HCI Group, Inc. Annual Report 2012

FY2012 Annual Report · HCI Group, Inc.

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SECURITIES & EXCHANGE COMMISSION EDGAR FILING

Form: 10-K

Date Filed: 2013-03-14

Corporate Issuer CIK: 1400810

© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.

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

Form 10-K

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

For the fiscal year ended December 31, 2012

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

OF 1934

Commission File Number
001-34126

Homeowners Choice, Inc.

(Exact name of Registrant as specified in its charter)

Florida
(State of Incorporation)

20-5961396
(IRS Employer
Identification No.)

5300 West Cypress Street, Suite 100
Tampa, FL 33607
(Address, including zip code of principal executive offices)

(888) 210-5235
(Registrant’s telephone number, including area code)

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

Title of Each Class
Common shares, no par value
7% Series A Cumulative Redeemable
Preferred Stock, no par value
8.00% Senior Notes due 2020

Name of Each Exchange on Which Registered
New York Stock Exchange
NASDAQ Capital Market

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ❑ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ❑ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ❑

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ❑

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ❑

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

Large accelerated filer ❑

Non-accelerated filer

❑

Accelerated filer

Smaller reporting company ❑

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes ❑ No x

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 29, 2012, computed by

reference to the price at which the common stock was last sold on June 29, 2012, was $137,935,846.

The number of shares outstanding of the registrant’s common stock, no par value, on March 1, 2013 was 10,907,144.

The information required by Part III of this Form 10-K is incorporated by reference from the registrant’s definitive proxy

statement which will be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B

Item 10
Item 11
Item 12
Item 13
Item 14

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HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures

PART I:

PART II:

Item 5

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

PART III:

Page

2-9
10-21
21
22
22
22

23-26
27
28-45
45-47
48-100
101
101-102
102

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

103
103
103
103
104

Item 15

Exhibits, Financial Statement Schedules

PART IV:

Signatures
Certifications

105-110

111

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ITEM 1 – Business

General

PART I

Homeowners Choice, Inc. (“HCI”) is a holding company owning subsidiaries primarily engaged in the property and casualty
insurance business. Homeowners Choice, Inc. was incorporated in Florida in 2006. References to “we,” “our,” “us,” “the Company,” or
“HCI” in this Form 10-K generally refer to Homeowners Choice, Inc. and its subsidiaries. Our principal executive offices are located at
5300 West Cypress Street, Suite 100, Tampa, Florida 33607, and our telephone number is (888) 210-5235.

Our principal operating subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) was
incorporated and began operations in 2007. Through HCPCI, we currently provide property and casualty homeowners’ insurance,
condominium-owners’ insurance, and tenants’ insurance to individuals owning property in Florida. HCPCI’s operations are supported
by the following HCI subsidiaries:

•

Homeowners Choice Managers, Inc. – acts as managing general agent and provides marketing, underwriting,

claims settlement, accounting and financial services to HCPCI;

Southern Administration, Inc. – provides policy administration services to HCPCI; and

Claddaugh Casualty Insurance Company, Ltd. – participates in the reinsurance program to HCPCI.

In addition, while not material to our consolidated financial statements, HCI has various subsidiaries primarily engaged in the

businesses of owning and leasing real property, operating marina facilities and one restaurant and developing software.

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Financial Highlights

We have one reportable segment for financial reporting purposes. We currently operate our business as a single segment based
on the manner in which we review and evaluate our business and financial performance. The following table summarizes our financial
performance during the years ended December 31, 2012, 2011 and 2010:

(Dollars in millions except per share amounts)
For the year ended December 31:
Net premium earned
Total revenue
Losses and loss adjustment expenses
Income before income taxes
Net income
Income available to common stockholders

Earnings per share of common stock:

Basic
Diluted

Dividends per common share

Net cash provided by operating activities

Cash dividends paid on common stock

At December 31:
Total investments
Cash and cash equivalents
Total assets
Total stockholders’ equity
Common shares outstanding (in millions)

2012
$157.7
$163.1
$ 66.3
$ 49.6
$ 30.2
$ 29.8

2011
88.1
93.8
48.2
16.4
10.0
9.1

2010
62.4
68.6
37.7
8.6
5.4
5.4

$ 3.45
$ 3.02

$ 1.49
$ 1.34

$ 0.88
$ 0.81

$ 0.88

$ 0.53

$ 0.30

$106.3

56.0

16.1

8.1

3.2

1.9

$ 60.9
$230.2
$338.3
$121.3
10.9

58.8
100.4
214.8
63.8
6.2

43.5
54.8
140.9
46.6
6.2

Property and Casualty Insurance Business

HCPCI began operations in July of 2007 by participating in a “take-out program” through which we assumed insurance policies

held by Citizens Property Insurance Corporation (“Citizens”), a Florida state-supported insurer. The take-out program is a legislatively
mandated program designed to reduce the State’s risk exposure by encouraging private companies to assume policies from Citizens.
Policies were assumed in nine separate assumption transactions which took place from July 2007 through November 2012. In
addition, we completed an assumption transaction with HomeWise Insurance Company (“HomeWise”) in November 2011 through
which we acquired the Florida policies of HomeWise. Substantially all of our premium revenue since inception has come from the
policies acquired in these assumption transactions and subsequent renewals. Through the Citizens and HomeWise assumptions, we
have over time been able to increase our geographic diversification within the state of Florida.

Citizens requires us to offer renewals on the policies we acquire in the take-out program for a period of three years subsequent

to the initial expiration of the assumed policies. The policyholders have the option to renew with us or they may ask their agent to
place their coverage with another

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insurance company. With respect to the assumptions through December 31, 2009, policyholders could also elect to return to Citizens,
or opt out, prior to the policy renewal date. With respect to our December 2010 and November 2012 assumptions, the opt-out
provision was limited to the thirty day period following the assumption date. We strive to retain these policies by offering competitive
rates to our policyholders. We intend to selectively pursue additional assumption transactions with Citizens in the future.

We face various challenges to implementing our operating and growth strategies. Since we write policies that cover Florida
homeowners, condominium owners, and tenants, we cover losses that may arise from, among other things, catastrophes, which
could have a significant effect on our business, results of operations, and financial condition. To mitigate our risk of such catastrophic
losses, we cede a portion of our exposure to reinsurers under contracts called catastrophe excess of loss reinsurance treaties. Even
without catastrophic events, we may incur losses and loss adjustment expenses that deviate substantially from our estimates and that
may exceed our reserves, in which case our net income and capital would decrease. Our operating and growth strategies may also
be impacted by regulation of our business by the State of Florida, which must approve our policy forms and premium rates as well as
monitor HCPCI’s ability to meet all requirements for regulatory compliance. Additionally, we may compete with large, well-established
insurance companies, possessing greater financial resources, larger agency networks, and greater name recognition. See Item 1A,
“Risk Factors,” below.

Competition

We operate in highly competitive markets where we face competition from national, regional and residual market insurance
companies. We believe that we have approximately 20 material competitors writing homeowners’ property and casualty insurance in
the state of Florida. Since beginning business in 2007, we have grown our business to become the eighth largest provider of
homeowners’ property and casualty insurance in the state of Florida based on approximately $215 million of annualized gross
premiums as of June 30, 2012, derived from 110,000 policies in force, according to data from the Florida Office of Insurance
Regulation (“FLOIR”).

Many of our competitors have larger financial capacities, greater resource availability, and more diversification in terms of
insurance coverage. Our competitors include companies which market their products through agents, as well as companies which sell
insurance directly to their customers. Large national insurers may have certain competitive advantages such as increased name
recognition, increased loyalty of their customer base, and reduced policy acquisition costs. We may also face competition from new or
temporary entrants in our niche markets. In some cases, such entrants may, because of inexperience, desire for new business or
other reasons, price their insurance below ours. Although our pricing is inevitably influenced to some degree by that of our
competitors, we believe that it is generally not in our best interest to compete solely on price.

Our competitive strategies focus on the following key areas:

•

Exceptional service – We are committed to maintaining superior service to our policyholders and agents.

Disciplined underwriting – We analyze exposures and utilize available underwriting data to ensure policies meet our

selective criteria.

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•

Effective and efficient use of technology – We strive to add or improve technology that can effectively and efficiently

enhance service to our policyholders and agents.

New product offerings – We may cross-sell additional insurance products to our existing policyholders in order to

broaden our lines of business and product mix.

Geographical expansion – We plan to seek opportunities to expand our business within the state of Florida and

perhaps into other states to increase overall geographic diversification.

Seasonality of Our Business

Our insurance business is seasonal as hurricanes and tropical storms typically occur during the period from June 1 through
November 30 each year. With our reinsurance treaty year effective on June 1 each year, any variation in the cost of our reinsurance,
whether due to changes in reinsurance rates or a change in the total insured value of our policy base, will occur and be reflected in
our financial results beginning June 1 each year.

Government Regulation

We are subject to the laws and regulations in Florida, and the regulations of any other states in which we may seek to conduct

business in the future. The regulations cover all aspects of our business and are generally designed to protect the interests of
insurance policyholders opposed to the interests of shareholders. Such regulations relate to a wide variety of financial and non-
financial matters including —

•

authorized lines of business;

capital and surplus requirements;

approval of allowable rates and forms;

approval of reinsurance contracts;

investment parameters;

underwriting limitations;

transactions with affiliates;

dividend limitations;

changes in control; and

market conduct.

Our failure to comply with certain provisions of applicable insurance laws and regulations could have a material adverse effect

on our business, results of operations or financial condition.

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Regulatory Uncertainty

Certain states including Florida have adopted laws or are considering proposed legislation which, among other things, limit the
ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing
policies. The Florida legislature continuously considers bills affecting the residential property insurance market in the state. Current
law penalizes insurers for noncompliance with the insurance code, establishes a private cause of action relating to claims payment
practices, extends the notice period applicable to non-renewals of certain residential policies, prevents non-renewals and cancellation
except for material misrepresentation and non-payment of premium and establishes procedures governing rate filings. Any changes in
such laws and regulations could materially and adversely affect our operations or our ability to expand.

State Licensure and Approval

Most states, including Florida, require licensure and regulatory approval prior to the marketing of new insurance products.
Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of
its officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities may not
allow entry into a new market by not granting a license or by withholding approval. In addition, regulatory authorities may preclude or
delay our entry into markets by disapproving or withholding approval of our product filings.

Statutory Reporting and Examination

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular
and special examinations by those agencies. In accordance with the National Association of Insurance Commissioners, the FLOIR
intends to comply with recent initiatives recommending that all insurance companies under the same insurance holding company
registration statement be subjected to concurrent triennial examinations. Our subsidiary, HCPCI, is subject to FLOIR examinations.

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Liability for Losses and Loss Adjustment Expenses

Our liability for losses and loss adjustment expenses represents estimates of the total cost of (i) claims that have been incurred,

but not yet paid, (ii) claims that have been “incurred but not yet reported” (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which
are intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims.
We base our estimates on various assumptions and actuarial data we believe to be reasonable under the circumstances. The
process of estimating the liability is inherently judgmental and is influenced by many variables such as past loss experience, current
claim trends and the prevailing social, economic and legal environments.

Significant time can elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that
loss. Our liability for losses and LAE, which represents the best estimate at a given point in time based on facts, circumstances and
historical trends then known, may necessarily be adjusted to reflect additional facts that become available during the loss settlement
period.

For a discussion and summary of the activity in the liability for losses and LAE for the years ended December 31, 2012, 2011
and 2010, see Note 8 – “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual
Report on Form 10-K.

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Loss Development

Our losses and LAE represent estimated costs ultimately required to settle all claims for a given period. The following table
illustrates development of the estimated liability for losses and LAE for the years 2007 (inception) through 2012 (dollars in thousands):

Originally estimated losses and LAE
1
Re-estimated losses and LAE as of:

1 year later
2 years later
3 years later
4 years later
5 years later

Cumulative redundancy (deficiency)
3

Cumulative amount of liability paid as of:

1 year later
2 years later
3 years later
4 years later
5 years later

Schedule of Loss Development

Years Ended December 31,

2007

2008

2009

2010

2011

2012

$ 1,688 14,763 19,178 22,146 27,424 41,168

1,412 10,879 18,399 26,776 27,309
1,236 10,991 19,866 26,003
1,268 11,661 19,361
1,327 11,528
1,330

358 3,235

(183)

(3,857)

115

760 7,725 10,481 16,833 15,652

1,108 9,229 15,336 20,708
1,108 10,339 17,065
1,327 10,947
1,330

Gross premiums earned

$29,360 61,925 110,011 119,757 143,606 233,607

1
2

Represents management’s original best estimated liability of (i) unpaid claims, (ii) IBNR, and (iii) loss adjustment expenses.
Represents the re-estimated liabilities in later years of unpaid claims, IBNR and loss adjustment expenses for each of the
respective years.
Represents the difference between the latest re-estimate and the original estimate. A redundancy means the original estimate is
higher than the current estimate whereas a deficiency means that the original estimate is lower than the current estimate.

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Other Operations

In April 2011, we acquired real property that included a marina operation in Tierra Verde, Florida, and in April 2012, we acquired
property in Treasure Island, Florida that includes a marina operation and restaurant. In November 2011, we acquired a small software
development company (Unthink Technologies Private Ltd.) located in India. In June 2010, we purchased real estate including an
office building in Tampa, Florida that we use for our headquarters and in which we currently lease approximately 46,000 square feet
to non-affiliates.

We do not believe that any of these non-insurance operations are material, either individually or in the aggregate, to our

consolidated financial statements or consolidated results of operations.

Environmental Matters

Our subsidiaries, which own waterfront property including marina facilities, are subject to regulation under various federal, state,

and local laws concerning the environment, including laws addressing the discharge of pollutants into the air and water and the
management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. For a discussion of the
liability assumed in connection with our acquisition of such marina facilities and the ongoing remedial action, see Note 13 –
“Commitments and Contingencies” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Employees

As of February 20, 2013, we employed approximately 150 full-time individuals working primarily from our headquarters in

Tampa, Florida and approximately 60 employees located in Noida, India. As of such date, our real estate operations have
approximately 80 employees leased through professional employer organizations.

Available Information

We file annual, quarterly, and current reports with the Securities and Exchange Commission (“SEC”). These filings are

accessible free of charge on our website, www.hcigroup.com (click “SEC filings” at the “Investors” tab), as soon as reasonably
practicable after they have been electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers, which you can access via the SEC’s website at
www.sec.gov. In addition, these filings are accessible at the SEC’s Public Reference Room, which is located at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330.

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ITEM 1A – Risk Factors

Our business is subject to a number of risks, including those described below, which could have a material effect on our results

of operations, financial condition or liquidity and, additionally, could cause our operating results to vary significantly from period to
period.

We currently conduct our insurance business in Florida only. Thus, any single catastrophic event or other condition
affecting losses in Florida could adversely affect our financial condition and results of operations.

A single catastrophic event, destructive weather pattern, general economic trend, regulatory development or other condition
specifically affecting the state of Florida could have a disproportionately adverse impact on our business, financial condition, and
results of operations. While we actively manage our exposure to catastrophic events through our underwriting process and the
purchase of reinsurance, the fact that our business is concentrated in the state of Florida subjects it to increased exposure to certain
catastrophic events and destructive weather patterns such as hurricanes, tropical storms, and tornados. Changes in the prevailing
regulatory, legal, economic, political, demographic and competitive environment, and other conditions in the state of Florida could
also make it less attractive for us to do business in Florida and would have a more pronounced effect on our business than it would
on other insurance companies that are geographically diversified. Since our business is concentrated in this manner, the occurrence
of one or more catastrophic events or other conditions affecting losses in the state of Florida could have an adverse effect on our
business, financial condition, and results of operations.

Our results may fluctuate based on many factors including cyclical changes in the insurance industry.

The insurance business historically has been a cyclical industry characterized by periods of intense price competition due to

excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing and, thus, more
favorable underwriting profits. As premium levels increase, there may be new entrants to the market, which could then lead to a
decrease in premium levels. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms
and fewer opportunities to underwrite insurance risks, which could have a material adverse effect on our results of operations and
cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers
may affect the cycles of the insurance business significantly.

We cannot predict whether market conditions will improve, remain constant or deteriorate. Negative market conditions may
impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If we cannot write insurance at
appropriate rates, our business would be materially and adversely affected.

Our business could be harmed if we lose the services of our key personnel.

Our operations are highly dependent on the efforts of our senior executive officers, particularly our chief executive officer,

Paresh Patel, as well as our chief financial officer,

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Richard Allen, and Scott Wallace, HCPCI’s president. The loss of their leadership, industry knowledge and experience could
negatively impact our operations. With the exception of Mr. Patel, Mr. Allen and Mr. Wallace, we have no employment agreements
with any of our personnel nor do we offer any guarantee of any employee’s ongoing service. We maintain key-man life insurance on
Mr. Patel although such policy may be insufficient to cover us for the damage resulting to our company from the loss of Mr. Patel’s
services.

We do not have significant redundancy in our operations.

We conduct our business primarily from offices located in Tampa, Florida where tropical storms could damage our facilities or
interrupt our power supply. The loss or significant impairment of functionality in these facilities for any reason could have a material,
adverse effect on our business as we do not have significant redundancies to replace our facilities if functionality is impaired. We
contract with a third party vendor to maintain complete daily backups of our systems, which are stored at the vendor’s facility in
Atlanta, Georgia. Access to these databases is strictly controlled and limited to authorized personnel. While we have implemented
daily off-site backups, we have not fully tested our plan to recover data in the event of a disaster. Additionally, effective February 28,
2013, we have purchased an office building in Ocala, Florida to be used by us primarily in the event a catastrophic event impacts our
home office and support operations.

Our information technology systems may fail or suffer a loss of security which could adversely affect our business.

Our insurance business is highly dependent upon the successful and uninterrupted functioning of our computer and data
processing systems. We rely on these systems to perform actuarial and other modeling functions necessary for writing business, as
well as to handle our policy administration process (i.e., the printing and mailing of our policies, endorsements, renewal notices, etc.).
The successful operation of our systems depends on a continuous supply of electricity. The failure of these systems or disruption in
the supply of electricity could interrupt our operations and result in a material adverse effect on our business.

The development and expansion of our insurance business is dependent upon the successful development and implementation

of advanced computer and data processing systems. Because HCPCI intends to expand its business by writing additional voluntary
policies, we are enhancing our information technology systems to handle and process an increased volume of voluntary policies. The
failure of these systems to function as planned could slow our growth and adversely affect our future business volume and results of
operations.

Because we believe that our independent insurance agents will play a key role in our efforts to increase the number of voluntary
policies written by HCPCI, we are also in the process of developing business platforms and distribution initiatives that will allow us to
provide information to, and exchange information with, our agents in an effective and efficient manner. These systems are intended to
provide us with current information regarding the insurance markets in which we operate, therefore permitting us to adjust our
selective underwriting criteria as needed to rapidly respond to market changes. In the event that the development of these systems
does not proceed as planned, the expansion of our business could be delayed. Internet disruptions or system failures once these
systems are fully operational could also adversely affect our future business volume and results of operations.

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In addition, a security breach of our computer systems could damage our reputation or result in liability. We retain confidential

business and policyholder information in our computer systems. We may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by such breaches. It is critical that these facilities and
infrastructure remain secure. Despite the implementation of security measures, this infrastructure may be vulnerable to physical
break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be
subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information.

Increased competition, competitive pressures, industry developments, and market conditions could affect the growth of our
business and adversely impact our financial results.

The property and casualty insurance industry in Florida is cyclical and highly competitive. We compete not only with other stock
companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Our principal
lines of business are written by numerous other insurance companies. Competition for any one account may come from very large,
well-established national companies, smaller regional companies, other specialty insurers in our field, and other companies that write
insurance only in Florida. Many of these competitors have greater financial resources, larger agency networks and greater name
recognition than our company. We compete for business not only on the basis of price, but also on the basis of financial strength,
types of coverage offered, availability of coverage desired by customers, commission structure, and quality of service. We may have
difficulty continuing to compete successfully on any of these bases in the future. Competitive pressures coupled with market
conditions may affect our rate of premium growth and financial results.

Our ability to compete in the property and casualty insurance industry and our ability to expand our business may be negatively
affected by the fact that we are a new company. We do not have an A.M. Best rating and do not expect to obtain such a rating in the
near future. HCPCI has obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in
the state of Florida and many other states. However, some mortgage companies may require homeowners to obtain property
insurance from an insurance company with a certain minimum A.M. Best rating, and such a requirement could prevent us from
expanding our business, which may in turn limit our ability to compete with large, national insurance companies and certain regional
insurance companies. In addition, a downgrade or loss of our Demotech rating could result in a substantial loss of business in the
event insureds move their business to insurers with a sufficient financial strength rating.

There are inherent limitations and risks related to our projections and our estimates of claims and loss reserves. If our actual
losses exceed our loss reserves, our financial results, our ability to expand our business, and our ability to compete in the property
and casualty insurance industry may be negatively affected. In addition, industry developments could further increase competition in
our industry. These developments could include —

•

an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies

attempt to enter the insurance business as a result of better pricing and/or terms;

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•

programs in which federally or state-sponsored entities provide property insurance in catastrophe-prone areas or other

alternative markets;

•

changes in Florida’s regulatory climate; and

•

the passage of federal proposals for an optional federal charter that would allow some competing insurers to operate under

regulations different or less stringent than those applicable to HCPCI.

These developments and others could make the property and casualty insurance marketplace more competitive by increasing

the supply of insurance available.

If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely

affected.

If our actual losses from claims exceed our loss reserves, our financial results would be adversely affected.

Our objective is to establish loss reserves that are adequate and represent management’s best estimate; that is, the amounts

initially recorded as reserves should approximate the ultimate cost to investigate and settle a specific claim. However, the process of
establishing adequate reserves is complex and inherently uncertain, and the ultimate cost of a claim may vary materially from the
amounts reserved. We regularly monitor and evaluate loss and loss adjustment expense reserve development to determine reserve
adequacy.

