to warrants*

Issuance costs

Issuance costs allocated to warrants*

Accrued dividends

Accretion - increasing dividend rates

Balance at March 31, 2021

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

For the three months ended March 31, 2021, net income attributable to redeemable noncontrolling interest was $ 794 , consisting of accrued dividends of $ 458 and accretion related to increasing dividend rates of $ 336 .

Note 19 -- Equity

Stockholders’ Equity

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

On December 19, 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020.

On March 13, 2020, the Board approved a stock repurchase plan for 2020 to repurchase up to $ 20,000 of the Company’s common shares before commissions and fees.

During the three months ended September 30, 2020, the Company repurchased and retired a total of 457 shares at a weighted average price per share of $ 43.76 under the plan for 2020.

The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2020 was $ 20 or $ 43.79 per share.

During the nine months ended September 30, 2020, the Company repurchased and retired a total of 129,142 shares at a weighted average price per share of $ 39.93 under these authorized repurchase plans.

The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2020 was $ 5,161 or $ 39.96 per share.

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 September 30, 2019, the Company repurchased and retired a total of 175,160 shares at a weighted average price per share of $ 40.99 under this authorized repurchase plan.

The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2019 was $ 7,185 , or $ 41.02 per share.

During the nine months ended September 30, 2019, the Company repurchased and retired a total of 367,736 shares at a weighted average price per share of $ 41.28 under this authorized repurchase plan.

The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2019 was $ 15,191 , or $ 41.31 per share.

On July 2, 2020, the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share.

The dividends were paid on September 18, 2020 to stockholders of record on August 21, 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 2012 Omnibus Incentive Plan which is currently active and available for future grants.

At September 30, 2020, there were 1,473,851 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 .

On March 13, 2020, the Board approved a new stock repurchase plan for 2020 to repurchase up to $ 20,000 of the Company’s common shares before commissions and fees.

During the three months ended March 31, 2020, the Company repurchased and retired a total of 76,851 shares at a weighted average price per share of $ 39.55 under these authorized repurchase plans.

The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended March 31, 2020 was $ 3,041 or $ 39.58 per share.

On January 19, 2021 , the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share.

The dividends were paid on March 19, 2021 to stockholders of record on February 19, 2021 .

At March 31, 2021, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock.

These warrants were issued by HCI to the Lead Investor described in Note 18 -- “Redeemable Noncontrolling Interest.”

Noncontrolling Interests

TTIG is authorized to issue 175 million shares of common stock with a par value of $ 0.001 per share, and 25 million shares of preferred stock.

In February 2021, TTIG issued 10 million shares of Series A Preferred Stock (see Note 18 -- “Redeemable Noncontrolling Interest”).

At March 31, 2021, there were 80,749,300 shares of TTIG’s common stock outstanding, of which 5,749,300 shares were not owned by HCI.

HCI GROUP, INC.

2 unchanged sentences

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

A summary of the stock option activity for the three and nine months ended September 30, 2020 and 2019 is as follows (option amounts not in thousands):

Note 20 -- Stock-Based Compensation

2012 Omnibus Incentive Plan

The Company currently has outstanding stock-based awards granted under the Plan which is currently active and available for future grants.

At March 31, 2021, there were 1,073,540 shares available for grant.

Stock Options

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

A summary of the stock option activity for the three months ended March 31, 2021 and 2020 is as follows (option amounts not in thousands):

Outstanding at January 1, 2021

Outstanding at March 31, 2021

Outstanding at June 30, 2020

Outstanding at September 30, 2020

Exercisable at September 30, 2020

Exercisable at March 31, 2021

Outstanding at January 1, 2020

Outstanding at March 31, 2020

Outstanding at June 30, 2019

Outstanding at September 30, 2019

Exercisable at September 30, 2019

The following table summarizes information about options exercised for the three and nine months ended September 30, 2020 and 2019 (option amounts not in thousands):

Exercisable at March 31, 2020

The following table summarizes information about options exercised for the three months ended March 31, 2021 and 2020 (option amounts not in thousands):

Three Months Ended

Nine Months Ended

September 30,

Options exercised

1 unchanged sentence

Tax benefits realized

For the three months ended September 30, 2020 and 2019, the Company recognized $ 300 and $ 222 , respectively, of compensation expense which was included in general and administrative personnel expenses.

For the nine months ended September 30, 2020 and 2019, the Company recognized $ 880 and $ 647 , respectively, of compensation expense.