Due to these uncertainties, the ultimate losses may vary materially from current loss reserves which could have a material

adverse effect on our future financial condition, results of operations and cash flows.

The failure of our claims department to pay claims accurately could adversely affect our insurance business, financial
results and capital requirements.

We rely on our claims department to accurately evaluate and pay the claims made under our policies. Many factors could affect

the ability of our claims department to accurately evaluate and pay claims, including the accuracy of our external independent
adjusters as they make their assessments and submit their estimates of damages; the training, background, and experience of our
claims representatives; the ability of our claims department to ensure consistent claims handling given the input by our external
independent adjusters; the ability of our claims department to translate the information provided by our external independent adjusters
into acceptable claims settlements; and the ability of our claims department to maintain and update its claims handling procedures
and systems as they evolve over time based on claims and geographical trends in claims reporting. Any failure to pay claims
accurately could lead to material litigation, undermine our reputation in the marketplace, impair our corporate image and negatively
affect our financial results.

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The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues
related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond
our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent
until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under
our insurance contracts may not be known for many years after a contract is issued and renewed, and our financial position and
results of operations may be adversely affected.

If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our
financial results may suffer.

Our future growth will depend on our ability to expand the number of insurance policies we write in Florida, to expand the kinds
of insurance products we offer, and to expand the geographic markets in which we do business, all balanced by the insurance risks
we choose to assume and cede. Our existing sources of funds include possible sales of our securities and our income from operations
and investments. Unexpected catastrophic events in our market areas, such as the hurricanes experienced in Florida, may result in
greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these
unanticipated claims unless we are able to raise additional capital.

We may require additional capital in the future which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish

premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future
operating requirements or to cover losses, we may need to raise additional funds through financings or curtail our growth. Based on
our current operating plan, we believe current capital together with our anticipated retained income will support our operations.
However, we cannot provide any assurance in that regard, since many factors will affect our capital needs and their amount and
timing, including our growth and profitability, and the availability of reinsurance, as well as possible acquisition opportunities, market
disruptions and other unforeseeable developments. If we require additional capital, it is possible that equity or debt financing may not
be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our
shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of
existing shareholders. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of
operations could be materially adversely affected.

Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment of
our available cash.

A portion of our income is, and likely will continue to be, generated by the investment of our capital, premiums and loss reserves.

The amount of income so generated is a function of our investment policy, available investment opportunities, and the amount of
available cash invested. As we continue to grow and to deploy our capital, the

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proportion of income invested will decrease, and investment income will make up a smaller percentage of our net revenue. At
December 31, 2012, approximately 16.3% of our available cash was invested in fixed-maturity and equity securities with the balance
in cash and cash equivalents. We may alter our investment policy to accept higher levels of risk with the expectation of higher
returns. Fluctuating interest rates and other economic factors make it impossible to estimate accurately the amount of investment
income that will be realized. In fact, we may realize losses on our investments.

We have exposure to unpredictable catastrophes, which can materially and adversely affect our financial results.

We write insurance policies that cover homeowners, condominium owners, and tenants for losses that result from, among other
things, catastrophes. We are therefore subject to losses, including claims under policies we have written, arising out of catastrophes
that may have a significant effect on our business, results of operations, and financial condition. A significant catastrophe could also
have an adverse effect on our reinsurers. Catastrophes can be caused by various events, including hurricanes, tropical storms,
tornadoes, windstorms, earthquakes, hailstorms, explosions, power outages, fires and by man-made events, such as terrorist attacks.
The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both
the total amount of insured exposure in the area affected by the event and the severity of the event. Our policyholders are currently
concentrated in Florida, which is especially subject to adverse weather conditions such as hurricanes and tropical storms. Therefore,
although we attempt to manage our exposure to catastrophes through our underwriting process and the purchase of reinsurance
protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance protection and may have a
material adverse impact on our results of operations and financial condition.

Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all and we risk non-
collectability of reinsurance amounts due us from reinsurers with which we have contracted.

Reinsurance is a method of transferring part of an insurance company’s liability and premium under an insurance policy to

another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our
underwriting results and to increase our underwriting capacity. The cost of such reinsurance is subject to prevailing market conditions
beyond our control such as the amount of capital in the reinsurance market and natural and man-made catastrophes. We cannot be
assured that reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us.
As a result, we may determine to increase the amount of risk we retain or look for other alternatives to reinsurance, which could in
turn have a material adverse effect on our financial position, results of operations and cash flows.

With respect to the reinsurance treaties we currently have in effect, our ability to recover amounts due from reinsurers is subject
to the reinsurance company’s ability and willingness to pay and to meet their obligations to us. We attempt to select financially strong
reinsurers with an A.M. Best rating of “A-” or better or we require the reinsurer to fully collateralize its exposure. While we then
monitor from time to time their financial condition, we rely principally on A.M. Best, our broker, and other rating agencies in
determining their ability to meet their obligations to us. Any failure on the part of any one reinsurance company to meet its obligations
to us could have a material adverse effect on our financial condition or results of operations.

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Industry trends, such as increased litigation against the insurance industry and individual insurers, the willingness of
courts to expand covered causes of loss, rising jury awards, and the escalation of loss severity may contribute to increased
costs and to the deterioration of the reserves of our insurance subsidiary.

Loss severity in the property and casualty insurance industry has continued to increase in recent years, principally driven by
larger court judgments. In addition, many legal actions and proceedings have been brought on behalf of classes of complainants,
which can increase the size of judgments. The propensity of policyholders and third party claimants to litigate and the willingness of
courts to expand causes of loss and the size of awards may render our loss reserves inadequate for current and future losses.

The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or
results of operations.

We utilize a number of strategies to mitigate risk exposure within our insurance business, which include:

•

engaging in vigorous underwriting;

carefully evaluating terms and conditions of our policies;

focusing on our risk aggregations by geographic zones and other bases; and

ceding insurance risk to reinsurance companies.

However, there are inherent limitations in all of these tactics. We cannot provide assurance that an event or series of

unanticipated events will not result in loss levels which could have a material adverse effect on our financial condition or results of
operations.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition
or our results of operations.

Our insurance underwriting process is designed to limit our exposure to known risks, including but not limited to exclusions

relating to homes in close proximity to the coast line. Various provisions of our policies, such as limitations or exclusions from
coverage which have been negotiated to limit our risks, may not be enforceable in the manner we intend.

In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline

coverage in the event of a violation of that condition. While our insurance product exclusions and limitations reduce the loss exposure
to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an
exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would
adversely effect our loss experience, which could have a material adverse effect on our financial condition or results of operations.

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In the future, we may rely on independent agents to write our insurance policies, and if we are not able to contract with and
retain independent agents, our revenues would be negatively affected.

Although voluntary policies comprise a minute percentage of our business, we expect to increase the number of voluntary
policies we write as our business expands. An inability to sell our products through independent agents would negatively affect our
revenues.

Many of our competitors rely on independent agents. As a result, we must compete with other insurers for independent agents’

business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher
commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to
attract business from independent agents to sell our products. A material reduction in the amount of our products that independent
agents sell could negatively affect our revenues.

Our success depends on our ability to accurately price the risks we underwrite.

The results of our operations and our financial condition depend on our ability to underwrite and set premium rates accurately for

a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, and
underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a
substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in
trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts
successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are
outside our control, including —

•

the availability of sufficient reliable data and our ability to properly analyze available data;

the uncertainties that inherently characterize estimates and assumptions;

our selection and application of appropriate rating and pricing techniques;

changes in legal standards, claim settlement practices, and restoration costs; and

legislatively imposed consumer initiatives.

In addition, we could underprice risks, which would negatively affect our profit margins. We could also overprice risks, which

could reduce our sales volume and competitiveness. In either event, our profitability could be materially and adversely affected.

Current operating resources are necessary to develop future new insurance products.

We may expand our product offerings by underwriting additional insurance products and programs, and marketing them through

our independent agent network. Expansion of our product offerings will result in increases in expenses due to additional costs
incurred in actuarial rate justifications, software and personnel. Offering additional insurance products will also require regulatory
approval, further increasing our costs and potentially affecting the speed with which we will be able to pursue new market
opportunities. We cannot assure you that we will be successful bringing new insurance products to our marketplace.

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As an insurance holding company, we are currently subject to regulation by the State of Florida and in the future may
become subject to regulation by certain other states or a federal regulator.

All states regulate insurance holding company systems. State statutes and administrative rules generally require each insurance

company in the holding company group to register with the department of insurance in its state of domicile and to furnish information
concerning the operations of the companies within the holding company system which may materially affect the operations,
management or financial condition of the insurers within the group. As part of its registration, each insurance company must identify
material agreements, relationships and transactions with affiliates, including without limitation loans, investments, asset transfers,
transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance
transactions, dividends, and consolidated tax allocation agreements.

Insurance holding company regulations generally provide that transactions between an insurance company and its affiliates

must be fair and equitable, allocated between the parties in accordance with customary accounting practices, and fully disclosed in
the records of the respective parties. Many types of transactions between an insurance company and its affiliates, such as transfers
of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions
between companies within the system may be subject to prior approval by, or prior notice to, state regulatory authorities. If we are
unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action which could
adversely affect our operations.

In addition, state insurance regulations also frequently impose notice or approval requirements for the acquisition of specified

levels of ownership in the insurance company or insurance holding company. For example, Section 428.461, Florida Statutes, states
that a person may not, individually or in conjunction with any affiliated person of such person, acquire directly or indirectly, conclude a
tender offer or exchange offer for, enter into any agreement to exchange securities for, or otherwise finally acquire 5 percent or more
of the outstanding voting securities of a domestic stock insurer or of a controlling company, unless we are in compliance with certain
notice and approval requirements.

We currently operate only in the state of Florida. In the future, we may become authorized to transact business in other states
and therefore will become subject to the laws and regulatory requirements of those states. These regulations may vary from state to
state, and states occasionally may have conflicting regulations. Since Florida is HCPCI’s state of domicile, Florida laws will generally
take precedence. Currently, the federal government’s role in regulating or dictating the policies of insurance companies is limited.
However, Congress, from time to time, considers proposals that would increase the role of the federal government in insurance
regulation, either in addition to or in lieu of state regulation. The impact of any future federal insurance regulation on our insurance
operations is unclear and may adversely impact our business or competitive position.

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HCPCI is subject to extensive regulation which may reduce our profitability or limit our growth. Moreover, if we fail to
comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect
our financial condition and results of operations.

The insurance industry is highly regulated and supervised. HCPCI is subject to the supervision and regulation of the state in
which it is domiciled (Florida) and the state(s) in which it does business (currently only Florida). Such supervision and regulation is
primarily designed to protect our policyholders rather than our shareholders. These regulations are generally administered by a
department of insurance in each state and relate to, among other things —

•

the content and timing of required notices and other policyholder information;

the amount of premiums the insurer may write in relation to its surplus;

the amount and nature of reinsurance a company is required to purchase;

participation in guaranty funds and other statutorily created markets or organizations;

business operations and claims practices;

approval of policy forms and premium rates;

standards of solvency, including risk-based capital measurements;

licensing of insurers and their products;

restrictions on the nature, quality and concentration of investments;

restrictions on the ability of insurance company subsidiaries to pay dividends to insurance holding companies;

restrictions on transactions between insurance companies and their affiliates;

restrictions on the size of risks insurable under a single policy;

requiring deposits for the benefit of policyholders;

requiring certain methods of accounting;

periodic examinations of our operations and finances;

the form and content of records of financial condition required to be filed; and

requiring reserves.

The FLOIR and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic

examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition,
holding company issues and

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other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business
objectives. These regulatory authorities also conduct periodic examinations into insurers’ business practices. These reviews may
reveal deficiencies in our insurance operations or differences between our interpretations of regulatory requirements and those of the
regulators.

HCPCI is subject to assessments levied by the Florida Insurance Guaranty Association, Inc. While we can recover these
assessments from policyholders through policy surcharges, our payment of the assessments and our recoveries may not offset each
other in the same reporting period in our financial statements and may cause a material adverse effect on our results of operations in
a particular reporting period.

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the

violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe
may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory
authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements,
insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise
penalize us. This could adversely affect our ability to operate our business.

Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or

interpretations by regulatory authorities could adversely affect our ability to operate our business, reduce our profitability and limit our
growth.

Our marina operations are subject to regulation under various federal, state, and local laws concerning the environment.

In April 2011, we acquired real estate that included a marina operation in Tierra Verde, Florida, and in April 2012, we acquired
real estate in Treasure Island, Florida that also includes a marina operation. Our marina operations are subject to regulation under
various federal, state, and local laws concerning the environment, including laws addressing the discharge of pollutants into the air
and water and the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could
incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party damage or personal injury claims,
if in the future we were to violate or become liable under environmental laws relating to our marina operations. With respect to an
existing environmental remediation plan we assumed in April 2011 when we acquired the real estate in Tierra Verde, Florida, there
can be no assurance that the remediation plan will be successful or that the cost will not exceed the $150,000 accrued at acquisition,
of which $53,000 had been paid at December 31, 2012.

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Our restaurant operations expose us to additional risks which could negatively impact our operating results and financial
condition.

In April 2012, we acquired real estate in Treasure Island, Florida that includes a restaurant. Our restaurant operations could
expose us to business risks that are different than the insurance business. For example, restaurant operations are dependent in large
part on food, beverage, and supply costs that are not within our control. Also, the restaurant industry is affected by changes in
consumer preferences and discretionary spending patterns that could adversely affect revenues from restaurant operations.
Moreover, the restaurant industry is affected by litigation and publicity concerning food quality, health, and other issues which can
cause guests to avoid restaurants and that can result in liabilities. Any one of these risks, among others, could negatively impact our
operating results and financial condition.

Our operations in India expose us to additional risks which could negatively impact our business, operating results, and
financial condition.

Our India operations expose us to additional risks including currency exchange rate fluctuations and risks related to other
challenges caused by distance, language, and compliance with Indian labor laws and other complex foreign and U.S. laws and
regulations that apply to our India operations. These numerous and sometimes conflicting laws and regulations include anti-corruption
laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, among
others. Violations of these laws and regulations could result in fines and penalties, or criminal sanctions against us, our officers, or
our employees. Although policies and procedures are designed to ensure compliance with these laws and regulations, there can be
no assurance that our employees, contractors, or agents will not violate our policies.

ITEM 1B – Unresolved Staff Comments

Not applicable.

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ITEM 2 – Properties

On November 7, 2012, we entered into an agreement to lease 15,000 square feet of office space in Noida, India. The lease has

On April 2, 2012, we purchased real estate in Treasure Island, Florida. Assets included with the acquisition consist of

approximately 10 acres of waterfront property and land improvements, a restaurant and a marina facility. The marina facility and the
restaurant are currently operated by us.

On April 20, 2011, we purchased real estate in Tierra Verde, Florida. The real estate consists of 7.1 acres of land, a dry rack

storage building with gross area of 57,500 square feet, and three buildings with retail space having an aggregate gross area of
25,082 square feet. This marina facility is being operated by us. Approximately 62% of the available retail space is leased to non-
affiliates.

On June 1, 2010, we purchased real estate in Tampa, Florida. The real estate consists of 3.5 acres of land, a building with gross

area of 122,000 square feet, and a four-level parking garage. This facility is used by us and our U.S. subsidiaries and serves as our
principal executive and principal operational office. Since June 2011, the majority of our U.S. employees have been headquartered in
the Tampa facility. In addition, we lease an aggregate of approximately 46,000 square feet to non-affiliates.

Rental expense under all facility leases was $527,000, $239,000 and $191,000 during the years ended December 31, 2012,

2011 and 2010, respectively, which includes expense in each year related to our former corporate headquarters.

ITEM 3 – Legal Proceedings

We are a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict

with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal
proceedings to which we are a party will have a material adverse effect on our consolidated financial position, results of operations or
cash flows.

ITEM 4 – Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Markets for Common Stock

On October 25, 2012, our common stock began trading on the New York Stock Exchange under the symbol “HCI.” Prior to the

aforementioned date, our common stock was traded on the NASDAQ Global Select Market under the symbol “HCII.” The following
table represents the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market and the New
York Stock Exchange for the periods indicated:

Calendar Quarter – 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Calendar Quarter – 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Common Stock
Price

High

Low

$14.14
$17.60
$23.98
$26.60

7.88
11.85
16.51
18.29

$ 8.70
$ 8.24
$ 7.00
$ 8.24

7.81
6.27
6.05
6.07

Holders

As of March 1, 2013, the market price for our common stock was $20.57 and there were 142 holders of record of our common

stock.

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Dividends

The declaration and payment of dividends is at the discretion of our board of directors. Our ability to pay dividends depends on

many factors, including the Company’s operating results, financial condition, capital requirements, and legal and regulatory
constraints and requirements on the payment of dividends, which are discussed in Note 15 - “Regulatory Requirements and
Restrictions” to our consolidated financial statements under Item 8 of this Annual Report on Form 10K, and such other factors as our
board of directors deems relevant. The following table represents the frequency and amount of all cash dividends declared on
common equity for the two most recent fiscal years:

Declaration
Date
1/26/2011
4/26/2011
7/26/2011
11/21/2011
11/21/2011
1/16/2012
3/28/2012
7/25/2012
10/19/2012
10/19/2012

Payment
Date
3/18/2011
6/17/2011
9/16/2011
12/16/2011
12/16/2011
3/16/2012
6/15/2012
9/21/2012
12/21/2012
12/21/2012

Date of
Record
2/18/2011
5/20/2011
8/19/2011
12/1/2011
12/1/2011
2/17/2012
5/17/2012
8/17/2012
11/16/2012
11/16/2012

Per Share
Amount
$ 0.100
$ 0.100
$ 0.100
$ 0.125
$ 0.100
$ 0.150
$ 0.200
$ 0.200
$ 0.225
$ 0.100

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

We currently expect that we will continue to pay cash dividends on our common stock at a rate comparable to our historical
dividend payments, although we are not obligated to do so and may discontinue cash dividends or change the cash-dividend rate on
our common stock at any time and for any reason.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes our equity compensation plans as of December 31, 2012. We currently have no equity

compensation plans not approved by our stockholders.

(a)

(b)

Plan Category

Outstanding Options

Number of Securities
To be Issued Upon
Exercise of

Weighted-Average
Exercise Price of

(c)
Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))

Equity Compensation Plans

Approved by Stockholders

Performance Graph

280,000

2.91

4,953,680

The line graph presented below compares the cumulative total dollar stockholder return on our common stock for the period

beginning September 15, 2008* and ending on December 31, 2012 with those of the Russell 2000 Index for a broad equity market
index and the NASDAQ Insurance Index for a peer group. The graph shows the change in value of an initial $100 investment over the
aforementioned period, assuming all dividends are reinvested.

* September 15, 2008 represents the date that our common stock and warrants issued in our initial public offering commenced

trading separately on the exchange.

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Recent Sales of Unregistered Securities

On November 2, 2011, we agreed to issue to Glencoe Acquisition, Inc., 1,000,000 warrants for the purchase of up to 500,000 of
our common shares in connection with the HomeWise assumption transaction. These warrants were exercised on December 3, 2012.
The warrants, and the shares issuable pursuant thereto, were issued pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

None.

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ITEM 6 – Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing
in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The consolidated statements of
income data for the years ended December 31, 2012, 2011, and 2010 and the consolidated balance sheet data at December 31,
2012 and 2011 are derived from our audited consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-
K. The consolidated statements of income data for the years ended December 31, 2009 and 2008, and the consolidated balance
sheet data at December 31, 2010, 2009, and 2008, are derived from our audited consolidated financial statements that are not
included in this Annual Report on Form 10-K. Certain reclassifications of prior year amounts have been made to conform to the
current year presentation. The historical results are not necessarily indicative of the results to be expected in any future period.

Operating Revenue
Gross premiums earned
Premiums ceded

Net premiums earned
Net investment income
Policy fee income
Realized investment gains
Gain on bargain purchase
Other income

2012

$233,607
(75,939)

157,668
980
2,538
276
179
1,424

As of or for the Years Ended December 31,
2011
2009
2010
(Dollars in thousands, except per share amounts)

143,606
(55,525)

88,081
2,061
1,438
290
936
1,003

119,757
(57,322)

62,435
1,962
1,464
2,003
—
751

110,011
(44,674)

65,337
1,793
1,226
—
—
22

2008

61,925
(14,659)

47,266
1,622
530
—
—
115

Total operating revenue

163,065

93,809

68,615

68,378

49,533

Operating Expenses
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Goodwill impairment loss
Other operating expenses

66,310
25,930
161
21,084

48,243
18,129
—
11,032

37,667
14,878
—
7,484

35,230
9,611
—
5,788

21,528
3,086
—
4,124

Total operating expenses

113,485

77,404

60,029

50,629

28,738

Income before income taxes
Income taxes

Net income
Preferred stock dividends

Income available to common stockholders

49,580
19,423

$ 30,157
(322)

$ 29,835

16,405
6,441

9,964
(815)

9,149

8,586
3,164

5,422
—

5,422

17,749
6,839

10,910
—

20,795
8,140

12,655
—

10,910

12,655

Per Share Data:

Basic earnings per common share

Diluted earnings per common share

Dividends per common share

Ratios to Net Premium Earned:

Loss Ratio
Expense Ratio

Combined Ratio

Ratios to Gross Premiums Earned:

Loss Ratio
Expense Ratio

Combined Ratio

Consolidated Balance Sheet Data:
Total investments
Total cash and cash equivalents
Total assets
Total stockholders’ equity

3.45

3.02

0.88

1.49

1.34

0.53

0.88

0.81

0.30

1.62

1.52

—

2.15

2.08

—

42.06%
29.92%

71.98%

28.39%
20.19%

48.58%

54.77%
33.11%

87.88%

33.59%
20.31%

53.90%

60.33%
35.82%

96.15%

31.45%
18.67%

50.12%

53.92%
23.57%

77.49%

32.02%
14.00%

46.02%

45.55%
15.25%

60.80%

34.76%
11.65%

46.41%

$ 60,916
$230,214
$338,288
$121,253

58,759
100,355
214,818
63,830

43,481
54,849
140,948
46,629

48,343
43,453
137,892
45,378

27,582
81,060
131,989
37,393

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ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes included

elsewhere in this annual report on Form 10-K.

Forward-Looking Statements

In addition to historical information, this annual report on Form 10-K contains forward-looking statements as defined

under federal securities laws. Such statements involve risks and uncertainties, such as statements about our plans,
objectives, expectations, assumptions or future events. These statements involve estimates, assumptions, known and
unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results,
performances or achievements expressed or implied by the forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited
to the effect of governmental regulation; changes in insurance regulations; the frequency and extent of claims;
uncertainties inherent in reserve estimates; catastrophic events; a change in the demand for, pricing of, availability of or
collectability of reinsurance; restrictions on our ability to change premium rates; increased rate pressure on premiums and
other risks and uncertainties and other factors listed under Item 1A - “Risk Factors” and elsewhere in this annual report on
Form 10-K and in our other Securities and Exchange Commission filings.

OVERVIEW

General

HCI is a Florida-based holding company primarily providing property and casualty insurance to homeowners, condominium
owners, and tenants in the state of Florida through its subsidiaries. We offer insurance products at competitive rates, while pursuing
profitability using selective underwriting criteria.

We began operations in 2007 by participating in a “take-out program” which is a legislatively mandated program designed to
encourage private companies to assume policies from Citizens. Our growth since inception has resulted primarily from a series of
policy assumptions from Citizens and one from HomeWise. This growth track has been beneficial to us in terms of reduced policy
acquisition and reinsurance costs. Even though expanding our policyholder base through opportunistic assumptions continues to be
important to our growth plan, we plan to seek opportunities to expand and to provide new product offerings.

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Recent Developments

On February 28, 2013, we purchased real estate in Ocala, Florida for a total purchase price of $2.0 million. The real estate
consists of 1.6 acres of land and a vacant office building with gross area of approximately 16,000 square feet. The facility will be used
by us primarily in the event a catastrophic event impacts our home office and support operations.

On January 17, 2013, we completed the sale of unsecured senior notes in a public offering for an aggregate principal amount of

$35 million. In addition, effective January 25, 2013, we received an aggregate principal amount of $5.3 million pursuant to the
underwriters’ exercise of the over-allotment option. The combined net proceeds after underwriting and issuance costs approximate
$38.7 million. The offering was made pursuant to our effective registration statement on Form S-3, as amended (Registration
Statement No. 333-185228) and our Prospectus Supplement dated January 10, 2013. The notes, due in 2020, bear interest at a fixed
annual rate of 8% which is payable quarterly. The notes may be redeemed, in whole or in part, at any time on and after January 30,
2016 and will rank on parity with all of our future unsecured senior debt.

On January 22, 2013, our Board of Directors declared a quarterly dividend of $0.225 per common share. The dividends will be

paid March 15, 2013 to stockholders of record on February 15, 2013.

HCPCI received a Notice of 2012 Assessment from the Florida Insurance Guaranty Association, Inc. (“FIGA”) that was issued
on November 21, 2012. All admitted carriers in Florida that transact the statutorily covered lines of business are required to become
members of FIGA, which was formed to provide a mechanism for the payment of covered claims in the event of the insolvency of an
insurer. The assessment, which was approved by the FLOIR, is equal to 0.9% of each insurer’s net direct written premiums for the
2011 calendar year from specified categories of property and liability lines of business. The amount of the assessment was
approximately $1.1 million, of which $657,000 was charged to our operations in the fourth quarter of 2012 and the balance of
$482,000 was recorded as an asset recoverable from policyholders. HCPCI has filed with the FLOIR to enable HCPCI to recover the
full amount of this assessment from its policyholders.

Effective November 6, 2012, we assumed approximately 60,000 policies upon completion of our ninth assumption transaction

with Citizens representing approximately $150 million in additional annualized premiums.

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RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011

Our results of operations for the year ended December 31, 2012 reflect income available to common stockholders of $29.8
million, or $3.02 earnings per diluted common share, compared with income available to common stockholders of $9.1 million, or
$1.34 earnings per diluted common share, for the year ended December 31, 2011. Our results for the years ended December 31,
2012 and 2011 include bargain purchase gains on acquisitions of $179,000 ($110,000 net of tax) and $936,000 ($575,000 net of tax),
respectively, or $0.01 and $0.08 diluted earnings per common share, respectively.

Revenue

Gross Premiums Earned for the year ended December 31, 2012 were $233.6 million and reflect the revenue from policies
acquired from HomeWise in November 2011 and policies originally assumed from Citizens and subsequent renewals, including
approximately 60,000 policies assumed in November 2012. Gross premiums earned for the year ended December 31, 2011 were
$143.6 million and principally reflect the revenue from policies assumed from Citizens and subsequent renewals.

Premiums Ceded for the years ended December 31, 2012 and 2011 were $75.9 million and $55.5 million, respectively. Our

premiums ceded represent amounts paid to reinsurers to cover losses from catastrophes that exceed the thresholds defined by our
catastrophe excess of loss reinsurance treaties. Our reinsurance rates are based primarily on policy exposures reflected in gross
premiums earned. Premiums ceded were 32.5% and 38.7% of gross premiums earned during the years ended December 31, 2012
and 2011, respectively. The percentage decrease in 2012 is primarily due to lower costs during the first five months of 2012 related to
policies assumed from HomeWise, which were subject to minimal reinsurance premiums. In addition, we have two months of earned
premium in 2012 related to the November 2012 Citizens assumption with no associated increase in reinsurance premium.

Net Premiums Earned for the years ended December 31, 2012 and 2011 were $157.7 million and $88.1 million, respectively,

and reflect the gross premiums earned less reinsurance costs as described above.

Net Premiums Written during the years ended December 31, 2012 and 2011 totaled $203.2 million and $131.7 million,

respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less reinsurance costs.

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The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the years ended December 31,

2012 and 2011 (in thousands):

Net Premiums Written
Increase in Unearned Premiums

Net Premiums Earned

Years Ended
December 31,

2012
$203,240
(45,572)

2011
131,724
(43,643)

$157,668

88,081

Net Investment Income for the years ended December 31, 2012 and 2011 was $1.0 million and $2.1 million, respectively. The

decline in 2012 is primarily due to operating losses incurred with respect to certain operations of our real estate investments.

Policy Fee Income for the years ended December 31, 2012 and 2011 was $2.5 million and $1.4 million, respectively, and

reflects the policy fee income we earn with respect to our issuance of renewal policies.

Gain on Bargain Purchase was $179,000 ($110,000 net of tax), or $0.01 diluted earnings per common share, and $936,000
($575,000 net of tax), or $0.08 diluted earnings per common share, for the years ended December 31, 2012 and 2011, respectively.
The bargain purchase gains relate to our business acquisitions completed in April 2012 and in April 2011.

Other Income for the years ended December 31, 2012 and 2011 was $1.4 million and $1.0 million, respectively. The increase in

other income in 2012 is primarily due to policy payment plan fees.

Expenses

Our Losses and Loss Adjustment Expenses amounted to $66.3 million and $48.2 million, respectively, during the years ended

December 31, 2012 and 2011. Our losses for the year ended December 31, 2012 include approximately $1.4 million and $2.1 million
related to case reported claims from Tropical Storm Debby and Tropical Storm Isaac, respectively, which occurred in June and
August 2012.

Our liability for losses and loss adjustment expense (“Reserves”), which is more fully described below under “Critical Accounting
Policies and Estimates,” are specific to homeowners insurance, which is HCPCI’s only line of business. These Reserves include both
case reserves on reported claims and our reserves for “IBNR” losses. At each period-end date, the balance of our Reserves is based
on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based
primarily on our historical experience. Our Reserves increased from $27.4 million at December 31, 2011 to $41.2 million at
December 31, 2012. The $13.8 million increase in our Reserves is comprised of $29.5 million in new reserves specific to the year
ended December 31, 2012 offset by reductions of $11.1 million and $4.7 million in our Reserves for 2011 and 2010 and prior loss
years, respectively. The $29.5 million in Reserves established for 2012 claims is primarily due to the increase in our policy exposure.
The decrease of $15.8 million specific to our 2011 and 2010 and prior loss-year reserves is due to favorable development arising

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from lower than expected loss development during 2012 relative to expectations used to establish our Reserve estimates at the end
of 2011. Factors that are attributable to this favorable development may include a lower severity of claims than the severity of claims
considered in establishing our Reserves and actual case development may be more favorable than originally anticipated.

Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2012 and 2011 were $25.9 million and

$18.1 million, respectively, and primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for
production and renewal of policies, and premium taxes and policy fees. The $7.8 million increase in 2012 is primarily attributable to
an increase in our commissions and premium taxes for policy renewals combined with the one-time, $1.2 million adjustment specific
to our adoption in January 2012 of the accounting standard update related to deferred acquisition costs (see Note 2 – “Recent
Accounting Pronouncements” to the consolidated financial statements).

Other Operating Expenses for the years ended December 31, 2012 and 2011 were $21.1 million and $11.0 million, respectively.

The $10.1 million increase is primarily attributable to a $7.4 million increase in compensation and related expenses of which $2.4
million relates to an increase in stock-based compensation and cash bonus expense. The remaining increase of $2.7 million relates
to our other administrative costs, which include a variety of professional service fees, license fees, corporate insurances, lease
expense, information system expense, and other general expenses. Our 2012 compensation and related expenses include a full year
of payroll expense related to our India operations (acquired in November 2011) and to the employees hired in late 2011 to service
policies acquired from HomeWise. As of December 31, 2012, we had 145 employees located at our headquarters in Tampa, Florida
compared to 119 employees as of December 31, 2011. We also had 62 employees located in Noida, India at December 31, 2012
versus 68 at December 31, 2011.

Income Taxes for the years ended December 31, 2012 and 2011 were $19.2 million and $6.4 million, respectively, for state,

federal and foreign income taxes resulting in an effective tax rate of 39.2% for 2012 and 39.3% for 2011.

Ratios:

The loss ratio applicable to the year ended December 31, 2012 (loss and loss adjustment expenses related to net premiums

earned) was 42.1% compared to 54.8% for the year ended December 31, 2011. Our loss ratio was positively impacted by a
significant increase in our gross premiums earned during 2012 (see Gross Premiums Earned above).

The expense ratio applicable to the year ended December 31, 2012 (policy acquisition and other underwriting expenses related

to net premiums earned plus compensation, employee benefits, and other operating expenses) was 29.9% compared to 33.1% for
the year ended December 31, 2011. The decrease in our expense ratio is attributable to the significant increase in our gross
premiums earned as we experienced an increase in other operating expenses during 2012 (see Other Operating Expenses above).

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The combined loss and expense ratio (total of all expenses related to net premiums earned) is the key measure of underwriting

performance traditionally used in the property and casualty industry. A combined ratio under 100% generally reflects profitable
underwriting results. A combined ratio over 100% generally reflects unprofitable underwriting results. Our combined ratio for the year
ended December 31, 2012 was 72.0% compared to 87.9% for the year ended December 31, 2011.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the

combined loss and expense ratio measured to gross premiums earned is more relevant in assessing overall performance. The
combined loss and expense ratio to gross premiums earned for the year ended December 31, 2012 was 48.6% compared to 53.9%
for the year ended December 31, 2011.

Comparison of the Year Ended December 31, 2011 to the Year Ended December 31, 2010

Our results of operations for the year ended December 31, 2011 reflect income available to common stockholders of $9.1
million, or $1.34 earnings per diluted common share, compared to income available to common stockholders of $5.4 million, or $0.81
earnings per diluted common share, for the year ended December 31, 2010. Our results for the year ended December 31, 2011
include a bargain purchase gain of $936,000 ($575,000 net of tax), or $0.08 diluted earnings per common share. The bargain
purchase gain relates to our business acquisition completed in April 2011.

Revenue

Gross Premiums Earned for the year ended December 31, 2011 were $143.6 million and principally reflect the revenue from

policies acquired from Citizens and HomeWise and subsequent renewals. The policies acquired from HomeWise in November 2011
contributed approximately $18.3 million to our 2011 gross premiums earned. Gross premiums earned for the year ended
December 31, 2010 were $119.8 million and principally reflect the revenue from policies we acquired from Citizens and subsequent
renewals.

Premiums Ceded for the years ended December 31, 2011 and 2010 were $55.5 million and $57.3 million, respectively. Our

Net Premiums Earned for the years ended December 31, 2011 and 2010 were $88.1 million and $62.4 million, respectively, and

reflect the gross premiums earned less reinsurance costs as described above. Net premiums earned increased by $25.7 million in
2011 compared to 2010 a result of the $23.8 million increase in gross premiums earned combined with a slight decrease of $1.9
million in premiums ceded.

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Net Premiums Written during the years ended December 31, 2011 and 2010 totaled $131.7 million and $59.0 million,

respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less reinsurance costs.
The significant increase in 2011 compared to 2010 is directly attributed to the HomeWise assumption completed in November 2011.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the years ended December 31,

2011 and 2010 (in thousands):

Net Premiums Written
(Increase) Decrease in Unearned Premiums

Net Premiums Earned

Years Ended
December 31,

2011
$131,724
(43,643)

2010
58,960
3,475

$ 88,081

62,435

Policy Fee Income for the years ended December 31, 2011 and 2010 was $1.4 million and $1.5 million, respectively, and

reflects the policy fee income we earn with respect to our issuance of renewal policies.

Realized Investment Gains for the years ended December 31, 2011 and 2010 of $0.3 million and $2.0 million, respectively,

reflects the net gain realized from sales of securities during the period.

Gain on Bargain Purchase was $936,000 ($575,000 net of tax), or $0.08 diluted earnings per common share, for the year ended

December 31, 2011. The bargain purchase gain relates to our business acquisition completed in April 2011. We had no business
acquisitions in 2010.

Other Income for the years ended December 31, 2011 and 2010 was $1.0 million and $0.8 million, respectively. Our other

income in 2011 and 2010 is primarily rental income from our Tampa office building.

Expenses

Our Losses and Loss Adjustment Expenses amounted to $48.2 million and $37.7 million, respectively, during the years ended

December 31, 2011 and 2010.

Our Reserves, which are more fully described below under “Critical Accounting Policies and Estimates,” are specific to

homeowners insurance, which is HCPCI’s only line of business. These Reserves include both case reserves on reported claims and
our reserves for IBNR. At each period-end date, the balance of our Reserves is based on our best estimate of the ultimate cost of
each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Our
Reserves increased from $22.1 million at December 31, 2010 to $27.4 million at December 31, 2011. The $5.3 million increase in our
Reserves during 2011 is comprised of $17.5 million in new reserves specific to the year ended December 31, 2011 offset by
reductions of $8.8 million and $3.4 million in our Reserves for 2010 and 2009 and prior years, respectively. The $17.5 million in
Reserves established for 2011 claims is due to the increase in our policy exposure, which resulted in an increase in the amount of
reported losses in 2011. The decrease of $12.2 million specific to our 2010 and prior loss-year reserves is due to favorable
development arising from lower than expected loss development

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during 2011 relative to expectations used to establish our Reserve estimates at the end of 2010. Factors that are attributable to this
favorable development may include a lower severity of claims than the severity of claims considered in establishing our Reserves and
actual case development may be more favorable than originally anticipated.

Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2011 and 2010 of $18.1 million and

$14.9 million, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for
production and renewal of policies, and premium taxes and policy fees. The $3.2 million increase in 2011 is primarily attributable to
an increase in our commissions, premium taxes, and other underwriting expenses directly attributable to policy renewals,
commissions specific to policies assumed in 2011, and increases in our payroll and other underwriting expenses required to manage
our policies in force.

Other Operating Expenses for the years ended December 31, 2011 and 2010 were $11.0 million and $7.5 million, respectively.

Such expenses include administrative compensation and related benefits, corporate insurance, professional fees, office lease and
related expenses, information system expense, and other general and administrative costs. The $3.5 million increase is primarily
attributable to increases in compensation and related expenses, and other general administrative costs of $2.1 million and $1.4
million, respectively. As of December 31, 2011, we had 187 employees of which 68 were located in Noida, India and 119 were located
primarily at our headquarters in Tampa, Florida. As of December 31, 2010 we had 76 employees.

Income Taxes for the years ended December 31, 2011 and 2010 were $6.4 million and $3.2 million, respectively, for state and

federal income taxes resulting in an effective tax rate of 39.3% for 2011 and 36.9% for 2010.

Ratios:

The loss ratio applicable to the year ended December 31, 2011 (loss and loss adjustment expenses related to net premiums

earned) was 54.8% compared to 60.3% for the year ended December 31, 2010. Our loss ratio was positively impacted by a
significant increase in our gross premiums earned during 2011 (see Gross Premiums Earned above).

The expense ratio applicable to the year ended December 31, 2011 (policy acquisition and other underwriting expenses related

to net premiums earned plus compensation, employee benefits, and other operating expenses) was 33.1% compared to 35.8% for
the year ended December 31, 2010. The decrease in our expense ratio is attributable to the significant increase in our gross
premiums earned as we experienced an increase in our policy acquisition and other underwriting expenses during 2011 (see Policy
Acquisition and Other Underwriting Expenses above).

The combined loss and expense ratio (total of all expenses related to net premiums earned) is the key measure of underwriting

performance traditionally used in the property and casualty industry. A combined ratio under 100% generally reflects profitable
underwriting results. A combined ratio over 100% generally reflects unprofitable underwriting results. Our combined ratio for the year
ended December 31, 2011 was 87.9% compared to 96.2% for the year ended December 31, 2010.

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Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the

combined loss and expense ratio measured to gross premiums earned is more relevant in assessing overall performance. The
combined loss and expense ratio to gross premiums earned for the year ended December 31, 2011 was 53.9% compared to 50.1%
for the year ended December 31, 2010.

Seasonality of Our Business

Our insurance business is seasonal as hurricanes and tropical storms typically occur during the period from June 1 through
November 30 each year. With our reinsurance treaty year effective on June 1 each year, any variation in the cost of our reinsurance,
whether due to changes in reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in
our financial results beginning June 1 each year.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, our liquidity requirements have been met through issuance of our common and preferred stock, our recent debt

offering and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the
cash received by HCPCI from premiums written and investment income. In addition, we may consider raising capital through future
debt and equity offerings.

HCPCI requires liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating

expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the
duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested,
interest and dividends are earned thereon, and loss and loss adjustment expenses are paid out over a period of years. This period of
time varies by the circumstances surrounding each claim. A substantial portion of our losses and loss expenses are fully settled and
paid within 90 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as
commissions, taxes, payroll, and general overhead expenses.

We believe that we maintain sufficient liquidity to pay HCPCI’s claims and expenses, as well as satisfy commitments in the

event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a
comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

In the future, we anticipate our primary use of funds will be to pay claims and reinsurance premiums, and fund operating

expenses.

Common Stock

On April 19, 2012, we entered into an underwriting agreement (the “Underwriting Agreement”) pursuant to which we agreed to

sell 1,600,000 shares of our common stock, no par value per share (the “Common Stock”), for $11.75 per share, less a 6.0%
underwriting commission. Under the terms of the Underwriting Agreement, we granted the underwriter an option to purchase up to an
additional 240,000 shares of Common Stock at the public offering price, less a 6.0% underwriting

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commission, within 45 days from the date of the Underwriting Agreement to cover over-allotments, if any. The offering was made
pursuant to our effective registration statement on Form S-3, as amended (Registration Statement No. 333-180322), and the
Prospectus Supplement dated April 19, 2012. On April 23, 2012, the underwriter elected to fully exercise its overallotment option. The
closing of the sale of an aggregate of 1,840,000 shares of Common Stock occurred on April 25, 2012. The offering resulted in
aggregate gross proceeds to us of approximately $21.6 million and net proceeds of approximately $20.1 million after underwriting
commissions and offering expenses.

Preferred Stock

On March 25, 2011, we closed our preferred stock offering under which a total of 1,247,700 shares of our Series A cumulative

convertible preferred stock (“Series A Preferred”) were sold for gross proceeds of approximately $12.5 million and net proceeds after
offering costs of approximately $11.3 million. Dividends on the Series A Preferred are cumulative from the date of original issue and
accrue on the last day of each month, at an annual rate of 7.0% of the $10.00 liquidation preference per share, equivalent to a fixed
annual amount of $0.70 per share. Accrued but unpaid dividends accumulate and earn additional dividends at 7.0%, compounded
monthly.

Shareholders of Series A Preferred may convert all or any portion of their shares, at their option, at any time, into shares of our
common stock at an initial conversion rate of one share of common stock for each share of Series A Preferred, which is equivalent to
an initial conversion price of $10.00 per share; provided, however, that we may terminate this conversion right on or after March 31,
2014, if for at least twenty trading days within any period of thirty consecutive trading days, the market price of our common stock
exceeds the conversion price of the Series A Preferred by more than 20% and our common stock is then traded on the New York
Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, or the NYSE Amex.
Under certain circumstances, we will be required to adjust the conversion rate. The initial conversion price of $10.00 per share is
subject to proportionate adjustment in the event of stock splits, reverse stock splits, stock dividends, or similar changes with respect
to our common stock. During the year ended December 31, 2012, holders of 1,006,518 shares of Series A Preferred converted their
Series A Preferred shares to 1,006,518 shares of common stock. There were 241,182 shares of Series A Preferred outstanding as of
December 31, 2012. Shareholders of record of our Series A Preferred at the close of business on a date for determining shareholders
entitled to dividends will be entitled to receive the dividends payable on their Series A Preferred shares on the corresponding dividend
payment date notwithstanding the conversion of such Series A Preferred shares before the dividend payment date. The Series A
Preferred terms include a provision requiring such shareholders to pay an amount equal to the amount of the dividend payable.
However, we have permanently waived that requirement.

The Series A Preferred is not redeemable prior to March 31, 2014. If we issue a conversion cancellation notice, the Series A
Preferred will be redeemable on or after March 31, 2014 for cash, at our option, in whole or in part, at $10.00 per share, plus accrued
and unpaid dividends to the redemption date. Otherwise, the Series A Preferred will be redeemable for cash, at our option, in whole
or in part, at a redemption price equal to $10.40 per share for redemptions on or after March 31, 2014; $10.20 per share for
redemptions on or after March 31, 2015; and $10.00 per share for redemptions on or after March 31, 2016, in each case, plus
accrued and unpaid dividends to the redemption date.

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The Series A Preferred shares have no stated maturity and are not subject to any sinking fund or mandatory redemption

requirements.

Holders of the Series A Preferred shares generally have no voting rights, except under limited circumstances, and holders are

entitled to receive cumulative preferential dividends when and as declared by our Board of Directors.

Senior Notes Due 2020

In January 2013, we completed the sale of an aggregate of approximately $40.3 million of our 8.00% Senior Notes due 2020.

The Senior Notes were issued under an Indenture, dated January 17, 2013, between us and The Bank of New York Mellon Trust
Company, N.A., as Trustee. The Senior Notes bear interest at a rate of 8.00% per year, payable quarterly on
January 30, April 30, July 30 and October 30 of each year, beginning on April 30, 2013. Interest on the Senior Notes begins accruing
from January 17, 2013, and the Senior Notes will mature on January 30, 2020. We may redeem the Senior Notes, in whole or in part,
at any time on and after January 30, 2016, at a redemption price equal to 100% of the principal amount redeemed plus accrued and
unpaid interest to the redemption date. Additionally, we may at any time repurchase Senior Notes at any price in the open market and
may hold, resell or surrender such Senior Notes to the Trustee for cancellation. The Senior Notes are our senior unsecured
obligations, and rank on a parity with all of our other existing and future senior unsecured obligations. The Indenture relating to the
Senior Notes, as supplemented, contains customary events of default. If an event of default occurs and is continuing with respect to
any series of the Senior Notes, then the Trustee or the holders of at least 25% of the principal amount of the outstanding Senior Notes
may declare the Senior Notes to be due and payable immediately. In addition, in the case of an event of default arising from certain
events of bankruptcy, insolvency or reorganization, all outstanding Senior Notes will become due and payable immediately. During
the year ended December 31, 2012, we accrued $128,000 of the costs related to this offering of which $35,000 had been paid as of
December 31, 2012.

Cash Flows

Our cash flows from operating, investing and financing activities for the years ended December 31, 2012, 2011 and 2010 are

summarized below.

Cash Flows for the Year ended December 31, 2012

Net cash provided by operating activities for the year ended December 31, 2012 was approximately $106.3 million, which
consisted primarily of cash received from net written premiums less cash disbursed for operating expenses and losses and loss
adjustment expenses. Net cash used in investing activities of $1.2 million was primarily due to our business acquisitions completed in
2012 of $8.2 million, the purchases of fixed-maturity and equity securities of $16.5 million, and the purchases of $2.8 million of
property, equipment and other investments offset by the proceeds from sales of fixed-maturity and equity securities of $10.7 million,
proceeds from calls, repayments, and maturities of fixed-maturity securities of $3.1 million and time deposit redemptions of $12.4
million.

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Net cash provided by financing activities totaled $24.8 million, which was primarily due to $20.1 million from the issuance of common
stock, $12.2 million related to the exercise of stock options and warrants and $1.2 million excess tax benefit from stock options
exercised offset by $8.6 million in cash dividends paid.

Cash Flows for the Year ended December 31, 2011

Net cash provided by operating activities for the year ended December 31, 2011 was approximately $56.0 million, which

consisted primarily of cash received from net written premiums less cash disbursed for operating expenses and losses and loss
adjustment expenses. Net cash used in investing activities of $17.0 million was primarily due to our business acquisitions completed
in 2011 of $5.3 million, the purchase of $3.3 million in property and equipment, and the purchases of fixed-maturity and equity
securities of $37.8 million offset by the proceeds from sales of fixed-maturity and equity securities of $26.6 million, proceeds from
calls, repayments, maturities of fixed-maturity securities of $1.3 million, and time deposit redemptions of $1.6 million. Net cash
provided by financing activities totaled $6.4 million, which was primarily due to $11.3 million from the issuance of preferred stock and
$0.8 million related to the exercise of stock options offset by $3.8 million in cash dividends paid and $1.9 million used to repurchase
our common shares.

Cash Flows for the Year ended December 31, 2010

Net cash provided by operating activities for the year ended December 31, 2010 was approximately $16.1 million, which

resulted primarily from the $19.5 million of premiums collected from Citizens offset by $10.6 million from reinsurance premiums
prepaid in 2010 and $7.2 million in cash received from net written premiums less cash disbursed for operating expenses and losses
and loss adjustment expenses. Net cash used in investing activities was approximately $0.2 million of which $7.3 million was
contributed from investment sales net of investment purchases offset by $7.5 million used to purchase property and equipment. Net
cash used in financing activities totaled $4.5 million, which was primarily due to $3.6 million used to repurchase our shares and $1.9
million used to pay dividends offset by approximately $1.0 million from proceeds and tax benefits related to stock option exercises.

Investments

The main objective of our investment policy is to maximize our after-tax investment income with a minimum of risk given the

current financial market. Our excess cash is invested primarily in money market accounts, time deposits (i.e. CDs with original
maturities of more than twelve months), and available-for-sale investments.

At December 31, 2012, we had $44.8 million of available-for-sale investments, which are carried at fair value. Changes in the

general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate
environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments
and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity
investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment
gains on disposition.

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With the exception of large national banks, it is our current practice not to maintain cash deposits of more than an aggregate of
$5.5 million in any one bank at any time. From time to time, we may have in excess of $5.5 million of cash designated for investment
and on deposit at a single national brokerage firm. In the future, we may alter our investment policy to include or increase investments
in federal, state and municipal obligations, preferred and common equity securities, real estate and real estate mortgages.
Investments by HCPCI are limited by insurance law and regulations.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2012 and 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of SEC Regulation

S-K.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of December 31, 2012:

Operating lease (1)
Service agreement (1)

Total

Payment Due by Period (in thousands)

Less than

Total

1 Year

1-3 Years

3-5 Years

$1,372
244

$1,616

139
22

161

265
48

313

292
52

344

More than
5 Years

676
122

798

(1) On November 7, 2012, we entered into an agreement to lease 15,000 square feet of office space in Noida, India. The lease has

an initial term of nine years commencing January 15, 2013 with monthly rental payments of approximately $10,200 plus
applicable service tax for the first year. Thereafter the monthly rental payment will increase by five percent every year. We are
entitled to terminate the lease after the 36-month period following the commencement date. In connection with this lease, we
signed a long-term contract with the landlord to receive maintenance and facility services. The agreement has the same initial
term of nine years with monthly payments of approximately $1,800 plus applicable service tax for the first year. Thereafter the
monthly payment will increase by five percent every year. Liabilities were converted from India Rupee to U.S. dollars using the
December 31, 2012 exchange rate.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the

United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments
to develop amounts reflected and disclosed in our financial statements. Material estimates that are particularly susceptible to
significant change in the near term are related to our losses and loss adjustment expenses, which include amounts estimated for
claims incurred but not yet reported. We base our estimates on various assumptions and actuarial data that we believe to be
reasonable under the circumstances. Actual results may differ materially from these estimates.

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We believe our accounting policies specific to premium revenue recognition, losses and loss adjustment expenses, reinsurance,

deferred policy acquisition costs, deferred income taxes, and stock-based compensation expense involve our most significant
judgments and estimates material to our consolidated financial statements.

Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies. Unearned premiums

represent the portion of the premium related to the unexpired policy term.

Reserves for Losses and Loss Adjustment Expenses. We establish Reserves for the estimated total unpaid costs of losses
including LAE. Reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid,
and (ii) claims that have been “incurred but not yet reported” (“IBNR”). Reserves established by us are not an exact calculation of our
liability. Rather, loss reserves represent management’s best estimate of our company’s liability based on the application of actuarial
techniques and other projection methodology and taking into consideration other facts and circumstances known at the balance sheet
date. The process of establishing loss reserves is complex and necessarily imprecise, as it involves using judgment that is affected by
many variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments. The
impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. Our exposure is impacted by both
the risk characteristics of the physical locations where we write policies, such as hurricane and tropical storm-related risks, as well as
risks associated with varying social, judicial and legislative characteristics in Florida, the state in which we operate. In determining
loss reserves, we give careful consideration to all available data and actuarial analyses, and this process involves significant
judgment.

Reserves represent estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been

reported to our insurance company. The amount of loss reserves for reported claims is based primarily upon a case-by-case
evaluation of the kind of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions
relating to the type of loss. The amounts of Reserves for unreported claims and LAE are determined using historical homeowners
insurance information as adjusted to current conditions. Inflation is ordinarily implicitly provided for in the reserving function through
analysis of costs, trends and reviews of historical reserving results over multiple years.

Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a
variety of actuarial techniques. Specifically, claims management personnel complete weekly and ongoing reviews of existing case
reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior years. As we develop
historical data regarding paid and incurred losses, we use this data to develop expected ultimate loss and loss adjustment expense
ratios. We then apply these expected loss and loss adjustment expense ratios to earned premium to derive a reserve level for our
homeowners line of business. In connection with the determination of these reserves, we will also consider other specific factors such
as recent weather-related losses, trends in historical paid losses, and legal and judicial trends regarding liability. Most of our
business was assumed from Citizens and HomeWise. Therefore, we use the loss ratio method, among other methods, to project an
ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the
possibility of variability from the initial estimate of ultimate losses.

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When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate
payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and
knowledge of the estimator. The individual estimating the reserve considers the nature and value of the specific claim, the severity of
injury or damage, location, and the policy provisions relating to the type of loss. Case reserves are adjusted by us as more
information becomes available. It is our policy to settle each claim as expeditiously as possible.

We maintain IBNR Reserves to provide for already incurred claims that have not yet been reported and subsequent

development on reported claims. The IBNR reserve is determined by estimating our insurance company’s ultimate net liability for both
reported and unreported claims and then subtracting the case reserves and payments made to date for reported claims.

Loss Reserve Estimation Methods. We apply the following general methods in projecting loss and LAE reserves:

•

Reported loss development;

Paid loss development;

Loss ratio method; and

Average outstanding and open claims.

The results of the reserve calculations using these methods were similar, and therefore, we relied on an average of the four

methods.

Description of Ultimate Loss Estimation Methods. The reported loss development method relies on the assumption that, at any

given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by
a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement
rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be
effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Because of our limited loss experience,
we select loss development factors based on industry data found in current A.M. Best’s Aggregates and Averages –
Property/Casualty – United States & Canada. We assume that our loss development patterns will be reasonably consistent with
industry averages, and use the selected factors to project the ultimate losses.

The paid loss development method is mechanically identical to the reported loss development method described above. The

paid method does not rely on case reserves or claim reporting patterns in making projections.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim

department processing changes, a shift between single and multiple claim payments, legal changes, or variations in our mix of
business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors are
volatile. A small

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variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate losses.
Therefore, ultimate values for immature loss years are often based on alternative estimation techniques.

The loss ratio method used by us relies on the assumption that remaining unreported losses are a function of the total expected
losses rather than a function of currently reported losses. The expected loss ratio is multiplied by earned premium to produce ultimate
losses. Reported incurred losses are then subtracted from this estimate to produce expected unreported losses.

The loss ratio method is most useful as an alternative to other models for immature loss years. For these immature years, the

amounts reported or paid may be small and unstable, and therefore, not predictive of future development. Therefore, future
development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This
method is also useful when changing reporting patterns or payment patterns distort the historical development of losses.

Finally, we employ the average outstanding and open claims method. We segregate our claims according to when they were

assumed and conduct a detailed review in order to estimate average future development of open claims and average projected loss
on IBNR claims. We combine this estimate with our open claims in order to derive an estimate of expected unreported losses. Paid
losses are added to this estimate in order to derive an estimate of ultimate losses. This method is based on the assumption that
future unreported claims and the average severity of open claims and unreported claims can be reasonably estimated from the
experience available.

While the property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related
illnesses, environmental remediation, product and mold, and other uncertain or environmental exposures, we have not experienced
significant losses from these types of claims.

Currently, our estimated ultimate liability is calculated monthly using these principles and procedures applicable to the lines of

business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that
ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and
financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the
operating results of the period during which such adjustments are made.

Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine our
net loss reserves. Management does not believe that any reasonably likely changes in the frequency of claims would affect our loss
reserves. However, management believes that a reasonably likely increase or decrease in the severity of claims could impact our net
loss reserves. The table below summarizes the effect on net loss reserves and equity in the event of reasonably likely changes in the
severity of claims considered in establishing loss and loss adjustment expense reserves. The range of reasonably likely changes in
the severity of our claims was established based on a review of changes in loss year development and applied to loss reserves as a
whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios:

Year Ended December 31, 2012

Change in Reserves

-10.0%
-7.5%
-5.0%
-2.5%

Base

2.5%
5.0%
7.5%
10.0%

Reserves
37,051
38,080
39,110
40,139
41,168
42,197
43,226
44,256
45,285

Percentage
change in
equity, net of tax

2.06%
1.55%
1.03%
0.52%
—
-0.52%
-1.03%
-1.55%
-2.06%

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Reinsurance. In the normal course of business, we seek to reduce the loss that may arise from catastrophes or other events

that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. The Company contracts with a number of well-known and rated reinsurers to secure its annual reinsurance
coverage, which becomes effective June 1 each year. We purchase reinsurance each year taking into consideration maximum
projected losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsured policy. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis consistent with
those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to reinsurers
have been reported as a reduction of premium income.

Deferred policy acquisition costs. Deferred policy acquisition costs (“DAC”) for the year ended December 31, 2012 primarily
represent commissions paid to outside agents at the time of collection of the policy premium, premium taxes, and commissions with
respect to assumed reinsurance and are amortized over the life of the related policy in relation to the amount of gross premiums
earned. In addition to the foregoing expenses, DAC for the year ended December 31, 2011 included certain salaries and other policy
acquisition expenses, which were deferred pursuant to the accounting standard then in effect (see Accounting Standards Update
No. 2010-26 under Note 2 – “Recent Accounting Pronouncements” to the consolidated financial statements). 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 LAE and certain other costs expected to be incurred as the premium is earned.

DAC is reviewed to determine if it is recoverable from future 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.

Income Taxes. We account for income taxes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”),

resulting in two components of income tax expense: current

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and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the
enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in
which they occur. Valuation allowances are provided against assets that are not likely to be realized, if any. We have elected to
classify interest and penalties, if any, as income tax expense as permitted by current accounting standards.

Stock-Based Compensation. We account for our stock option and incentive plan 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 including stock options and restricted stock issuances based on estimated fair values. We recognize stock-based
compensation in the consolidated statements of income on a straight-line basis over the vesting period. We use the Black-Scholes
option pricing model, which requires the following variables for input to calculate the fair value of each stock award on the option grant
date: 1) expected volatility of our stock price, 2) the risk-free interest rate, 3) expected term of each award, 4) expected dividends, and
5) an expected forfeiture rate.

ITEM 7A – Quantitative and Qualitative Disclosures About Market Risk

Our investment portfolios at December 31, 2012 included fixed-maturity and equity securities, the purposes of which are not for

trading or speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet
policyholder obligations while minimizing market risk which is the potential economic loss from adverse fluctuations in securities
prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation
of interest rates, durations and market conditions in developing investment strategies. Investment securities are managed by
investment companies and are overseen by the investment committee appointed by our board of directors. Our investment portfolios
are primarily exposed to interest rate risk, credit risk and equity price risk. We classify our fixed-maturity and equity securities as
available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive
income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying
value of our stockholders’ equity.

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Interest Rate Risk

Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage

the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities

at December 31, 2012 (in thousands):

Hypothetical Change in Interest Rates
300 basis point increase
200 basis point increase
100 basis point increase
100 basis point decrease
200 basis point decrease
300 basis point decrease

Credit Risk

Estimated
Fair
Value
$31,768
33,163
34,558
37,282
38,295
38,980

Change in
Estimated
Fair Value
$ (4,184)
(2,789)
(1,395)
1,329
2,342
3,027

Percentage
Increase
(Decrease) in
Estimated
Fair Value

(11.64)%
(7.76)%
(3.88)%
3.70%
6.51%
8.42%

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of
our fixed-maturity securities. We mitigate the risk by investing in fixed-maturity securities that are rated “B” or higher and diversifying
our investment portfolio to avoid concentrations in any single issuer or business sector.

The following table presents the composition of our fixed-maturity securities, by rating, at December 31, 2012 (in thousands):

% of
Total

Amortized

Estimated
Fair Value
$10,659
6,183
8,980
8,885
1,246

% of
Total
Estimated
Fair Value
30
17
25
25
3

Cost

29
17
25
25
4

100

$35,953

100

Comparable Rating
AAA
AA1, AA2, AA3
A1, A2, A3
BBB1, BBB2, BBB3
BB1, BB2

Total

Cost
$ 9,695
5,785
8,497
8,260
1,199

$33,436

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Equity Price Risk

Our equity investment portfolio at December 31, 2012 included common stocks, perpetual preferred stocks, mutual funds and

exchange traded funds (“ETF”). We may incur potential losses due to adverse changes in equity security prices. We manage the risk
primarily through industry and issuer diversification and asset allocation techniques.

The following table illustrates the composition of our equity securities at December 31, 2012 (in thousands):

Stocks by sector:

Financial
Energy
Consumer
Other (1)

Mutual funds and ETF by type:

Debt
Equity

Total

Estimated
Fair Value

$ 1,909
1,188
516
458

4,071

4,576
229

4,805

$ 8,876

% of
Total
Estimated
Fair Value

22
13
6
5

52
2

100

(1) Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At December 31, 2012, we did not have any material exposure to foreign currency related risk.

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ITEM 8 – Financial Statements and Supplementary Data

Index to Financial Statements

Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2012 and 2011
Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2012, 2011 and 2010

Page
49-50

51
52
53

54-56
57-58
59-100

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Homeowners Choice, Inc.
Tampa, Florida:

We have audited the accompanying consolidated balance sheets of Homeowners Choice, Inc. and Subsidiaries (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated

financial position of the Company at December 31, 2012 and 2011, and the consolidated results of its operations, its comprehensive
income and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally
accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 14, 2013 expressed an unqualified opinion thereon.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA
Tampa, Florida
March 14, 2013

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Report of Independent Registered Public Accounting Firm on Internal Control

Board of Directors and Stockholders
Homeowners Choice, Inc.,
Tampa, Florida:

We have audited Homeowners Choice, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying management assessment report. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of December 31, 2012 and 2011 and for each of the years in the three-year period ended
December 31, 2012 of the Company and our report dated March 14, 2013 expressed an unqualified opinion on those financial
statements.

/s/ Hacker, Johnson & Smith PA
HACKER, JOHNSON & SMITH PA
Tampa, Florida
March 14, 2013

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HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)

Assets

Fixed-maturity securities, available-for-sale, at fair value
Equity securities, available-for-sale, at fair value
Time deposits
Other investments

Total investments
Cash and cash equivalents
Accrued interest and dividends receivable
Premiums and reinsurance receivable
Prepaid reinsurance premiums
Deferred policy acquisition costs
Property and equipment, net
Goodwill
Deferred income taxes
Other assets

Total assets

Liabilities and Stockholders’ Equity

Losses and loss adjustment expenses
Unearned premiums
Advance premiums
Assumed reinsurance balances payable
Accrued expenses
Dividends payable
Income taxes payable
Other liabilities

Total liabilities

Stockholders’ equity:

7% Series A cumulative convertible preferred stock (liquidation preference $10.00 per share), no par

value, 1,500,000 shares authorized, 241,182 and 1,247,700 shares issued and outstanding in 2012
and 2011, respectively

Preferred stock (no par value, 18,500,000 shares authorized, no shares issued or outstanding)
Common stock (no par value, 40,000,000 shares authorized, 10,877,537 and 6,202,485 shares issued

and outstanding in 2012 and 2011, respectively)

Additional paid-in capital
Retained income
Accumulated other comprehensive income

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying Notes to Consolidated Financial Statements.

December 31,

2012

2011

$ 35,953 35,788
8,876 4,061
— 12,427
16,087 6,483

375

60,916 58,759
230,214 100,355
408
10,642 13,909
9,112 14,169
10,032 12,321
10,853 10,499
161
—
3,848 2,368
2,296 1,869

$338,288 214,818

$ 41,168 27,424
154,249 108,677
4,029 2,132
1,377 —
3,041 3,478
218
8,813 4,956
4,316 4,103

217,035 150,988

— —
— —

— —
63,875 29,636
55,758 33,986
208

1,620

121,253 63,830

$338,288 214,818

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)

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Revenue

Gross premiums earned
Premiums ceded

Net premiums earned

Net investment income
Policy fee income
Realized investment gains
Gain on bargain purchase
Other

Total revenue

Expenses

Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Goodwill impairment loss
Other operating expenses

Total expenses

Income before income taxes

Income taxes

Net income

Preferred stock dividends

Years Ended December 31,
2011

2012

2010

$233,607
(75,939)

143,606
(55,525)

119,757
(57,322)

157,668

88,081

62,435

980
2,538
276
179
1,424

2,061
1,438
290
936
1,003

1,962
1,464
2,003
—
751

163,065

93,809

68,615

66,310
25,930
161
21,084

48,243
18,129
—
11,032

37,667
14,878
—
7,484

113,485

77,404

60,029

49,580

16,405

19,423

6,441

$ 30,157

(322)

9,964

(815)

8,586

3,164

5,422

—

Income available to common stockholders

$ 29,835

9,149

5,422

Basic earnings per common share

Diluted earnings per common share

Dividends per common share

See accompanying Notes to Consolidated Financial Statements.

3.45

3.02

0.88

1.49

1.34

0.53

0.88

0.81

0.30

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HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)

Net income

Other comprehensive income:
Change in unrealized gain on investments:
Unrealized gain arising during the period
Call and repayment losses charged to investment income
Reclassification adjustment for realized gains

Net change in unrealized gain
Deferred income taxes on above change

Total other comprehensive income

Comprehensive income

See accompanying Notes to Consolidated Financial Statements.

Years Ended December 31,
2011
2012

2010

$30,157 9,964 5,422

2,571
3
(276)

674 2,431
23 —
(290) (2,003)

2,298
(886)

407
(157)

428
(164)

1,412

250

264

$31,569 10,214 5,686

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Balance at December 31,

2011
Net income
Change in unrealized gain
on available-for-sale
securities, net of
income taxes

Exercise of common stock

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2012
(Dollars in thousands, except share amounts)

Preferred Stock

Common Stock

Amount

Additional
Paid-In
Capital

Retained
Income

Accumulated
Other

Comprehensive

Income

Total

1,247,700 $
—

— 6,202,485 $
—
—

—
—

29,636
—

33,986
30,157

208
—

63,830
30,157

—

1,412

options

—

267,408

—

283

—

283

Exercise of common stock

warrants

Excess tax benefit from

—

— 1,314,806

—

11,869

—

11,869

stock options exercised

—

1,161

—

1,161

Conversion of preferred

stock to common stock (1,006,518)

— 1,006,518

—

Issuance of restricted

stock

Issuance of common stock
(net of offering costs of
$220)

Common stock dividends
Preferred stock dividends
Stock-based

—

246,320

—

—
—
—

— 1,840,000
—
—
—
—

—
—
—

20,082
—
—

—
(8,063)
(322)

—
—
—

20,082
(8,063)
(322)

compensation

—

844

—

844

Balance at December 31,

2012

241,182 $

— 10,877,537 $

—

63,875

55,758

1,620 121,253

(continued)

Table of Contents

Balance at December 31,

2010
Net income
Change in unrealized loss
on available-for-sale
securities, net of income
taxes

Proceeds from sale of

preferred stock (net of
offering costs of $1,170)
Exercise of common stock

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity – (Continued)
For the Year Ended December 31, 2011
(Dollars in thousands, except share amounts)

Preferred Stock

Common Stock

Amount

Additional
Paid-In
Capital

Retained
Income

Accumulated
Other

Comprehensive

Income

Total

— $
—

— 6,205,396 $
—
—

—
—

18,606
—

28,065
9,964

(42)
—

46,629
9,964

—

250

1,247,700

—

11,307

—

11,307

options

—

— 245,883

—

564

—

564

Excess tax benefit from

stock options exercised
Common stock dividends
Preferred stock dividends
Repurchase and retirement

of common stock
Warrants issued in
connection with
assumption transaction
Stock-based compensation

Balance at December 31,

—
—
—

265
—
—

—
(3,229)
(814)

—
—
—

265
(3,229)
(814)

—

— (248,794)

—

(1,887)

—

(1,887)

—
—

754
27

—
—

754
27

2011

1,247,700 $

— 6,202,485 $

—

29,636

33,986

208

63,830

(continued)

Table of Contents

Balance at December 31,

2009
Net income
Change in unrealized loss
on available-for-sale
securities, net of income
taxes

Exercise of common stock

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity – (Continued)
For the Year Ended December 31, 2010
(Dollars in thousands, except share amounts)

Preferred Stock

Common Stock

Amount

Additional
Paid-In
Capital

Retained
Income

Accumulated
Other

Comprehensive

Income

Total

— $
—

— 6,456,635 $
—
—

—
—

21,164
—

24,520
5,422

(306)
—

45,378
5,422

—

264

options

—

— 260,000

—

650

—

650

Excess tax benefit from

stock options exercised
Common stock dividends
Repurchase and retirement

of common stock

Stock-based compensation

Balance at December 31,

—
—

301
—

—
(1,877)

—
—

301
(1,877)

— (511,239)
—
—

—
—

(3,596)
87

—
—

(3,596)
87

2010

— $

— 6,205,396 $

—

18,606

28,065

(42)

46,629

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)

Years Ended December 31,
2011

2012

2010

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

$ 30,157

9,964

5,422

Stock-based compensation
Net amortization of premiums on investments in fixed-maturity securities
Depreciation and amortization
Deferred income taxes (benefit)
Net realized investment gains
Gain on bargain purchase
Goodwill impairment loss
Foreign currency remeasurement loss
Changes in operating assets and liabilities:
Premiums and reinsurance receivable
Advance premiums
Prepaid reinsurance premiums
Accrued interest and dividends receivable
Other assets
Assumed reinsurance balances payable
Deferred policy acquisition costs
Losses and loss adjustment expenses
Unearned premiums
Income taxes payable
Accrued expenses and other liabilities

844
279
1,591
(2,366)
(276)
(179)
161
23

3,267
1,897
5,057
33
(803)
1,377
2,289
13,744
45,572
3,857
(258)

27
195
576
(1,984)
(290)
(936)
—
—

(8,061)
1,018
3,618
(228)
82
—
(2,914)
5,278
43,643
4,646
1,399

87
(28)
178
1,690
(2,003)
—
—
—

18,576
401
(10,582)
(4)
(99)
—
1,089
2,968
(3,475)
143
1,768

Net cash provided by operating activities

106,266

56,033

16,131

Cash flows from investing activities:

Cash consideration paid for acquired business, net of cash acquired
Purchase of property and equipment, net
Purchase of other investments
Purchase of fixed-maturity securities
Purchase of equity securities
Proceeds from sales of fixed-maturity securities
Proceeds from calls, repayments and maturities of fixed-maturity securities
Proceeds from sales of equity securities
Decrease in short-term investments, net
Decrease (increase) in time deposits, net

Net cash used in investing activities

Cash flows from financing activities:

Net proceeds from the issuance of common stock
Net proceeds from the issuance of preferred stock
Proceeds from the exercise of common stock options
Proceeds from the exercise of common stock warrants
Cash dividends paid
Repurchases of common stock
Debt issuance costs paid
Excess tax benefit from common stock options exercised

Net cash provided by (used in) financing activities

(8,157)
(1,196)
(1,600)
(10,128)
(6,410)
8,991
3,127
1,735
—
12,427

(5,309)
(3,144)
(205)
(31,170)
(6,625)
24,904
1,327
1,665
—
1,606

—
(7,534)
—
(31,921)
(5,384)
29,116
—
4,515
11,521
(526)

(1,211)

(16,951)

(213)

20,082
—
283
11,869
(8,561)
—
(35)
1,161

—
11,307
564
—
(3,825)
(1,887)
—
265

—
—
650
—
(1,877)
(3,596)
—
301

24,799

6,424

(4,522)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows – (Continued)
(Dollars in thousands)

Effect of exchange rate changes on cash

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosure of cash flow information:

Cash paid for income taxes

Non-cash investing and financing activities:

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

Common stock warrants issued for outside services

Transfer of securities held-to-maturity to securities available-for-sale

Conversion of Series A Preferred Stock to common stock

See accompanying Notes to Consolidated Financial Statements.

Years Ended December 31,

2012

2011

2010

5 — —

129,859 45,506 11,396
100,355 54,849 43,453

$230,214 100,355 54,849

$ 16,710 3,451

790

1,412

250

264

—

754 —

— — 1,900

9,121 — —

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

The accompanying consolidated financial statements of Homeowners Choice, Inc. (“HCI” or the “Company”) include the
accounts of HCI, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), HCI’s property and casualty
insurance company, and certain other insurance and non-insurance subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Through its subsidiaries, the Company is primarily engaged in the property and casualty insurance business. HCPCI is

authorized to underwrite homeowners’ property and casualty insurance in the State of Florida. HCPCI’s operations are supported by
the following HCI subsidiaries:

•

Homeowners Choice Managers, Inc. (“HCM”) – acts as managing general agent and provides marketing,

underwriting, claims settlement, accounting and financial services to HCPCI;

Southern Administration, Inc. – provides policy administration services to HCPCI; and

Claddaugh Casualty Insurance Company, Ltd. – participates in the reinsurance program to HCPCI.

In addition, while not material to the consolidated financial statements, HCI has various subsidiaries primarily engaged in the

businesses of owning and leasing real estate, operating marina facilities and one restaurant and developing software.

Prior to November 2011, nearly all of the Company’s customers were obtained through participation in a “take-out program” with
Citizens Property Insurance Corporation (“Citizens”), a Florida state supported insurer. The customers were obtained in nine separate
assumption transactions which took place from July 2007 through November 2012. The Company is required to offer renewals on the
policies acquired for a period of three years subsequent to the initial expiration of the assumed policies. During the first full year after
assumption, such renewals are required to have rates that are equivalent to or less than the rates charged by Citizens. In November
2011, the Company completed an assumption transaction with HomeWise Insurance Company, Inc. (“HomeWise”) through which the
Company assumed the Florida policies of HomeWise. Substantially all of the Company’s premium revenue since inception comes
from these assumptions.

Acquisition Accounting. The Company accounts for business combinations using the acquisition method, which requires an

allocation of the purchase price of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition. Goodwill represents the excess of the purchase price over the net tangible and intangible assets
acquired. In the event the net assets acquired exceed the purchase price, the Company will recognize a gain on bargain purchase.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies, continued

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ
materially from these estimates. Material estimates that are particularly susceptible to significant change in the near term are related
to losses and loss adjustment expenses.

Cash and Cash Equivalents. The Company considers all short-term highly liquid investments with original maturities of less

than three months to be cash and cash equivalents. At December 31, 2012 and 2011, cash and cash equivalents consist of cash on
deposit with financial institutions and securities brokerage firms.

Time Deposits. Time deposits consisted of certificates of deposit with original maturities ranging from one to five years.

Investments. Investments consist of fixed-maturity and equity securities. Fixed-maturity securities include debt securities and

redeemable preferred stock. Securities may be classified as either trading, held to maturity or available-for-sale. The Company’s
available-for-sale securities are carried at fair value. Temporary changes in the fair value of available-for-sale securities are excluded
from income and reported in stockholders’ equity as a component of accumulated other comprehensive income, net of deferred
income taxes. Realized investment gains and losses from sales are recorded on the trade date and are determined using the specific
identification method. Investment income is recognized as earned and discounts or premiums arising from the purchase of debt
securities are recognized in investment income using the interest method over the estimated remaining term of the security. Gains
and losses from call redemptions and repayments are charged to investment income.

The Company reviews all securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such review. When the fair value of any investment is lower than its cost, an
assessment is made to determine whether the decline is temporary or other-than-temporary. If the decline is determined to be other-
than-temporary, the investment is written down to fair value and an impairment charge is recognized in income in the period in which
the Company makes such determination. For a debt security that the Company does not intend to sell and it is not more likely than
not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is
recognized in income, while the impairment related to all other factors is recognized in other comprehensive income. The Company
considers various factors in determining whether an individual security is other-than-temporarily impaired (see Note 3 –
“Investments”).

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies, continued

Other investments consist primarily of real estate and the related assets purchased during 2011 and 2012 (see Note 3 –
“Investments” and Note 5 – “Business Acquisitions”). Real estate and the related depreciable assets are carried at cost, net of
accumulated depreciation, which is allocated over the estimated useful life of the asset using the straight-line method of depreciation.
Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be
recoverable.

In addition to the foregoing expenses, DAC for the year ended December 31, 2011 included certain salaries and other policy
acquisition expenses, which were deferred pursuant to the accounting standard then in effect (see Accounting Standards Update
No. 2010-26 under Note 2 – “Recent Accounting Pronouncements” to the consolidated financial statements). 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 LAE and certain other costs expected to be incurred as the premium is earned.

Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization.

Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building 39 years; computer hardware
and software 3 years; office and furniture equipment 3 to 7 years. Leasehold improvements are amortized over the shorter of the
lease term or the asset’s useful life. Expenditures for improvements are capitalized to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.

Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses
the recoverability of long-lived assets by determining whether the assets can be recovered from undiscounted future cash flows.
Recoverability of long-lived assets is dependent upon, among other things, the Company’s ability to maintain profitability, so as to be
able to meet its obligations when they become due. In the opinion of management, based upon current information and projections,
long-lived assets will be recovered over the period of benefit.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies, continued

Losses and Loss Adjustment Expenses. Reserves for losses and loss adjustment expenses (“LAE”) are determined by

establishing liabilities in amounts estimated to cover incurred losses and LAE. Such reserves are determined based on the
assessment of claims reported and the development of pending claims. These reserves are based on individual case estimates for
the reported losses and LAE and estimates of such amounts that are incurred but not reported. Changes in the estimated liability are
charged or credited to income as the losses and LAE are settled.

The estimates of unpaid losses and LAE are subject to trends in claim severity and frequency and are continually reviewed. As

part of the process, the Company reviews historical data and considers various factors, including known and anticipated regulatory
and legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data
becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and
LAE. Adjustments are reflected in the results of operations in the period in which they are made and the liabilities may deviate
substantially from prior estimates.

Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or
other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers. The Company contracts with a number of well-known and rated reinsurers to secure its annual
reinsurance coverage, which becomes effective June 1 each year. We purchase reinsurance each year taking into consideration
maximum projected losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner
consistent with the reinsured policy. Reinsurance premiums and reserves related to reinsured business are accounted for on a basis
consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded
to other companies have been reported as a reduction of premium income. Prepaid reinsurance premiums represent the unexpired
portion of premiums ceded to reinsurers.

Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies. Unearned premiums

represent the portion of the premium related to the unexpired policy term.

Policy Fees. Policy fees represent nonrefundable fees for insurance coverage, which are intended to reimburse a portion of the

costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is written.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies, continued

Premium-Based Assessments. From time to time, the Company may be assessed by the state guaranty association. The

assessments are intended to be used for the payment of covered claims of insolvent insurance entities. The assessments are
generally based on a percentage of premiums written during or following the year of insolvency. Liabilities are recognized when the
assessments are probable to be imposed on the premiums on which they are expected to be based and the amounts can be
reasonably estimated. The Company is permitted by Florida statutes to recover the entire amount of assessments from in-force and
future policyholders through policy surcharges. U.S. GAAP provides that the Company should record an asset based on the amount
of written or obligated-to-write premiums and limited to the amounts recoverable over the life of the in-force policies.

Foreign Currency. The functional currency of the Company’s Indian subsidiary is the U.S. dollar. As such, the monetary assets

and liabilities of this subsidiary are remeasured into U.S. dollars at the exchange rate in effect on the balance sheet date. Non-
monetary assets and liabilities are remeasured using historical rates. Expenses recorded in the local currency are remeasured at the
prevailing exchange rate. Exchange gains and losses resulting from these remeasurements are included in the results of operations.

Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP, resulting in two components of
income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by
applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company
determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in
tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets

are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon
examination. The term “more likely than not” means a likelihood of more than fifty percent; the terms “examined” and “upon
examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-
than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than fifty
percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The
determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts,
circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are
reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a
deferred tax asset will not be realized. As of December 31, 2012, management is not aware of any uncertain tax positions that would
have a material effect on the Company’s consolidated financial statements.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies, continued

Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their
fair values at December 31, 2012 and 2011. Fair value for securities are based on the framework for measuring fair value established
by U.S. GAAP (see Note 3 – “Investments”).

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 including stock options and restricted stock issuances based on estimated fair values. In accordance with
U.S. GAAP, the fair value of stock-based awards is amortized over the requisite service period, which is defined as the period during
which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for
all grants that include only a service condition. The Company’s restricted stock awards include both service and market conditions. As
a result, certain restricted stock grants are expensed over the derived service period for each separately vesting tranche.

Basic and diluted earnings per common share. Basic earnings per common share is computed by dividing net income

attributable to common stockholders by the weighted-average number of common shares outstanding for the period. U.S. GAAP
requires the inclusion of restricted stock as participating securities since holders of the Company’s restricted stock have the right to
share in dividends, if declared, equally with common stockholders. During periods of net income, participating securities are allocated
a proportional share of net income determined by dividing total weighted-average participating securities by the sum of total weighted-
average common shares and participating securities (the “two-class method”). Diluted earnings per common share reflect the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted as well as
participating equities. Potentially dilutive securities at December 31, 2012 consisted of stock options and the 7.0% Series A
cumulative convertible preferred stock issued March 25, 2011 (see Note 11 – Stockholders’ Equity).

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

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 2 — Recent Accounting Pronouncements

Accounting Standards Update No. 2013-02. In February 2013, the FASB issued Accounting Standards Update No. 2013-02

(“ASU 2013-02”), Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the
financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of
accumulated other comprehensive by component. In addition, an entity is required to present, either on the face of the statement
where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by
the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in
the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is
required to cross-reference to other disclosures required that provide additional detail about those amounts. ASU 2013-02 is effective
prospectively for public entities for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of
this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2013-01. In January 2013, the FASB issued Accounting Standards Update No. 2013-01

(“ASU 2013-01”), Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-
01 clarifies that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and
Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities
borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or
subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or
after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures
retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the
Company’s consolidated financial statements.

Accounting Standards Update No. 2012-02. In July 2012, the FASB issued Accounting Standard Update No. 2012-12 (“ASU
2012-12”), Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of
ASU 2012-02 is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying
how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset
categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an
indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment
test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General intangibles Other than Goodwill. The more-
likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in ASU 2012-12 are effective for
annual and interim impairment tests performed for the fiscal years beginning after September 15, 2012. Early adoption is permitted.
The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 2 — Recent Accounting Pronouncements, continued

Accounting Standards Update No. 2011-11. In December 2011, the FASB issued Accounting Standards Update No. 2011-11

(“ASU 2011-11”), Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to
disclose information about offsetting and related arrangements of financial and derivative instruments. ASU 2011-11 is effective for
annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should
provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. The adoption of this guidance
is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2010-26. In October 2010, the FASB issued Accounting Standards Update No. 2010-26

(“ASU 2010-26”), Financial Services – Insurance (ASC Topic 944), Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts. The objective of the amendments in ASU 2010-26 is to address diversity in practice regarding the interpretation
of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments in ASU 2010-26
specify which costs should be capitalized. The amendments in ASU 2010-26 are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2011 and can be applied prospectively upon adoption. Retrospective or prospective
application is permitted. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company
adopted ASU 2010-26 effective January 1, 2012 on a prospective basis. As such, the Company recognized additional amortization
expense of $1.2 million with a corresponding decrease in deferred acquisition costs as of the date of adoption. This one-time
adjustment reduced our net income for the year ended December 31, 2012 by approximately $741,000, or $0.08 earnings per diluted
common share. In addition, certain direct marketing, compensation, and other administrative costs are no longer deferred. Rather,
such costs are expensed as incurred beginning January 1, 2012.

(continued)

Table of Contents

Note 3 — Investments

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The Company holds investments in fixed-maturity securities as well as equity securities, which are classified as available-for-

sale. At December 31, 2012 and 2011, the amortized cost, gross unrealized gains and losses, and estimated fair value of the
Company’s available-for-sale securities by security type were as follows (in thousands):

As of December 31, 2012
Fixed-maturity securities
U.S. Treasury and U.S. government agencies
Corporate bonds
Commercial mortgage-backed securities
State, municipalities, and political subdivisions
Redeemable preferred stock

Total

Equity securities

As of December 31, 2011
Fixed-maturity securities
U.S. Treasury and U.S. government agencies
Corporate bonds
Commercial mortgage-backed securities
State, municipalities, and political subdivisions
Redeemable preferred stock
Other

Total

Equity securities

Gross

Amortized

Unrealized

Cost

Gain

Loss

Estimated
Fair
Value

$ 1,359
10,298
10,708
10,152
919

88
572
936
914
18

—
(10)
—
—
(1)

1,447
10,860
11,644
11,066
936

$33,436

2,528

(11)

35,953

$ 8,756

303

(183)

8,876

$
509
10,199
10,574
9,982
1,144
2,883

$35,291

$ 4,220

47
58
314
393
12
117

941

121

—
(417)
(14)
(3)
(10)
—

(444)

(280)

556
9,840
10,874
10,372
1,146
3,000

35,788

4,061

The scheduled maturities of fixed-maturity securities at December 31, 2012 and 2011 are as follows (in thousands):

Available-for-sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Commercial mortgage-backed securities

December 31,

2012

2011

Amortized

Cost

$ 1,258
8,387
8,045
5,038
10,708

Estimated

Fair
Value

1,264
8,728
8,612
5,705
11,644

Amortized

Cost

1,009
10,523
6,835
6,350
10,574

Estimated
Fair
Value

1,010
10,169
7,075
6,660
10,874

$33,436

35,953

35,291

35,788

(continued)

Table of Contents

Note 3 — Investments, continued

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the years ended

December 31, 2012, 2011 and 2010 were as follows (in thousands):

Year ended December 31, 2012
Fixed-maturity securities

Equity securities

Year ended December 31, 2011
Fixed-maturity securities

Equity securities*

Year ended December 31, 2010
Fixed-maturity securities

Equity securities*

Proceeds

Gross

Realized
Gains

Gross
Realized
Losses

$ 8,991

421

(6)

$ 1,735

(230)

$24,904

545

$ 1,665

121

$29,116

1,828

$ 4,515

369

(96)

(280)

(17)

(177)

* Amounts reported for the year ended December 31, 2011 and 2010 include the gross realized gains and losses from equity option
contracts. During the years ended December 31, 2011 and 2010, the Company entered into equity contracts for exchange traded
call and put options to meet certain investment objectives. With respect to these option contracts, the Company received net
proceeds of $89,000 and $391,000, respectively, and realized gains of $49,000 and $327,000, respectively, during the years
ended December 31, 2011 and 2010. Such gains are included in the realized investment gains in the Consolidated Statements of
Income. There were no open option contracts at December 31, 2011 and 2010.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 3 — Investments, continued

Other-than-temporary Impairment (“OTTI”)

The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in

determining whether each individual security is other-than-temporarily impaired, including:

•

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

income;

•

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

general market conditions and industry or sector specific factors;

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

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

Securities with gross unrealized loss positions at December 31, 2012 and 2011, aggregated by investment category and length

of time the individual securities have been in a continuous loss position, are as follows (in thousands):

Less Than Twelve Months

Twelve Months or
Greater

Total

Gross
Unrealized
Loss

Estimated
Fair
Value

Gross
Unrealized
Loss

Estimated
Fair
Value

Gross
Unrealized
Loss

Estimated
Fair
Value

(2)
(1)

(3)
(136)

444
66

(8)
—

981
—

(8)
(47)

981
201

510
3,019

3,529

(10)
(1)

(11)
(183)

1,425
66

1,491
3,220

(55)

1,182

(194)

4,711

(continued)

As of December 31, 2012

Fixed-maturity securities
Corporate bonds
Redeemable preferred stock

Total fixed-maturity securities
Equity securities

Total available-for-sale securities

(139)

Table of Contents

Note 3 — Investments, continued

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

As of December 31, 2011

Fixed-maturity securities
Corporate bonds
States, municipalities and political subdivisions
Commercial mortgage-backed securities
Redeemable preferred stock

Total fixed-maturity securities
Equity securities

Less Than Twelve Months

Twelve Months or
Greater

Total

Gross
Unrealized
Loss

Estimated
Fair
Value

Gross
Unrealized
Loss

Estimated
Fair
Value

Gross
Unrealized
Loss

Estimated
Fair
Value

(417)
(3)
(14)
(10)

(444)
(191)

5,112
2,449
612
232

8,405
2,464

—
—
—
—

—
(89)

—
—
—
—

—
87

(417)
(3)
(14)
(10)

(444)
(280)

5,112
2,449
612
232

8,405
2,551

Total available-for-sale securities

(635)

10,869

(89)

(724)

10,956

The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its
available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused by interest rate changes.
It is expected that the securities would not be settled at a price less than the par value of the investments. In determining whether
equity securities are other than temporarily impaired, the Company considers its intent and ability to hold a security for a period of
time sufficient to allow for the recovery of cost. Because the decline in fair value is attributable to changes in interest rates or market
conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a
market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at
December 31, 2012 and 2011.

Other Investments

Other investments consist primarily of real estate and the related assets and operations of the marina acquired in 2011 and the

real estate and related assets of the marina and restaurant facilities acquired in April 2012 (see Note 5 – Business Acquisitions).
Operating activities related to the Company’s real estate investments include leasing of office and retail space to tenants, wet and dry
boat storage, a restaurant, and fuel services with respect to marina clients and recreational boaters.

Other investments consist of the following as of December 31, 2012 and 2011 (in thousands):

Land
Land improvements
Building
Other

Total, at cost

Less: accumulated depreciation and amortization

Other investments

December 31,

2012
$10,993
1,326
2,869
1,238

16,426
(339)

2011
4,438
283
1,418
404

6,543
(60)

$16,087

6,483

(continued)

Table of Contents

Note 3 — Investments, continued

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Depreciation and amortization expense under other investments was $279,000 and $60,000, respectively, for the years ended

December 31, 2012 and 2011.

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

Available-for-sale securities
Time deposits
Other investments
Cash and cash equivalents
Short-term investments

Years Ended December 31,

2012
$ 1,806
357
(1,334)
151
—

2011
1,494
538
(96)
125
—

2010
1,112
530
—
226
94

980

2,061

1,962

At December 31, 2012, deposits at two national banks totaled $208.9 million, representing 90.7% of the Company’s cash and

cash equivalents. In addition, at December 31, 2011, cash and cash equivalents included $62.8 million on deposit at one national
bank. At December 31, 2012 and 2011, the Company also had an aggregate of $23.0 million and $18.0 million, respectively, in money
market funds at two custodial firms.

Note 4 — Fair Value Measurements

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

inputs to valuation techniques used to measure fair value into three broad levels as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets.

Level 2 – Other inputs that are observable for the asset, either directly or indirectly.

Level 3 – Inputs that are unobservable.

Cash and cash equivalents:

Cash and cash equivalents primarily consist of money market funds. Their carrying value approximates fair value due to the

short maturity and high liquidity of these funds.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 4 — Fair Value Measurements, continued

Available-for-sale securities:

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

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

Time deposits:

Time deposits consisted of certificates of deposit. Their carrying value approximated fair value due to the short maturity of these

investments.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 4 — Fair Value Measurements, continued

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 as of December 31, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine such fair value (in thousands):

Fair Value Measurements Using
(Level 2)

(Level 1)

(Level 3)

Total

As of December 31, 2012
Cash and cash equivalents

Fixed-maturity securities:
U.S. Treasury and U.S. government agencies
Corporate bonds
Commercial mortgage-backed securities
State, municipalities, and political subdivisions
Redeemable preferred stock

Total fixed-maturity securities

Equity securities

$ 230,214

—

230,214

583
10,860
—
11,066
936

864
—
11,644
—
—

23,445
8,876

12,508
—

—
—
—
—
—

—
—

1,447
10,860
11,644
11,066
936

35,953
8,876

Total available-for-sale securities

32,321

12,508

—

44,829

Total

$ 262,535

12,508

—

275,043

Fair Value Measurements Using
(Level 2)

(Level 1)

(Level 3)

Total

As of December 31, 2011
Cash and cash equivalents

Time deposits

Total fixed-maturity securities

Equity securities

$ 100,355

—

100,355

—

12,427

556
9,840
—
10,372
1,146
2,735

—
—
10,874
—
—
265

24,649
4,061

11,139
—

—
—
—
—
—
—

—
—

556
9,840
10,874
10,372
1,146
3,000

35,788
4,061

Total available-for-sale securities

28,710

11,139

—

39,849

Total

$ 129,065

11,139

12,427

152,631

Assets Measured at Estimated Fair Value on a Nonrecurring Basis:

The Company used a discounted cash flow method which relies on Level 3 inputs in valuing goodwill at November 30, 2012.
The Company did not identify the existence of goodwill and, as a result, goodwill was eliminated resulting in an impairment loss of
$161,000 for the year ended December 31, 2012.

There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2012 and 2011.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 4 – Fair Value Measurements, continued

With respect to the Company’s business acquisitions completed in 2012 and 2011 (see Note 5 – “Business Acquisitions”), all

assets acquired, aside from cash which was valued based on Level 1 measurements, and liabilities assumed were valued based on
Level 3 measurements. Property, plant and equipment acquired in April 2012 was valued based on an external appraisal using the
sales comparison approach and other unobservable inputs. The carrying amounts of all other acquired assets and assumed liabilities
approximated their fair values at the acquisition date. Property, plant and equipment related to the April 2011 acquisition was valued
based on an external appraisal using the sales comparison approach and other unobservable inputs. The environmental liability was
valued based on third party estimates to complete the site assessment and remediation plan. The November 2011 acquisition was
valued using the market approach and other unobservable inputs. The carrying amounts of all other assets and liabilities
approximated their fair values at the acquisition date.

Note 5 — Business Acquisitions

The Company completed three acquisitions during the years ended December 31, 2012 and 2011.

2012 Acquisition

Effective April 2, 2012, the Company, through its subsidiary, HCI Holdings LLC, acquired the assets and operations of John’s

Pass Marina, Inc. and Rice Family Holdings LLLP. The real estate consists primarily of ten acres of waterfront property and land
improvements, which include a waterfront restaurant and a marina facility purchased for approximately $8.2 million. Operating
activities at acquisition include the restaurant as well as wet boat storage for approximately 13 clients, and fuel services with respect
to marina clients and recreational boaters. The Treasure Island, Florida real estate and operations were acquired to further strengthen
and diversify the Company’s investment portfolio.

The fair value of the net assets acquired was approximately $8.3 million, which exceeded the $8.2 million purchase price. As a

result, the Company recognized a gain on bargain purchase in the amount of $179,000 ($119,000 net of tax), which is included in
operations for the year ended December 31, 2012. The recorded gain is subject to adjustment as the Company will continue to
evaluate the purchase price allocation during the measurement period. The following table summarizes the Company’s preliminary
allocation of the net consideration paid to the fair value of the assets acquired, identifiable intangible assets acquired and liabilities
assumed at April 2, 2012 (in thousands):

Property, plant and equipment
Other assets
Cash
Deferred tax liability

Fair value of net assets acquired
Gain on bargain purchase, net of tax of $60

Cash consideration paid

$8,280
56
9
(60)

8,285
(119)

$8,166

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 5 — Business Acquisitions, continued

For the year ended December 31, 2012, the effects of the acquisition was not material to the Company’s consolidated financial

statements and basic and diluted earnings per share and, as such, pro forma information has not been presented. The acquired
assets are included in other investments of the consolidated balance sheet. For the year ended December 31, 2012, the acquired
business contributed approximately $4.5 million in revenues and $698,000 of net loss inclusive of the net gain on bargain purchase.

2011 Acquisition

Effective April 20, 2011, the Company, through its subsidiary, TV Investment Holdings LLC, acquired the assets and operations

of Tierra Verde Marina Holdings (“TVMH”). The real estate consists primarily of land, land improvements, retail buildings, and a
marina facility. Operating activities at acquisition include leasing of office and retail space to 11 tenants, wet and dry boat storage for
approximately 150 clients, and fuel services with respect to marina clients and other recreational boaters. The Tierra Verde, Florida
real estate and operations were purchased for $5.1 million through a foreclosure sale conducted by the Pinellas County Clerk of the
Circuit Court. The Company’s primary reason for the acquisition was to strengthen its investment portfolio through diversification and
quality of assets owned.

The fair value of the net assets acquired was approximately $5.7 million, which exceeded the $5.1 million purchase price. As a

result, the Company recognized a gain on bargain purchase in the amount of $936,000 ($575,000 net of tax), which is included in
operations for the year ended December 31, 2011. There were no intangibles acquired with respect to this acquisition. The acquired
assets are included in other investments of the consolidated balance sheet.

Effective November 18, 2011, the Company, through its subsidiary, HCI Technical Resources Inc., acquired Unthink

Technologies Private Ltd. (“Unthink”), a software development company located in India, for $199,000 in cash. The fair value of the
net assets acquired was $38,000. The Company recorded $161,000 of goodwill in connection with this acquisition. The goodwill,
which is attributable to the workforce of the acquired business, was not deductible for tax purposes. Management believes this
acquisition will provide the Company with additional system design expertise that strengthens the Company’s ability to develop,
enhance and maintain software applications for our insurance operations.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 5 — Business Acquisitions, continued

The following table summarizes the Company’s allocation of the net consideration paid to the fair value of the assets acquired

and liabilities assumed at April 20, 2011 for the acquisition of TVMH and at November 18, 2011 for the acquisition of Unthink (in
thousands):

Property, plant and equipment
Other assets
Environmental liability (Note 13)
Deferred tax liability
Other liabilities

Fair value of net assets acquired
Gain on bargain purchase, net of tax of $361
Goodwill

Cash consideration paid

TVMH

Unthink

Total

$6,338
132
(150)
(361)
(274)

5,685
(575)
—

66
15
—
—
(43)

38
—
161

6,404
147
(150)
(361)
(317)

5,723
(575)
161

$5,110

199

5,309

For the year ended December 31, 2011, the effects of the acquisitions were not material to the Company’s consolidated

financial statements and basic and diluted earnings per share and, as such, pro forma information has not been presented.

For the year ended December 31, 2011, the acquired businesses contributed approximately $1.9 million in revenues and $0.4
million of net income inclusive of the net gain on bargain purchase. Based on an impairment test performed in November 2012, the
Company eliminated the entire $161,000 of goodwill.

Note 6 — Property and Equipment, net

Property and equipment, net consists of the following (in thousands):

Land
Building
Computer hardware and software
Office and furniture and equipment
Tenant and leasehold improvements
Other

Total, at cost
Less: accumulated depreciation and amortization

Property and equipment, net

December 31,

2012
$ 1,241
5,955
1,089
1,131
2,767
251

12,434
(1,581)

2011
1,241
5,883
729
778
2,418
184

11,233
(734)

$10,853

10,499

Depreciation and amortization expense under property and equipment was $848,000, $466,000 and $178,000, respectively, for

the years ended December 31, 2012, 2011 and 2010.

(continued)

Table of Contents

Note 7 — Reinsurance

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

The Company cedes a portion of its homeowners insurance exposure to other entities under reinsurance agreements called
catastrophe excess of loss reinsurance treaties. The Company remains liable with respect to claims payments in the event that any of
the reinsurers are unable to meet their obligations under the reinsurance agreements. The Company evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts
with a number of well-known and rated reinsurers to secure its annual reinsurance coverage, which becomes effective June 1 each
year. We purchase reinsurance each year taking into consideration maximum projected losses and reinsurance market conditions.

The impact of the catastrophe excess of loss reinsurance treaties on premiums written and earned is as follows (in thousands):

Premiums Written:
Direct
Assumed

Gross written
Ceded

Net premiums written

Premiums Earned:
Direct
Assumed

Gross earned
Ceded

Net premiums earned

Years Ended December 31,
2011

2012

2010

$205,839
73,340

279,179
(75,939)

125,145
62,104

187,249
(55,525)

114,599
1,683

116,282
(57,322)

$203,240

131,724

58,960

$168,937
64,670

233,607
(75,939)

119,756
23,850

143,606
(55,525)

104,621
15,136

119,757
(57,322)

$157,668

88,081

62,435

During the years ended December 31, 2012, 2011 and 2010, there were no recoveries pertaining to reinsurance contracts that

were deducted from losses incurred. Prepaid reinsurance premiums related to 31 reinsurers at December 31, 2012 and 18 reinsurers
at December 31, 2011, respectively. There were no amounts receivable with respect to reinsurers at December 31, 2012 and 2011.
Thus, there were no concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums as of
December 31, 2012 and 2011. The percentages of assumed premiums earned to net premiums earned for the years ended
December 31, 2012, 2011 and 2010 were 41.0%, 27.1% and 24.2%, respectively.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 8 — Losses and Loss Adjustment Expenses

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.

Activity in the liability for unpaid losses and LAE is summarized as follows (in thousands):

Balance, beginning of year

Incurred related to:
Current year
Prior years

Total incurred

Paid related to:

Current year
Prior years

Total paid

Balance, end of year

Years Ended December 31,
2011

2012

2010

$ 27,424

22,146

19,178

66,425
(115)

43,613
4,630

38,446
(779)

66,310

48,243

37,667

(36,914)
(15,652)

(26,132)
(16,833)

(24,218)
(10,481)

(52,566)

(42,965)

(34,699)

$ 41,168

27,424

22,146

The significant increase from 2011 to 2012 is primarily due to the increase in policy base as a result of the HomeWise

assumption in November 2011 and the Citizens assumption in November 2012.

The Company writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes.
Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, the Company
believes that such an event would not be so material as to disrupt the overall 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.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 9 — Income Taxes

A summary of income tax expense is as follows (in thousands):

Current:

Federal
State
Foreign

Total current taxes

Deferred:

Federal
State

Total deferred taxes

Income taxes

Years Ended December 31,

2012

2011

2010

$18,484
3,168
137

7,220
1,196
9

1,238
236
—

21,789

8,425

1,474

(1,986)
(380)

(1,715)
(269)

1,449
241

(2,366)

(1,984)

1,690

$19,423

6,441

3,164

The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as

follows (dollars in thousands):

Income taxes at statutory rate
Increase (decrease) in income taxes resulting from :
State income taxes, net of federal tax benefits
Stock-based compensation
Other

Income taxes

Years Ended December 31,

2012

2011

2010

Amount % Amount % Amount %
$17,353 35.0 5,785 35.0 3,005 35.0

1,799 3.6 599 3.6 313 3.6
7 0.0
— 0.0
13 0.2
50 0.7 (167) (1.9)
271 0.6

$19,423 39.2 6,441 39.3 3,164 36.9

The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income

tax rate. The tax years ending December 31, 2011, 2010, and 2009 remain subject to examination by our major taxing jurisdictions.
The Company elected to classify, if any, interest and penalties arising from uncertain tax positions as income tax expense as
permitted by current accounting standards.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities

for financial reporting purposes and the amounts used for income tax purposes.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 9 — Income Taxes, continued

Significant components of our net deferred income tax asset are as follows (in thousands):

Deferred tax assets:

Unearned premiums
Losses and loss adjustment expenses
Organizational costs
Stock-based compensation
Accrued expenses
Deferred expenses

Total deferred tax assets

Deferred tax liabilities:

Property and equipment
Deferred policy acquisition costs
Unrealized net gain on securities available-for-sale
Prepaid expenses
Unearned brokerage income
Other

Total deferred tax liabilities

Net deferred tax assets

December 31,

2012

2011

$ 9,149
1,116
106
394
40
72

6,768
756
118
252
466
—

10,877

8,360

(1,519)
(4,027)
(1,017)
(225)
(105)
(136)

(943)
(4,870)
(131)
—
—
(48)

(7,029)

(5,992)

$ 3,848

2,368

A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of
the tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more
likely than not that deferred tax assets will be realized. As a result, the Company did not have a valuation allowance established as of
December 31, 2012 or 2011.

Note 10 — Earnings Per Share

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

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 10 — Earnings Per Share, continued

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

(dollars and shares in thousands, except per share amounts):

Income
(Numerator)

(Denominator)

Per Share
Amount

Year Ended December 31, 2012

Net income
Less: Preferred stock dividends
Less: Income attributable to participating securities

$ 30,157
(322)
(488)

Basic Earnings Per Share:
Income allocated to common stockholders

Effect of Dilutive Securities:
Stock options
Convertible preferred stock
Warrants

Diluted Earnings Per Share:
Income available to common stockholders and assumed

29,347

8,497

$ 3.45

—
322
—

220
655
441

conversions

$ 29,669

9,813

$ 3.02

Year Ended December 31, 2011

Net income
Less: Preferred stock dividends

Basic Earnings Per Share:
Income available to common stockholders

Effect of Dilutive Securities:
Stock options
Convertible preferred stock

9,964
(815)

9,149

6,132

$ 1.49

—
815

352
961

Diluted Earnings Per Share:
Income available to common stockholders and assumed

conversions

9,964

7,445

$ 1.34

Year Ended December 31, 2010

Net income
Less: Preferred stock dividends

Basic Earnings Per Share:
Income available to common stockholders

Effect of Dilutive Securities:
Stock options

5,422
—

5,422

6,179

$ 0.88

—

495

Diluted Earnings Per Share:
Income available to common stockholders and assumed

conversions

5,422

6,674

$ 0.81

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 10 — Earnings Per Share, continued

For the years ended December 31, 2011 and 2010, 2,738,335 and 1,738,335 warrants to purchase 1,405,001 and 905,001
shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the exercise price
of $9.10 exceeded the average market price of the Company’s common stock. See Note 11 – “Stockholders’ Equity” for a summary of
warrant activity over the last three years. On September 26, 2012, the Company’s Board of Directors fixed October 27, 2012 as the
cancellation date for the IPO warrants. As such, the record holders of the IPO warrants had no further rights under the warrants on
and after October 27, 2012. There were no preferred shares outstanding in 2010.

Note 11 — Stockholders’ Equity

Common Stock

On April 19, 2012, the Company entered into an underwriting agreement (the “Underwriting Agreement”) pursuant to which the

Company agreed to sell 1,600,000 shares of the Company’s common stock, no par value per share (the “Common Stock”), for $11.75
per share, less a 6.0% underwriting commission. Under the terms of the Underwriting Agreement, the Company granted the
underwriter an option to purchase up to an additional 240,000 shares of Common Stock at the public offering price, less a 6.0%
underwriting commission, within 45 days from the date of the Underwriting Agreement to cover over-allotments, if any. The offering
was made pursuant to the Company’s effective registration statement on Form S-3, as amended (Registration Statement No. 333-
180322), and the Prospectus Supplement dated April 19, 2012. On April 23, 2012, the underwriter elected to fully exercise its
overallotment option. The closing of the sale of an aggregate of 1,840,000 shares of Common Stock occurred on April 25, 2012. The
offering resulted in aggregate gross proceeds to the Company of approximately $21.6 million and net proceeds of approximately
$20.1 million after underwriting commissions and offering expenses.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 11 — Stockholders’ Equity, continued

Effective March 18, 2009, the Company’s Board of Directors authorized a plan to repurchase up to $3.0 million (inclusive of
commissions) of the Company’s common shares. The repurchase plan allowed the Company to repurchase shares from time to time
through March 19, 2010. This repurchase plan was supplemented in December 2009 upon approval by the Board of Directors to
extend the repurchase authority by an additional $3.0 million and continue until the repurchase plan is terminated by the Company or
the maximum number of dollars has been expended. During the year ended December 31, 2010, the Company repurchased and
retired a total of 311,239 shares at an average price of $7.00 per share and a total cost, inclusive of fees and commissions, of
$2,196,392, or $7.06 per share. During the year ended December 31, 2011, the Company repurchased and retired a total of 83,594
shares at an average price of $8.23 per share and a total cost, inclusive of fees and commissions, of $693,000, or $8.29 per share.

As of March 28, 2011, the maximum amount designated for repurchases under this plan was expended and the share

repurchase program was terminated.

Common Stock Warrants

A summary of the warrants is presented below:

Warrants issued with IPO units
Warrants issued to the Company’s placement agents

net of forfeitures and repurchases

Warrants outstanding at December 31, 2009
Placement agent warrants repurchased by the

Company at a price of $1.20 per warrant in January
2010

Warrants outstanding at December 31, 2010
Warrants issued in 2011*

Warrants outstanding at December 31, 2011
Exercise of warrants issued with IPO units
Exercise of warrants issued in 2011
Adjustment for fractional shares
Forfeiture of placement agent warrants
Cashless exercise of placement agent warrants
Cancellation of warrants issued with IPO units

Warrants outstanding at December 31, 2012

Number Of
Warrants

Outstanding

1,666,668

72,000

1,738,668

(333)

1,738,335
1,000,000

2,738,335
(1,608,528)
(1,000,000)
—
(5,000)
(66,667)
(58,140)

—

Number of Common
Shares Issuable Upon
Conversion of
Warrants Outstanding

833,334

72,000

905,334

(333)

905,001
500,000

1,405,001
(804,260)
(500,000)
(4)
(5,000)
(66,667)
(29,070)

—

In connection with the HomeWise assumption transaction in November 2011, the Company issued 1,000,000 warrants, which
were exercisable to purchase 500,000 shares of the Company’s common stock at a per share exercise price of $9.10.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 11 — Stockholders’ Equity, continued

The warrants issued prior to 2011 could be exercised at an exercise price equal to $9.10 per share on or before July 30, 2013.
At any time after January 30, 2009 and before the expiration of the warrants, the Company at its option could cancel the warrants in
whole or in part, provided that the closing price per share of the Company’s common stock had exceeded $11.38 for at least ten
trading days within any period of twenty consecutive trading days, including the last trading day of the period. The placement agents
also had the option to effect a cashless exercise in which the warrants would be exchanged for the number of shares which is equal
to the intrinsic value of the warrant divided by the current value of the underlying shares. On September 26, 2012, the Company
announced its Board of Directors had fixed October 27, 2012 as the cancellation date for the IPO warrants. As such, the record
holders of the IPO warrants have no further rights under the warrants on and after October 27, 2012.

During 2012, 10,546 shares of common stock were issued upon the cashless exercise of 66,667 placement agent warrants in

February. As of December 31, 2012, there are no placement agent warrants outstanding.

The Company did not grant any warrants in 2012 and 2010. The fair value of the warrants issued in 2011 was estimated on the

date of issuance using the following assumptions and the Black-Scholes option pricing model:

Expected dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Per share grant date fair value of warrants issued

5.0%
52%
0.23%
1.75
$0.754

The $754,000 aggregate value of the warrants was deferred and is being amortized over the expected policy term of the policies

assumed in the transaction. The warrants, the issuance of which is not registered or required to be registered under the Securities
Act of 1933, were exercisable for a term beginning on November 1, 2011 and ending on July 31, 2013 unless cancelled earlier at the
Company’s option under the terms specified by the warrant agreement. Effective December 31, 2012, 500,000 shares of common
stock were issued upon the exercise of 1,000,000 warrants. As of December 31, 2012, there were no warrants outstanding.

The aggregate intrinsic value of warrants exercised during the year ended December 31, 2012 was $15.1 million.

Preferred Stock

In March 2011, the Company designated 1,500,000 shares of the Company’s preferred stock as Series A cumulative convertible

preferred stock (“Series A Preferred”).

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 11 — Stockholders’ Equity, continued

On March 25, 2011, the Company closed its preferred stock offering under which a total of 1,247,700 shares of its Series A

Preferred were sold for gross proceeds of approximately $12.5 million and net proceeds after offering costs of approximately $11.3
million. Dividends on the Series A Preferred are cumulative from the date of original issue and accrue on the last day of each month,
at an annual rate of 7.0% of the $10 liquidation preference per share, equivalent to a fixed annual amount of $0.70 per share.
Accrued but unpaid dividends accumulate and earn additional dividends at 7.0%, compounded monthly.

Shareholders of Series A Preferred may convert all or any portion of their shares, at their option, at any time, into shares of the
Company’s common stock at an initial conversion rate of one share of common stock for each share of Series A Preferred, which is
equivalent to an initial conversion price of $10 per share; provided, however, that the Company may terminate this conversion right
on or after March 31, 2014, if for at least twenty trading days within any period of thirty consecutive trading days, the market price of
the Company’s common stock exceeds the conversion price of the Series A Preferred by more than 20% and the Company’s common
stock is then traded on the New York Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the
NASDAQ Capital Market, or the NYSE Amex. Under certain circumstances, the Company will be required to adjust the conversion
rate. The initial conversion price of $10 per share is subject to proportionate adjustment in the event of stock splits, reverse stock
splits, stock dividends, or similar changes with respect to the Company’s common stock.

During the year ended December 31, 2012, holders of 1,006,518 shares of Series A Preferred converted their Series A

Preferred shares to 1,006,518 shares of common stock. There were no preferred stock conversions during the year ended
December 31, 2011. As of December 31, 2012, 241,182 shares of Series A Preferred remain outstanding.

Shareholders of record of the Company’s Series A Preferred at the close of business on a date for determining shareholders
entitled to dividends will be entitled to receive the dividends payable on their Series A Preferred shares on the corresponding dividend
payment date notwithstanding the conversion of such Series A Preferred shares before the dividend payment date. The Series A
Preferred terms include a provision requiring such shareholders to pay an amount equal to the amount of the dividend payable. That
requirement has been permanently waived by the Company.

Holders of the Series A Preferred shares generally have no voting rights, except under limited circumstances, and holders are

entitled to receive cumulative preferential dividends when and as declared by the Company’s Board of Directors.

In addition, the Company is authorized to issue up to an additional 18,500,000 shares of preferred stock, no par value. The
authorized but unissued and undesignated preferred stock may be issued in one or more series and the shares of each series shall
have such rights as determined by the Company’s Board of Directors subject to the rights of the holders of the Series A Preferred.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 11 — Stockholders’ Equity, continued

On December 11, 2012, the Company’s Board of Directors declared a cash dividend on its Series A Preferred shares in the

amount of $0.05833 per share for each of the months of December 2012, January 2013, and February 2013. The December 2012
dividend was paid on January 28, 2013 to shareholders of record at the close of business on January 2, 2013. The January 2013
dividend was paid on February 27, 2013 to shareholders of record at the close of business on February 1, 2013. The February 2013
dividend is payable on March 27, 2013 to shareholders of record at the close of business on March 1, 2013.

Stock Option and Incentive Plan

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

The Company’s 2007 Stock Option and Incentive Plan (“2007 Plan”) provided for granting of stock-based compensation to
employees, directors, consultants, and advisors of the Company. Under the 2007 Plan, an aggregate of 6,000,000 shares of the
Company’s common stock could be granted, including through the grant of stock options and restricted stock. On April 20, 2012, the
Company’s Board of Directors adopted, subject to shareholder approval, the 2012 Omnibus Incentive Plan (the “2012 Plan”). The
2012 Plan was approved by the Company’s shareholders effective as of May 24, 2012, at which time the 2007 Plan was terminated
and the remaining 4,604,800 shares reserved for future issuance under the 2007 Plan were cancelled. The aggregate number of
shares of the Company’s common stock reserved and available for issuance pursuant to awards granted under the 2012 Plan is
5,000,000 of which only 4,000,000 shares may be issued upon the exercise of incentive stock options. At December 31, 2012, 46,320
shares have been granted under the 2012 Plan and 4,953,680 shares are available for grant under the 2012 Plan.

Note 12 — Stock-Based Compensation

Stock Options

Outstanding stock options granted under the 2007 Plan vest over periods ranging from immediately vested to five years and are

exercisable over the contractual term of ten years.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 12 — Stock-Based Compensation, continued

A summary of the activity in the Company’s 2007 Plan for the years ended December 31, 2012, 2011 and 2010 is as follows

(dollars in thousands, except per share amounts):

Outstanding at December 31, 2009
Exercised

Outstanding at December 31, 2010
Issued
Forfeited
Exercised

Outstanding at December 31, 2011

Exercised

Outstanding at December 31, 2012

Exercisable at December 31, 2012

Weighted
Average
Exercise

Weighted
Average
Remaining
Contractual

Price

Term

Aggregate
Intrinsic
Value

$ 2.66
$ 2.50

$ 2.71
$ 6.30
$ 2.50
$ 2.50

6.5 years

$ 4,675

Number of
Options

1,130,000
(260,000)

870,000
30,000
(24,800)
(255,200)

620,000
(340,000)

$ 2.97
$ 3.03

280,000

$ 2.91

260,000

$ 2.65

5.7
years

4.9
years

4.6
years

$ 3,122

$ 5,007

$ 4,717

The following table summarizes information about options granted, exercised, and the fair value of vested options for the years

ended December 31, 2012, 2011 and 2010:

Options granted
Weighted-average grant-date fair value

Options exercised
Total intrinsic value of exercised options
Tax benefits realized

2012

2011

—
n/a

2010
30,000
1.70

340,000
$3,648,000
$1,161,000

255,200
$1,184,000
$ 265,000

260,000
$1,097,000
$ 301,000

Total fair value of vested options

22,000

76,000

$ 196,000

During the year ended December 31, 2012, a total of 340,000 options were exercised of which 227,003 options were net settled
by surrender of 72,592 shares. During the year ended December 31, 2011, a total of 255,200 options were exercised, which includes
30,000 options exercised and net settled by surrender of 9,317 shares. Compensation expense recognized for the years ended
December 31, 2012, 2011 and 2010 totaled approximately $68,000, $27,000 and $87,000, respectively. At December 31, 2012, there
was approximately $25,000 of unrecognized compensation expense related to nonvested stock options granted under the plan. The
Company expects to recognize the remaining compensation expense over a weighted-average period of 16 months. Deferred tax
benefits related to stock options for the years ended December 31, 2012, 2011 and 2010 were immaterial.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 12 — Stock-Based Compensation, continued

No options were granted during the years ended December 31, 2012 and 2010. In 2011, 30,000 options were granted on
August 26, 2011, with fair value estimated on the date of grant using the following assumptions and the Black-Scholes option pricing
model:

Expected dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)

6.3%
53.3%
0.97%
5.00

Restricted Stock Awards

During 2012, the Company granted restricted stock awards to certain executive officers and employees in connection with their
service to the Company. The terms of the Company’s restricted stock grants include both service and market-based conditions. The
fair value of the awards with market-based conditions is determined using a Monte Carlo simulation method which calculates many
potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value
with respect to the awards with only service-based conditions is based on the value of the Company’s stock on the grant date.

Information with respect to nonvested restricted stock awards, which were granted in April and May 2012 under the 2007 Plan

and in December 2012 under the 2012 Plan, is as follows:

Nonvested at December 31, 2011
Granted

Nonvested at December 31, 2012

Number of
Restricted
Stock
Awards

—
246,320

Weighted
Average
Grant Date
Fair Value

—
$ 14.54

246,320

$ 14.54

The Company recognized compensation expense of $776,000 in the year ended December 31, 2012. At December 31, 2012,

there was approximately $2.8 million of total unrecognized compensation expense related to nonvested restricted stock arrangements
granted under the Company’s 2007 Plan and 2012 Plan. For the year ended December 31, 2012, the Company recognized deferred
tax benefits of approximately $299,000 related to restricted stock awards.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 12 — Stock-Based Compensation, continued

The Company expects to recognize the remaining compensation expense over a weighted-average period of 30 months. No
restricted stock was granted during the years ended December 31, 2011 and 2010. The following presents assumptions used in a
Monte Carlo simulation model to determine the fair value of the awards with market-based conditions:

Expected dividends per share
Expected volatility
Risk-free interest rate
Estimated cost of capital
Expected life (in years)

Note 13 — Commitments and Contingencies

Lease Commitments

$0.80
36.7 – 50.0%
0.1 – 1.2%
11.9 – 12.1%
6.00

In November 2012, the Company entered into an agreement to lease a 15,000 square feet of office space in Noida, India. The

lease has an initial term of nine years commencing January 15, 2013 with monthly rental payments of approximately $10,200 plus
applicable service tax for the first year. Thereafter the monthly rental payment will increase by five percent every year. The Company
is entitled to terminate the lease 36 months after the commencement date by providing 3 months’ written notice to the landlord.

The Company leased office space in Noida, India effective with the Company’s acquisition of Unthink in November 2011. This
non-cancelable lease, which was assumed by the Company at acquisition, required the Company to pay base rent of approximately
$3,200 per month throughout the lease term which will expire on June 2, 2013.

Minimum future rental payments under operating leases after December 31, 2012 are as follows (in thousands):

Year
2013
2014
2015
2016
2017
Thereafter

Total minimum future payments

Amount
$ 139
129
136
142
150
676

$1,372

Rental expense under all facility leases was $527,000, $239,000 and $191,000, respectively, during the years ended

December 31, 2012, 2011 and 2010. Included in each year was expense related to the Company’s former corporate headquarters.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 13 — Commitments and Contingencies, continued

Service Agreement

In connection with the lease for new office space in India as described in the lease commitments above, the Company signed a

long-term contract with the landlord to receive maintenance and facility services. The agreement has the same initial term of nine
years with monthly payments of approximately $1,800 plus applicable service tax for the first year. Thereafter the monthly payment
will increase by five percent every year. The Company is also entitled to terminate the agreement 36 months after the
commencement date by providing 3 months’ written notice to the landlord.

Minimum future payments under the service agreement after December 31, 2012 are as follows (in thousands):

Year
2013
2014
2015
2016
2017
Thereafter

Total minimum future payments

Rental Income

Amount
22
$
23
25
25
27
122

$ 244

The Company owns real estate which consists of 3.5 acres of land, a building with gross area of 122,000 square feet, and a

four-level parking garage. This facility is used by the Company and its subsidiaries. In addition, the Company leases space to non-
affiliates.

Expected annual rental income due under non-cancellable operating leases for all properties and other investments owned at

December 31, 2012 are as follows (in thousands):

Year
2013
2014
2015
2016
2017

Total

Amount
$1,102
815
591
347
27

$2,882

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 13 — Commitments and Contingencies, continued

Regulatory Assessments

Regular Insurance Assessments and Surcharges

As a direct premium writer in the state of Florida, the Company is subject to mandatory assessments by Citizens and mandatory
surcharges by the Florida Hurricane Catastrophe Fund (FHCF). These assessments and surcharges are paid based on a percentage
of the Company’s direct written premium by line of business. For the years ended December 31, 2012, 2011 and 2010, HCPCI paid
assessments to FHCF amounting to $2,517,000, $1,592,000 and $987,000, respectively. Additionally, HCPCI paid assessments to
Citizens of $1,936,000, $1,604,000 and $1,382,000, respectively, for the years ended December 31, 2012, 2011 and 2010. These
assessments are recorded as a surcharge in premium billings to insureds. As of December 31, 2012, 2011 and 2010, the surcharge
rate in effect for FHCF was 1.3%, 1.3% and 1.0%, respectively. As of December 31, 2012, 2011 and 2010, the surcharge rate in
effect for Citizens was 1.0%, 1.0% and 1.4%, respectively.

b) Guaranty Fund

The Florida Insurance Guaranty Association may assess the Company to provide for the payment of covered claims of insolvent
insurance entities. The assessments are generally based on a percentage of premiums written as of the end of the prior year in which
the assessment is levied. Although the Company is permitted by Florida statutes to recover the entire amount of assessments from
existing and future policyholders through policy surcharges, liabilities are recognized when the assessments are probable to be
imposed on the premiums on which they are expected to be based and the amounts can be reasonably estimated. During 2012, the
Company paid $1.1 million of guaranty fund assessments, $482,000 of which was recognized as an asset recoverable from
policyholders. The balance of $657,000 was charged to expense in 2012. However, the entire amount of $1.1 million is expected to
be recovered from policyholders over a twelve-month period beginning February 2013. The amount recovered in excess of $482,000
will be credited to expense. The Company has filed with the Florida Office of Insurance Regulation to enable HCPCI to recover the
full amount of this assessment from its policyholders. At December 31, 2012, the Company did not provide for a liability related to
guaranty fund assessments.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 13 — Commitments and Contingencies, continued

Environmental Matters

In connection with the Company’s April 20, 2011 acquisition of the real estate located in Pinellas County, Florida (see Note 5 –

“Business Acquisitions”), the Company assumed the liability to complete a site assessment and remediation of environmental
contamination that resulted from a petroleum release at the marina site in late 2009. The Company and its environmental consultants
have assumed the remedial action work plan developed by prior management and its environmental consultant, which consists of
completing the site assessment, performing soil excavation, and installing wells for collection of groundwater and soil samples
throughout the monitoring phase of the project. At acquisition, the Company recorded a liability of $150,000 with respect to the
planned remedial action. Such liability was determined based on reasonably estimable costs of completing the actions defined in the
existing ongoing work plan. As of December 31, 2012, a total of $53,000 has been expended with respect to the site assessment and
the remaining $97,000 accrued at acquisition is included in other liabilities in the accompanying consolidated balance sheets.
Although the Company has accrued all reasonably estimable costs of completing the actions defined in the current ongoing work
plan, it is possible that additional testing and additional environmental monitoring and remediation will be required in the near future
as part of the Company’s ongoing discussions with the Florida Department of Health, the agency contracted by the Florida
Department of Environmental Protection to administer cases of petroleum contamination in Pinellas County, in which case additional
expenses could significantly exceed the current estimated liability. However, based on information known at December 31, 2012, the
Company does not expect that such additional expenses would have a material adverse effect on the liquidity or financial condition of
the Company.

Litigation

The Company is party to claims and legal actions arising routinely in the ordinary course of business. In the opinion of

management, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or
liquidity.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 14 – Quarterly Results of Operations (Unaudited)

The tables below summarize unaudited quarterly results of operations for 2012, 2011 and 2010 (in thousands, except per share

data).

Net premiums earned
Total revenue
Losses and loss adjustment expenses
Policy acquisition and other underwriting expenses
Total expenses
Income before income taxes
Net income
Net income available to common stockholders
Earnings per share:

Basic
Diluted

Three Months Ended

03/31/12
$40,431
41,652
19,168
6,836
30,271
11,381
6,968
6,787

06/30/12
37,070
38,855
16,197
6,243
26,846
12,009
7,262
7,199

09/30/12
30,603
31,481
15,017
6,611
26,356
5,125
2,826
2,784

12/31/12
49,564
51,077
15,928
6,240
30,012
21,065
13,101
13,065

$
$

1.07
0.88

$
$

0.85
0.74

$
$

0.30
0.27

$
$

1.27
1.19

Three Months Ended

03/31/11
$16,674
18,049
10,403
4,263
16,794
1,255
793
776

06/30/11
17,044
19,481
10,523
2,780
15,660
3,821
2,301
1,940

09/30/11
18,530
19,713
10,431
3,529
16,407
3,306
2,074
1,856

12/31/11
35,833
36,566
16,886
7,557
28,543
8,023
4,796
4,578

$
$

0.13
0.12

$
$

0.32
0.30

$
$

0.30
0.27

$
$

0.74
0.62

Three Months Ended

03/31/10
$16,241
16,987
9,813
4,292
15,801
1,186
698
698

06/30/10
15,645
17,411
10,863
2,668
15,417
1,994
1,282
1,282

09/30/10
15,084
17,072
8,783
3,730
14,534
2,538
1,657
1,657

12/31/10
15,465
17,145
8,208
4,188
14,277
2,868
1,785
1,785

$
$

0.11
0.10

$
$

0.21
0.19

$
$

0.27
0.25

$
$

0.29
0.27

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 15 — Regulatory Requirements and Restrictions

The Florida Insurance Code (the “Code”) requires HCPCI to maintain capital and surplus equal to the greater of 10% of its

liabilities or a statutory minimum as defined in the Code. At December 31, 2012, HCPCI is required to maintain a minimum capital
and surplus of $19.7 million. At December 31, 2012, 2011 and 2010, HCPCI’s statutory capital and surplus was $69.8 million, $46.5
million and $31.1 million, respectively. HCPCI had a statutory net income of $13.2 for the year ended December 31, 2012 and a
statutory net loss of $4.3 million and $2.3 million for the years ended December 31, 2011 and 2010, respectively. Statutory surplus
differs from stockholders’ equity reported in accordance with U.S. GAAP primarily because policy acquisition costs are expensed
when incurred. In addition, the recognition of deferred tax assets is based on different recoverability assumptions.

Since inception, HCPCI has maintained a cash deposit with the Insurance Commissioner of the state of Florida, in the amount of

$300,000, to meet regulatory requirements.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except
out of that part of its available and accumulated capital and surplus funds which is derived from realized net operating profits on its
business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders
without prior approval of the Florida Office of Insurance Regulation if the dividend or distribution would exceed the larger of (1) the
lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward,
(2) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (3) the
lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three year carry forward with dividends payable constrained
to unassigned funds minus 25% of unrealized capital gains. At December 31, 2012, 2011 and 2010, no dividends are available to be
paid by HCPCI.

The Bermuda Monetary Authority requires Claddaugh to maintain minimum capital and surplus of $2.0 million. At December 31,

2012, 2011 and 2010, Claddaugh’s statutory capital and surplus was $10.3 million, $8.8 million and $4.5 million, respectively.
Claddaugh’s statutory net profit was $4.8 million, $4.3 million and $4.9 million, respectively, for the years ended December 31, 2012,
2011 and 2010. During the years ended December 31, 2012, 2011 and 2010, Claddaugh paid its parent, HCI, cash dividends of $6.0
million, $0 million and $4.8 million, respectively.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 16 — Related Party Transactions

On June 1, 2012, Claddaugh Casualty Insurance Company, Ltd. (“Claddaugh”), the Company’s Bermuda-based captive
reinsurer, entered into a reinsurance treaty with Moksha Re SPC Ltd. and multiple capital partners (“Moksha”) whereby a portion of
the business assumed from the Company’s insurance subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc.
(“HCPCI”), is ceded by Claddaugh to Moksha. With respect to the 2012-2013 treaty year, which covers the period from June 1, 2012
through May 31, 2013, Moksha assumed $13.8 million of the total covered exposure for approximately $4.0 million in premiums, a
rate which management believes to be competitive with market rates available to Claddaugh. The $4.0 million premium was fully paid
by Claddaugh in June 2012. Moksha capital partners deposited an aggregate of $9.8 million into a trust account along with the $4.0
million premium paid by Claddaugh to fully collateralize Moksha’s exposure. Trust assets may be withdrawn by HCPCI, the trust
beneficiary, in the event amounts are due under the 2012-2013 Moksha reinsurance agreement. Among the Moksha capital partner
participants, the Company’s chief executive officer and the Company’s vice president of investor relations contributed $700,000 and
$200,000, respectively. In addition, members of the chief executive officer’s immediate family contributed $942,500. The remaining
capital partner participants, who are multiple parties unrelated to the Company, contributed the balance of $7,960,000.

One of the Company’s directors is a partner at a law firm that manages certain of the Company’s corporate legal matters. Fees

incurred with respect to this law firm for the years ended December 31, 2012, 2011 and 2010 were approximately $335,000,
$232,000 and $266,000, respectively.

During 2010, 2011, and 2012, the Company leased office space under an operating lease agreement with one director. The

lease required annual base rental payments of approximately $150,000. The lease was terminated in December 2012 and the total
payments during 2012 were $179,000. Lease payments on this property for each of the years ended December 31, 2011 and 2010
totaled $160,000.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 16 — Related Party Transactions, continued

Effective April 4, 2011, the Company repurchased and retired a total of 80,000 shares of the Company’s common stock at a

price of $8.00 per share for a total cost of $640,000. Such shares were repurchased under a stock purchase agreement with one of
the Company’s directors at a price below the $8.20 market value of the Company’s common stock on the date of the transaction.
Such repurchases were not part of a publicly announced plan or program.

Effective June 27, 2011, the Company repurchased and retired a total of 85,200 shares of the Company’s common stock at a

price of $6.50 per share for a total cost of $553,800. Such shares were repurchased under a stock purchase agreement with the
Company’s former Chief Executive Officer at a price below the $6.96 market value of the Company’s common stock on the date of the
transaction. Such repurchases were not part of a publicly announced plan or program.

One of the Company’s directors received a consulting fee and software license fees for development and use of the Company’s
premium administration application software. Under this arrangement, the Company incurred fees of $181,000 and $359,000 for the
years ended December 31, 2011 and 2010, respectively. Effective June 30, 2011, all rights to the software license were assigned to
the Company in exchange for a one-time payment of $50,000. Such payment was made to the Company’s director who developed
and licensed the software to the Company. The related software license and consulting agreements were terminated coincident with
this exchange.

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 17 — Condensed Financial Information of Homeowners Choice, Inc.

Condensed financial information of Homeowners Choice, Inc. is as follows:

Balance Sheets

Assets

Cash and cash equivalents
Investment in subsidiaries
Property and equipment, net
Income tax receivable
Deferred income taxes
Other assets

Total assets

Liabilities and Stockholders’ Equity

Accrued expenses and other liabilities
Income taxes payable
Deferred income taxes
Dividends payable
Due to related parties

Total liabilities

Total stockholders’ equity

Total liabilities and stockholders’ equity

December 31,

2012

2011

(in thousands)

6,317

$
1
140,563 88,421
1,293
950
2,379 —
—
348
916 1,428

$151,468 91,148

727 1,778
— 1,605
415 —
218
42
29,031 23,717

30,215 27,318

121,253 63,830

$151,468 91,148

(continued)

Years Ended December 31,
2011
2012
(in thousands)

2010

8
144

80
45
(2,812) (2,428) (1,427)

75
66

(2,660) (2,287) (1,302)
485

846

750

(1,910) (1,441)
(817)
32,067 11,405 6,239

$30,157 9,964 5,422

(continued)

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 17 — Condensed Financial Information of Homeowners Choice, Inc. (continued)

Statements of Income

Net investment income
Other income
Operating expenses

Loss before income tax benefit and equity in income of subsidiaries
Income tax benefit

Net loss before equity in income of subsidiaries
Equity in income of subsidiaries

Net income

Table of Contents

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 17 — Condensed Financial Information of Homeowners Choice, Inc. (continued)

Statements of Cash Flows

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

Stock-based compensation
Depreciation and amortization
Equity in income of subsidiaries
Deferred income taxes
Changes in operating assets and liabilities:

Income taxes receivable
Other assets
Accrued expenses and other liabilities
Income taxes payable
Due to related parties

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of short-term investments
Redemption of short-term investments
Purchases of property and equipment
Dividends received from subsidiary
Investment in subsidiaries

Net cash used in investing activities

Cash flows from financing activities:

Net proceeds from the issuance of common stock
Repurchases of common stock
Dividends paid to stockholders
Proceeds from exercise of stock options
Proceeds from exercise of stock warrants
Proceeds from sale of preferred stock, net of costs
Debt issuance costs paid
Excess tax benefits from stock options exercised

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Years Ended December 31,

2012

2011

2010

(in thousands)

$ 30,157

9,964

5,422

237
788
(32,067)
763

27
214
(11,405)
(83)

87
84
(6,239)
136

(2,379)
84
(1,051)
(1,605)
5,314

—
(348)
1,488
(1,957)
10,489

674
(226)
38
3,562
6,267

241

8,389

9,805

—
—
(668)
6,000
(24,056)

—
2,074
(900)
—
(16,400)

(80)
—
(44)
4,800
(9,889)

(18,724)

(15,226)

(5,213)

20,082
—
(8,561)
283
11,869
—
(35)
1,161

—
(1,887)
(3,827)
564
—
11,307
—
265

—
(3,596)
(1,877)
650
—
—
—
301

24,799

6,422

(4,522)

6,316
1

$ 6,317

(415)
416

70
346

416

(continued)

Table of Contents

Note 18 — Subsequent Events

HOMEOWNERS CHOICE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

On February 28, 2013, the Company purchased real estate in Ocala, Florida for a total purchase price of $2.0 million. The real
estate consists of 1.6 acres of land and a vacant office building with gross area of approximately 16,000 square feet. The facility will
be used by the Company and its subsidiaries primarily in the event a catastrophic event impacts the Company’s home office and
support operations.

On January 22, 2013, the Company’s Board of Directors declared a quarterly dividend of $0.225 per common share. The

dividends are scheduled for payment on March 15, 2013 to stockholders of record on February 15, 2013.

On January 17, 2013, the Company completed the sale of unsecured senior notes in a public offering for an aggregate principal

amount of $35 million. In addition, effective January 25, 2013, the Company received an aggregate principal amount of $5.3 million
pursuant to the underwriters’ exercise of the over-allotment option. The offering was made pursuant to the Company’s effective
registration statement on Form S-3, as amended (Registration Statement No. 333-185228) and the Prospectus Supplement dated
January 10, 2013. The combined net proceeds after underwriting and issuance costs approximate $38.7 million. The notes, due in
2020, bear interest at a fixed annual rate of 8% which is payable quarterly. The notes may be redeemed, in whole or in part, at any
time on and after January 30, 2016 and rank on parity with all of the Company’s other existing and future unsecured senior debts.

100

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ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer,

conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual
Report (December 31, 2012). Our disclosure controls and procedures are intended to ensure that the information we are required to
disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our
management, including the principal executive officer and principal financial officer to allow timely decisions regarding required
disclosures.

Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period

covered by this Annual Report, our disclosure controls and procedures were effective.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in

Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records

that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial
statements.

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Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, with the
participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our principal executive officer and principal
financial officer concluded that, as of December 31, 2012, our internal control over financial reporting was effective.

Hacker, Johnson & Smith PA, an independent registered public accounting firm, has audited the consolidated financial

statements included in this Annual Report on Form 10-K and, as part of their audit, has issued an attestation report, included herein,
on our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have

materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B – Other Information

None.

102

Table of Contents

ITEM 10 – Directors, Executive Officers and Corporate Governance

Code of Ethics

PART III

We have adopted a code of ethics applicable to all of our employees and directors, including our Chief Executive Officer

(principal executive officer) and Chief Financial Officer (principal financial officer). We have posted the text of our code of ethics to our
Internet web site: www.hcpci.com. Select “Investors” from the left and then select “Corporate Governance” and then “Code of
Conduct.” We intend to disclose any change to or waiver from our code of ethics by posting such change or waiver to our Internet
web site within the same section as described above.

The other information required under this item is incorporated by reference from our definitive proxy statement relating to our
annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2012.

ITEM 11 – Executive Compensation

The information required under this item is incorporated by reference from our definitive proxy statement relating to our annual
meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal
year ended December 31, 2012.

ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities authorized for issuance under equity compensation plans are summarized under Part II – Item 5 of this Form 10-K.

ITEM 13 – Certain Relationships and Related Transactions, and Director Independence

103

Table of Contents

ITEM 14 – Principal Accounting Fees and Services

The following table sets forth the aggregate fees for services related to the years ended December 31, 2012 and 2011 provided

by Hacker, Johnson & Smith PA, our principal accountant:

Audit fees (a)
All other fees (b)

2012
$189,500
58,000

2011
121,000
20,000

$247,500

141,000

(a) Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements, review of our
quarterly financial statements included in our quarterly reports on Form 10-Q, and audit services provided in connection with
other statutory and regulatory filings.

(b) All Other Fees represent fees billed for services provided to us not otherwise included in the category above, which are primarily
fees related to the review of our registration statements in connection with our senior note offering which was completed in
January 2013, our follow-on common stock offering in 2012 and our preferred stock offering completed in 2011.

104

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ITEM 15 – Exhibits, Financial Statement Schedules

(a) Financial Statements, Financial Statement Schedules and Exhibits

PART IV

(1) Consolidated Financial Statements: See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

(2) Financial Statement Schedules:

Any supplemental information we are required to file with respect to our property and casualty insurance operations is included

in Part II, Item 8 of this Form 10-K.

(3) Exhibits: See the exhibit listing set forth below:

The following documents are filed as part of this report:

EXHIBIT
NUMBER

3.1

3.2

4.1

4.2

4.3

4.4

DESCRIPTION

Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to
our Form 10-K filed March 29, 2011.

Bylaws as amended April 16, 2009. Incorporated by reference to the correspondingly numbered exhibit to our
Current Report on Form 8-K filed April 23, 2009.

Form of Common Stock Certificate. Incorporated by reference to the correspondingly numbered exhibit to our Post-
Effective Amendment No. 1 to our Registration Statement on Form S-1 (File No. 333-150513) filed August 6, 2008.

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

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

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

105

Table of Contents

4.6

4.7

4.8

4.9

4.10

4.11

10.1

10.2**

10.3

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

Warrant Agreement dated July 30, 2008, between Homeowners Choice, Inc. and GunnAllen Financial, Inc. Incorporated
by reference to the correspondingly numbered exhibit to our Post-Effective Amendment No. 1 to our Registration
Statement on Form S-1 (File No. 333-150513) filed August 6, 2008.

Letter Agreement dated August 1, 2008 among Homeowners Choice, Inc., Anderson & Strudwick, Incorporated and
GunnAllen Financial, Inc., whereby we waive certain cancellation rights under warrants issued to the other parties.
Incorporated by reference to the correspondingly numbered exhibit to our Post-Effective Amendment No. 1 to our
Registration Statement on Form S-1 (File No. 333-150513) filed August 6, 2008.

See Exhibits 3.1 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as
amended, defining certain rights of security holders. See also Exhibits 10.5, 10.6 and 10.7 defining certain rights of the
recipients of stock options and other equity-based awards.

Specimen 7% Series A Cumulative Preferred Stock Certificate Incorporated by reference to Exhibit 4.2 to Form 8-A filed
March 25, 2011.

Warrant Agreement dated November 2, 2011 between Homeowners Choice, Inc. and Glencoe Acquisition, Inc. as to the
issuance of 1,000,000 warrants. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q
filed August 14, 2012.

Excess of Loss Retrocession Contract, effective June 1, 2012, issued to Claddaugh Casualty Insurance Company, Ltd.
Incorporated by reference to Exhibit 10.1 to our Form 8-K filed August 13, 2012.

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

Placement Agreement dated March 25, 2011 between Homeowners Choice, Inc. and Anderson & Strudwick,
Incorporated. Incorporated by reference to Exhibit 1.1 to our Form 8-K filed March 31, 2011.

106

Table of Contents

10.4**

10.5**

10.6**

10.7**

10.8

10.10

10.11

10.12

10.13

10.14

Executive Employment Agreement dated July 1, 2011 between Homeowners Choice, Inc. and Paresh Patel.
Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 12, 2011.

Homeowners Choice, Inc. 2012 Omnibus Incentive Plan. Incorporated by reference to Appendix A to our Definitive Proxy
Statement on Schedule 14A filed April 27, 2012.

Homeowners Choice, Inc. 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly
numbered exhibit to our Form 10-Q filed August 29, 2008.

Form of Incentive Stock Option Agreement. Incorporated by reference to the correspondingly numbered exhibit to our
Registration Statement on Form S-1 (File No. 333-150513), originally filed April 30, 2008, effective July 24, 2008, as
amended.

Warrant Purchase Agreement dated November 19, 2012 between Homeowners Choice, Inc. and the bankruptcy trustee
of Glencoe Acquisition, Inc. Incorporated by reference to Exhibit 10.8 of our Form 8-K filed November 19, 2012.

PR-M Non-Bonus Assumption Agreement dated December 1, 2007 by and between Homeowners Choice Property &
Casualty Insurance Company, Inc. and Citizens Property Insurance Corporation. Incorporated by reference to the
correspondingly numbered exhibit to our Form 10-K filed March 30, 2010.

Reinstatement Premium Protection Agreement effective June 1, 2012 by Homeowners Choice Property & Casualty
Insurance Company, Inc. and Subscribing Reinsurers. Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed
August 14, 2012.

Excess Catastrophe Reinsurance Contract effective June 1, 2012 by Homeowners Choice Property & Casualty
Insurance Company, Inc. and Subscribing Reinsurers. Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed
August 14, 2012.

107

Table of Contents

10.15

10.16

10.17

10.19

10.20

10.22

Aggregate Excess Catastrophe Reinsurance Agreement dated June 1, 2012 by Homeowners Choice Property &
Casualty Insurance Company, Inc. and Subscribing Reinsurers. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q
filed August 14, 2012.

Aggregate Excess Catastrophe Reinsurance Agreement dated June 1, 2012 by Homeowners Choice Property &
Casualty Insurance Company, Inc. and Subscribing Reinsurers (Layer B). Portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to
our Form 10-Q filed August 14, 2012.

Form of indemnification agreement for our officers and directors. Incorporated by reference to the correspondingly
numbered exhibit to our Form 10-Q filed August 12, 2009.

Reimbursement Contract effective June 1, 2012 between Homeowners Choice Property and Casualty Insurance
Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund.
Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 14, 2012.

Per Occurrence Excess Of Loss Reinsurance contract dated June 1, 2012 by Homeowners Choice Property & Casualty
Insurance Company, Inc. and subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed
August 14, 2012.

All Other Perils Excess Catastrophe Reinsurance Contract, effective January 1, 2012 through May 31, 2012, by and
between Homeowners Choice Property & Casualty Insurance Company, Inc. and various reinsurers. Incorporated by
reference to the correspondingly numbered exhibit to our Form 10-K filed March 30, 2012.

10.23**

Retention Bonus Agreement dated February 16, 2012 (effective January 16, 2012) between Homeowners Choice, Inc.
and Paresh Patel. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 30,
2012.

10.24**

Executive Employment Agreement dated March 8, 2012 between Homeowners Choice, Inc. and Scott R. Wallace.
Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed March 30, 2012.

108

Table of Contents

10.25

10.26

10.27**

10.28**

10.29**

10.30**

10.31

31.1

31.2

32.1

32.2

Assumption Agreement dated November 2, 2011 by and between Homeowners Choice Property & Casualty Insurance
Company, Inc. and HomeWise Insurance Company. Incorporated by reference to the correspondingly numbered exhibit
to our Form 10-K filed March 30, 2012.

Commercial Real Estate Contract dated March 9, 2012 among HCI Holdings LLC and Rice Family Holdings, LLLP,
John’s Pass Marina, Inc. and Gators on the Pass, Inc. Incorporated by reference to Exhibit 10.26 of our Form 10-Q filed
May 14, 2012.

Restricted Stock Agreement dated April 20, 2012 whereby Homeowners Choice, Inc. issued 100,000 shares of
restricted common stock to Scott R. Wallace. Incorporated by reference to Exhibit 10.27 of our Form 10-Q filed May 14,
2012.

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

Restricted Stock Agreement dated May 8, 2012 whereby Homeowners Choice, Inc. issued 30,000 shares of restricted
common stock to Sanjay Madhu. Incorporated by reference to Exhibit 10.29 of our Form 8-K filed May 10, 2012.

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

PR-M Non-Bonus Assumption Agreement, dated September 20, 2012, by and between Homeowners Choice Property &
Casualty Insurance Company and Citizens Property Insurance Corporation.

Code of Conduct of Homeowners Choice, Inc. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed
October 18, 2012.

Subsidiaries of Homeowners Choice, Inc.

Consent of Hacker, Johnson, & Smith PA.

Certification of the Chief Executive Officer

Certification of the Chief Financial Officer

Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350

Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350

109

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101.INS

XBRL Instance Document.

(1)

101.SCH

XBRL Taxonomy Extension Schema.

(1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase.

(1)

101.DEF

XBRL Definition Linkbase.

(1)

101.LAB

XBRL Taxonomy Extension Label Linkbase.

(1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

(1)

(1) Pursuant to Rule 406T of U.S. Securities and Exchange Commission Regulation S-T, the interactive data files on Exhibit 101 of
this report are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those sections.

** Management contract or compensatory plan.

110

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this

report to be signed on its behalf by the undersigned thereunto duly authorized.

March 14, 2013

HOMEOWNERS CHOICE, INC.

By /s/ Paresh Patel
Paresh Patel
Chief Executive Officer and Chairman of The Board of Directors
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following

persons on behalf of the registrant and in the capacities and on the dates indicated.

March 14, 2013

By /s/ Paresh Patel
Paresh Patel
Chief Executive Officer and Chairman of The Board of Directors
(Principal Executive Officer)

By /s/ Richard R. Allen
Richard R. Allen
Chief Financial Officer
(Principal Financial and Accounting Officer)

By /s/ George Apostolou
George Apostolou, Director

By /s/ Sanjay Madhu
Sanjay Madhu, Director

By /s/ Harish M. Patel
Harish M. Patel, Director

By /s/ Gregory Politis
Gregory Politis, Director

By /s/ Anthony Saravanos
Anthony Saravanos, Director

By /s/ Martin A. Traber
Martin A. Traber, Director

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

111

As of December 31, 2012, the Company had the following active subsidiaries:

HOMEOWNERS CHOICE, INC.

Subsidiaries

Wholly-owned subsidiaries of Homeowners Choice, Inc.

Homeowners Choice Property & Casualty Insurance Company, Inc.
Homeowners Choice Managers, Inc.
Claddaugh Casualty Insurance Company Ltd.
Cypress Property Management Services, Inc.
Cypress Claims Services, Inc.
Cypress Tech Development Company, Inc.
Exzeo USA, Inc.
HCI Technical Resources, Inc.
HCI Holdings LLC
Omega Insurance Agency, Inc.
Southern Administration, Inc.

Wholly-owned subsidiary of Homeowners Choice Property & Casualty Insurance Company, Inc.

HCPCI Holdings LLC

Wholly-owned subsidiary of HCI Technical Resources, Inc.

Unthink Technologies Private Limited

Wholly-owned subsidiaries of HCI Holdings LLC

Gators on the Pass Holdings, LLC
John’s Pass Marina Investment Holdings, LLC
JP Beach Holdings, LLC
Pass Investment Holdings, LLC
TI Marina Company, Inc.
Treasure Island Restaurant Company, Inc.
TV Investment Holdings LLC
Silver Springs Property Investments LLC

Wholly-owned subsidiary of Cypress Tech Development Company, Inc.

Exzeo Software Private Limited

Exhibit 21

State or Sovereign Power
of Incorporation
Florida
Florida
Bermuda
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida

State or Sovereign Power
of Incorporation
Florida

State or Sovereign Power
of Incorporation
India

State or Sovereign Power
of Incorporation
Florida
Florida
Florida
Florida
Florida
Florida
Florida
Florida

State or Sovereign Power
of Incorporation
India

Consent of Hacker, Johnson & Smith PA
Independent Registered Public Accounting Firm

Exhibit 23

The Board of Directors
Homeowners Choice, Inc.:

We consent to the incorporation by reference in the Registration Statements on Form S-3 (file number 185228 and file number 333-
180322) as supplemented from time to time, and the Registration Statements on Form S-8 (file number 333-154436 and file number
333-184227), of our report dated March 14, 2013, with respect to the consolidated financial statements of Homeowners Choice, Inc.
and subsidiaries included in this report on Form 10-K for the year ended December 31, 2012.

/s/ Hacker, Johnson & Smith PA
HACKER, JOHNSON & SMITH PA
Tampa, Florida
March 14, 2013

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Paresh Patel, certify that:

1. I have reviewed this annual report on Form 10-K of Homeowners Choice, Inc.;

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

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

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

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

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

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

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

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

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

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

March 14, 2013

/s/ PARESH PATEL
Paresh Patel

President and Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard R. Allen, certify that:

1. I have reviewed this annual report on Form 10-K of Homeowners Choice, Inc.;

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

March 14, 2013

/s/ RICHARD R. ALLEN
Richard R. Allen

Chief Financial Officer
(Principal Financial and Accounting Officer)

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Exhibit 32.1

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of Homeowners Choice,

Inc. (the “Company”), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the annual
period ended December 31, 2012 as filed with the Securities and Exchange Commission on March 14, 2013 (the “Report”), fully
complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and that information contained
in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ PARESH PATEL
Paresh Patel
President and Chief Executive Officer
March 14, 2013

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Exhibit 32.2

Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of Homeowners Choice,

/s/ RICHARD R. ALLEN
Richard R. Allen
Chief Financial Officer
March 14, 2013