Deferred tax benefits related to stock options were $ 19 and $ 18 for the three months ended September 30, 2020 and 2019, respectively, and $ 57 for each of the nine months ended September 30, 2020 and 2019, respectively.

The Company recognized a reduction in realized tax benefit of $ 3 in September 2019 resulting from the change in the Florida corporate income tax rate described in Note 17 – “Income Taxes.” At September 30, 2020 and December 31, 2019, there was $ 2,189 and $ 1,835 , respectively, of unrecognized compensation expense related to nonvested stock options.

For the three months ended March 31, 2021 and 2020, the Company recognized $ 223 and $ 283 , respectively, of compensation expense which was included in general and administrative personnel expenses.

Deferred tax benefits related to stock options were $ 1 and $ 19 for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021 and December 31, 2020, there was $ 1,666 and $ 1,889 , respectively, of unrecognized compensation expense related to nonvested stock options.

The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.2 years.

3 unchanged sentences

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

The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the nine months ended September 30, 2020 and 2019:

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 three months ended March 31, 2020:

Expected dividend yield

6 unchanged sentences

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 nine months ended September 30, 2020 and 2019 is as follows:

For awards with market-based conditions, the fair value is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome.

Information with respect to the activity of unvested restricted stock awards during the three months ended March 31, 2021 and 2020 is as follows:

Nonvested at January 1, 2021

Nonvested at March 31, 2021

Nonvested at June 30, 2020

Nonvested at September 30, 2020

Nonvested at January 1, 2020

Nonvested at March 31, 2020

Nonvested at June 30, 2019

Nonvested at September 30, 2019

HCI GROUP, INC.

2 unchanged sentences

(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 $ 1,862 and $ 1,524 for the three months ended September 30, 2020 and 2019, respectively, and $ 5,142 and $ 4,047 for the nine months ended September 30, 2020 and 2019, respectively.

At September 30, 2020 and December 31, 2019, there was approximately $ 15,658 and $ 12,661 , respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements.

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $ 1,905 and $ 1,558 for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021 and December 31, 2020, there was approximately $ 27,449 and $ 13,666 , respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements.

The Company expects to recognize the remaining compensation expense over a weighted-average period of 3.4 years.

The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended

Nine Months Ended

September 30,

Deferred tax benefits recognized

Deferred tax benefits (derecognized) recognized

Tax benefits realized for restricted stock

1 unchanged sentence

Fair value of vested restricted stock

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 September 30, 2019, the Company recognized dividends of $ 10 related to these awards in other operating expenses.

For the nine months ended September 30, 2019, the Company recognized dividends of $ 237 in general and administrative personnel expenses for $ 170 and in other operating expenses for $ 67 .

In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to the TypTap Group (See Note 1 -- “Nature of Operations”).

In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.

Subsidiary Equity Plan

On February 26, 2021, TTIG’s Board of Directors approved the 2021 Equity Incentive Plan (the “2021 Plan”) which is an incentive plan denominated in TTIG’s common shares.

The 2021 Plan provides for broad-based equity awards to employees and nonemployee directors of TypTap Group.

The maximum number of shares that may be issued under the 2021 Plan is 7,000,000 shares.

In February 2021, TTIG issued a total of 5,749,300 shares of restricted stock to the employees who transitioned to TypTap Group.

For the three months ended March 31, 2021, TypTap Group recognized compensation expense related to restricted stock of $ 215 .

At March 31, 2021, there was approximately $ 6,617 of total unrecognized compensation expense related to nonvested restricted stock.

Note 21 -- Commitments and Contingencies

Capital Commitment

Capital Commitments

As described in Note 5 -- “Investments” under Limited Partnership Investments , the Company is contractually committed to capital contributions for limited partnership interests.

At September 30, 2020, there was an aggregate unfunded balance of $ 12,178 .

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.

At March 31, 2021, there was an aggregate unfunded balance of $ 9,861 .

Note 22 -- Related Party Transactions

On February 12, 2021, the Company committed to provide a revolving line of credit with borrowing capacity of up to $ 60,000 to TTIG and the credit line would be available until the earlier of June 30, 2022 and the securing of alternative financing.

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

HCI GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 23 -- Subsequent Events

On October 16, 2020 , the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share.

The dividends are payable on December 18, 2020 to stockholders of record on November 20, 2020 .

On April 28, 2021 , the Company’s Board of Directors declared a quarterly dividend of $ 0.40 per common share.

The dividends are payable on June 18, 2021 to stockholders of record on May 21, 2021 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements