HCI Group
Annual Report 2020

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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, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-34126 HCI Group, Inc. (Exact name of Registrant as specified in its charter) Florida (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) (813) 849-9500 (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 Trading Symbol HCI Name of Each Exchange on Which Registered 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 ☒ 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 ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☐ ☐ Accelerated filer Smaller reporting company Emerging growth company ☒ ☐ ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2020, computed by reference to the price at which the common stock was last sold on June 30, 2020, was $286,741,595. The number of shares outstanding of the registrant’s common stock, no par value, on February 26, 2021 was 8,623,922. DOCUMENTS INCORPORATED BY REFERENCE 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. HCI GROUP, 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 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B 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 Item 10 Item 11 Item 12 Item 13 Item 14 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 PART III: PART IV: Item 15 Exhibits, Financial Statement Schedules Signatures Certifications Page 2-9 9-17 18 18 19 19 20-22 23-24 25-33 33-35 36-100 101 101 101 102 102 102 102 102 103-106 ITEM 1 – Business General PART I Incorporated in 2006, HCI Group, Inc. is a Florida-based company that, through its subsidiaries, is engaged in property and casualty insurance, reinsurance, real estate and information technology. References to “we,” “our,” “us,” “the Company,” or “HCI” in this Form 10-K generally refer to HCI Group, 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 (813) 849-9500. Our operations are classified as follows: a) Insurance Operations • • Property and casualty insurance Reinsurance b) c) Real Estate Operations Other Operations • • Information technology Other auxiliary operations Insurance Operations Property and Casualty Insurance We sell our property and casualty insurance products through two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). HCPCI was incorporated and began operations in 2007. TypTap was incorporated and began operations in 2016. We provide various forms of residential insurance products such as homeowners insurance, flood insurance and wind-only insurance to homeowners, condominium owners and tenants for properties primarily located in Florida. HCPCI’s and TypTap’s operations are supported by HCI and its wholly-owned subsidiaries. Such operational support services consist of general administration, marketing, underwriting, accounting, policy administration, claim adjusting, and information technology. In particular, we leverage our internally developed software technologies to drive efficiency in claim process and claims settlement, identify underwriting profitability, and improve satisfaction of our policyholders and agents within our insurance business. HCPCI began operations by participating in a “take-out program” through which we assumed insurance policies issued 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. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens. As an established carrier, HCPCI has stood ready to accept the transfer or assumption of policies from insurance companies in Florida or any states in which it operates and will continue to do so in the future. In 2011, we accepted approximately 70,000 homeowners’ insurance policies representing $106 million in written premium from a carrier placed into receivership, and in April 2020 accepted the transfer of approximately 43,000 homeowners’ insurance policies representing approximately $69 million of annualized premium from a ratings-downgraded carrier that no longer conducted insurance business. HCPCI will focus on optimizing its existing book of business and take advantage of opportunities as they arise. It is also approved to write residential property and casualty insurance in various states outside of Florida. Most recently, we assumed personal lines insurance business in four northeast states representing approximately $125 million in annual written premium from a well-established carrier. Written premium generated in states other than Florida during 2020 totaled approximately $204,000. In contrast, TypTap has grown its portfolio of policies organically. In its first year of operation in 2016, gross written premium was $2.5 million and by 2020 it has grown to $104.9 million. In October 2020, TypTap began applying for approval to offer homeowners coverage in 23 states outside of Florida. Since then, TypTap has received approvals from ten states. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently. The nature of our business is to cover losses that may arise from, among other things, hurricanes and other catastrophic events such as tornadoes, floods and winter storms. The occurrence of any such catastrophes could have a significant adverse effect on our business, results of operations, and financial condition. To mitigate the risk associated with catastrophic events, we purchase reinsurance from other large insurance companies. 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 and other states in which we may operate. For example, insurance regulators must approve our policy forms and premium rates as well as monitor our compliance with financial and regulatory requirements. See Item 1A, “Risk Factors,” below. 2 Business Strategy We operate in highly competitive markets where we face competition from national, regional and residual market insurance companies and, in the case of flood insurance, a program backed by the U.S. government. We may also face competition from new entrants in our markets, and such entrants may create pricing pressure that could lead to overall premium reductions. Our competitive strategies focus on the following key areas: • • • • • • Exceptional service – We are committed to maintaining superior service to our policyholders and agents. Claims settlement practices – We focus on fair and timely settlement of policyholder claims. Disciplined underwriting – We analyze exposures and utilize available underwriting data to ensure policies meet our selective criteria. 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 or identify other lines of insurance to offer. 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. For instance, we use our internally developed application, Exzeo®, to increase the efficiency of our claims processing and settlement. In addition, our online platform for quoting and binding residential flood policies streamlines the underwriting and policy production processes. Geographical expansion – We continue to seek opportunities to expand our business within the state of Florida and into other states to increase overall geographic diversification. HCPCI and TypTap currently have regulatory approvals to underwrite residential property and casualty insurance in various states. Seasonality of Our Business Our insurance business is seasonal. Hurricanes and tropical storms affecting Florida, our primary market, typically occur during the period from June 1st through November 30th of each year. Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. In addition, our reinsurance contracts are generally effective June 1 of each year, and 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 be reflected in our financial results beginning June 1st of each year. Government Regulation We are subject to the laws and regulations in any state in which we conduct our insurance business. The regulations cover all aspects of our business and are generally designed to protect the interests of insurance policyholders as 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. 3 State Licensure and Approval All states require licensure and regulatory approval prior to the marketing of insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, rates, and forms, the character of its officers and directors and other of its financial and non-financial aspects. The regulatory authorities may prevent entry into a new market by not granting a license. 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 in any state in which they are licensed to transact business and are subject to regular and special examinations by those agencies. The National Association of Insurance Commissioners mandates that all insurance companies be examined a minimum of once every five years. However, the Florida Department of Financial Services, Office of Insurance Regulation (“FLOIR”) has the authority to conduct an examination whenever it is deemed appropriate. HCPCI’s latest financial examination by the FLOIR related to the year ended December 31, 2015. As for TypTap, its latest limited scope examination was for the year ended December 31, 2018. Liability for Losses and Loss Adjustment Expenses Our liability for losses and loss adjustment expenses represents our estimate of the total cost of (i) claims that have been incurred, but not yet paid (“case reserves”), (ii) losses that have been “incurred but not yet reported” (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which are intended to cover the ultimate cost of adjusting, investigating and 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 subjective 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 we believe 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, 2020, 2019 and 2018, see Note 15 -- “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Loss Development Our liability for losses and LAE represents 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 as of December 31 for the years 2010 through 2020 (amounts in thousands): 4 Schedule of Loss Development 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 97,818 $ 94,826 $ 98,174 $ 141,065 26,776 26,003 27,226 26,544 26,871 27,732 26,838 27,064 27,224 27,949 27,309 28,536 28,499 29,038 30,788 29,505 29,844 30,124 30,848 38,712 40,015 42,976 45,279 43,403 44,496 45,026 46,151 47,344 50,280 54,696 52,404 55,656 56,466 58,091 57,807 65,367 66,211 71,495 74,675 76,791 72,229 78,511 89,017 92,987 95,517 89,199 104,097 110,329 112,109 110,286 116,406 119,536 105,385 108,015 99,974 (5,803) (3,424) (4,983) (14,405) (27,883) (43,827) (41,617) (21,718) (13,189) (1,800) 26,595 38,695 45,655 49,924 53,678 55,279 56,196 22,365 31,824 37,041 40,152 42,303 43,789 44,461 44,813 15,652 21,707 25,350 26,772 28,052 28,967 29,297 29,826 29,950 16,833 20,708 23,732 25,063 25,681 26,238 26,478 26,628 27,155 27,179 $ 119,757 $ 143,606 $ 233,607 $ 337,113 $ 365,488 $ 423,120 $ 378,678 $ 358,253 $ 343,065 $ 342,079 $ 415,918 33,347 49,122 58,141 66,558 71,741 74,215 41,053 61,947 77,876 87,080 91,779 50,533 80,279 98,216 105,057 57,621 87,390 100,709 55,711 77,462 45,373 $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 198,578 $ 207,586 $ 214,697 $ 212,169 — — — — — — — (100,760) (112,760) (116,523) (71,104) $ 22,146 $ 27,424 $ 41,168 $ 43,686 $ 48,908 $ 51,690 $ 70,492 $ 97,818 $ 94,826 $ 98,174 $ 141,065 Original net liability for losses and LAE (a) Re-estimated net losses and LAE (b) as of: 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Cumulative net redundancy (deficiency) (c) Cumulative amount of net liability paid as of: 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Gross premiums earned Gross liability for unpaid losses and LAE Ceded liability for unpaid losses and LAE Net liability for unpaid losses and LAE (a) Represents management’s original net estimated liability for (i) unpaid claims, (ii) IBNR, and (iii) loss adjustment expenses. (b) Represents the re-estimated net liabilities in later years for unpaid claims, IBNR and loss adjustment expenses for each of the respective years. (c) Represents the difference between the latest net re-estimate and the original net estimate. A redundancy indicates the original net estimate is higher than the current net estimate whereas a deficiency indicates the original net estimate is lower than the current net estimate. 5 Reinsurance We have a Bermuda domiciled wholly owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, reducing the cost of third party reinsurance. Claddaugh fully collateralizes its exposure to our insurance subsidiaries by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts. Currently, Claddaugh does not provide reinsurance to non- affiliates. For the years ended December 31, 2020, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 88.4%, 95.0% and 95.0%, respectively, of total revenues of all operating segments. At December 31, 2020, 2019 and 2018, insurance operations’ total assets represented 84.2%, 85.5% and 85.9%, respectively, of the combined assets of all operating segments. See Note 16 -- “Segment Information” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Real Estate Operations Our real estate operations consist of multiple properties we own and operate for investment purposes and also properties we own and use for our own operations. Properties Used in Operations Our real estate used in operations consists of an office building purchased in April 2020 with gross area of 67,289 square feet in Tampa, Florida, and our secondary insurance operations site with gross area of approximately 16,000 square feet in Ocala, Florida. This newly purchased building will be used as our secondary site in the Tampa Bay area. In July 2020, we sold our headquarters location on West Cypress Street to the Florida Department of Transportation (“FDOT”) through eminent domain proceedings as described in Note 9 -- “Property and Equipment, Net” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. After the sale, we continue to occupy the premises under operating leases and manage the property for the FDOT temporarily. The Ocala location, in addition to day-to-day operational use, serves as our alternative site in the event we experience any significant disruption at our Tampa offices. Investment Properties Our portfolio of investment properties includes two waterfront properties consisting of a total of 17 acres and a five-acre submerged land lease. One waterfront property contains a building structure that we used to operate a full-service restaurant until October 2020 and a marina while the other houses retail space and a marina with high and dry storage. We acquired the restaurant and marina operations in connection with our purchase of the waterfront properties and we continue to operate two marinas to enhance the property values. The table below sets forth information concerning our investment properties. Description/Location Waterfront property Tierra Verde, Florida Waterfront property Treasure Island, Florida Retail shopping center Sorrento, Florida Retail shopping center Melbourne, Florida Office building Tampa, Florida Retail shopping center Riverview, Florida Retail shopping center Clearwater, Florida (under redevelopment) Vacant land Tampa, Florida (a) Affiliate. (b) Net rentable space is approximated. (c) Not applicable. Year Acquired Net Rentable Space (SF) Anchor Tenant 22,761 Tierra Verde Marina (a) 12,790 Crabby Bill’s restaurant 61,400 Publix supermarket 49,995 Fresh Market supermarket 68,867 Bank of America 8,400 Thorntons, LLC 56,000 (b) ALDI supermarket (c) (c) 2011 2012 2016 2016 2017 2018 2018 2018 6 Other Real Estate Investments Melbourne FMA, LLC, our wholly owned subsidiary, has a 90% interest in a company which owns two outparcels aggregating approximately 2.1 acres for sale or ground lease. See Investment in Unconsolidated Joint Venture in Note 5 -- “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K for additional information. Other Operations Information Technology Our information technology operations include a team of experienced software developers with extensive knowledge in designing and creating web-based applications and products for mobile devices. The operations, which are located in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products and services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors. Products created thus far have been solely for internal use. SAMSTM SAMS is an online policy administration platform used by HCPCI. SAMS processes the full life cycle of a policy from policy quoting and issuance to agency management, cash receipts/disbursements, claims reserving and claim payments. Harmony Harmony is the next generation policy administration platform for both HCPCI and TypTap. The innovative Harmony system easily supports multiple companies and their products. In addition to the standard policy management functionality, Harmony also provides advanced underwriting capabilities as well as a simplified user experience for quoting and binding. ClaimColony® ClaimColony (formerly known as Exzeo) is an end-to-end claims management platform used by insurance companies, third-party administrators, independent adjusters and insurance litigation services. Its unique capabilities include customizable workflows, real-time reporting, vendor management, and the ability to efficiently handle high claim volume. ClaimColony supports the entire claim lifecycle and also provides accounting and bookkeeping support as well as rich integration capabilities with policy administration systems such as SAMS and Harmony. AtlasViewerTM AtlasViewer is a mapping and data visualization platform. AtlasViewer allows users to map location-based data from multiple sources for a customized view of their data. The unique multilayered analysis improves decision making by providing unique insights into the data. Users can also securely share their maps and data with others, making the information instantly available to all invited users. 7 Financial Highlights The following table summarizes our financial performance during the years ended December 31, 2020, 2019 and 2018: (Amounts 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 Earnings per share: Basic Diluted Dividends per 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) 2020 2019 2018 262.5 $ 310.4 $ 160.0 $ 36.9 $ 27.6 $ 3.55 $ 3.49 $ 1.600 $ 77.3 $ 12.4 $ 225.7 $ 431.3 $ 941.3 $ 201.1 $ 7.8 216.3 $ 242.5 $ 107.5 $ 36.1 $ 26.6 $ 3.32 $ 3.31 $ 1.600 $ 54.0 $ 12.7 $ 341.5 $ 229.2 $ 802.6 $ 185.5 $ 7.8 213.4 231.3 109.3 26.9 17.7 2.34 2.34 1.475 28.6 10.4 387.8 239.5 832.9 181.4 8.4 $ $ $ $ $ $ $ $ $ $ $ $ $ $ *Net of cash dividends received under share repurchase forward contract. Environmental Matters As a property owner, we are subject to regulations 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. Cybersecurity We rely on digital technology to conduct our businesses and interact with customers, policyholders, agents, and vendors. With this reliance on technology comes the associated security risks from using today’s communication technology and networks. To defend our computer systems from cyber-attacks, we utilize tools such as firewalls, anti-malware software, multifactor authentication, e-mail security services, virtual private networks, third-party security experts, and timely applied software patches, among others. We engage third-party consultants to conduct penetration tests to identify potential security vulnerabilities. Although we believe our defenses against cyber-intrusions are sufficient, we continually monitor our computer networks for new types of threats. Work Environment We adhere to a harassment prevention policy which details how to report and respond to harassment issues and prohibits any form of retaliation. This includes mandatory harassment prevention training for all employees. We are committed to paying a living wage to all of our full-time employees. We offer competitive benefits to our employees including options for health coverage and short-term and long-term disability insurance at no cost to the employee. We also award restricted stock to employees to align their interests with stockholder interests. Additionally, our Bravo program allows employees to earn paid time off as well as cash bonuses for engaging in charitable causes, continued education and professional development activities. 8 Diversity We value a diverse and inclusive work environment. Our workforce comprises men and women of many races, religions, and national origins, and we forbid any form of discrimination based upon these factors. Our Board is highly diverse in terms of gender, ethnicity, culture, education and business backgrounds, and our U.S.-based workforce is 58% female and approximately 34% non-white. Employees As of February 20, 2021, we employed a total of 436 full-time individuals. In addition, we employed 15 employees through a professional employer organization. Available Information We file annual, quarterly, and current reports with the U.S. Securities and Exchange Commission (“SEC”). These filings are accessible free of charge on our website, www.hcigroup.com (click “SEC filings” at the “Investor Information” 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 can be accessed 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 20549-0213. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. 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 could cause our operating results to vary significantly from period to period. Business and operational risks Our historical revenue growth was derived primarily through policy assumptions and acquisitions. We cannot guarantee that future policy assumptions and acquisitions will be available to the extent they have in the past. Substantially all of our historical revenue has been generated from policies assumed from Citizens, our acquisition of policies from one Florida insurance company and subsequent renewals of these policies. Our ability to grow our premium base may depend upon the availability of future policy assumptions and acquisitions upon acceptable terms. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We cannot provide assurance that such opportunities will arise in the future. Although we began selling insurance products in other states, our insurance business is primarily in Florida. Thus, any catastrophic event or other condition affecting losses in Florida could adversely affect our financial condition and results of operations. Any catastrophic event, a destructive weather pattern, a general economic trend, regulatory developments or other conditions 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 tornadoes. 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 more 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/or results of operations. Our results may fluctuate based on many factors including cyclical changes in the insurance industry. The insurance industry historically has been cyclical, 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 subsequently lead to a decrease in premium levels. Any of these factors could lead to a significant reduction in premium rates in future periods, 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. 9 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, Mark Harmsworth, and the President of our Real Estate Division, Anthony Saravanos. The loss of their leadership, industry knowledge and experience could negatively impact our operations. However, we have management succession plans to lessen any such negative impact. Apart from Mr. Patel and Mr. Harmsworth, 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 the damage resulting from the loss of Mr. Patel’s services. Our information technology systems may fail or be disrupted, 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 underwriting 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 failure or disruption of these systems could interrupt our operations and result in a material, adverse effect on our business. The growth of our insurance business is dependent upon the successful development and implementation of advanced computer and data processing systems as well as the development and deployment of new information technologies to streamline our operations, including policy underwriting, production and administration and claim handling. The failure of these systems to function as planned could slow our growth and adversely affect our future business volume and results of operations. Additionally, our computer and data processing systems could become obsolete or could cease to provide a competitive advantage in policy underwriting, production and administration and claim handling which could negatively affect our future results of 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 although we believe we have sufficient 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. We additionally use industry leading Internet cloud infrastructure providers to host some of our data processing systems. These cloud providers ensure redundancy across geographic regions with additional daily system backups. Access to these databases and hosted environments is strictly controlled and limited to authorized personnel. In the event of a disaster causing a complete loss of functionality at our Tampa locations, we plan to temporarily use our secondary office in Ocala, Florida to continue our operations. 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 is cyclical and highly competitive. We compete not only with other stock companies but also with mutual companies, the U.S. government, 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 new entrants to the market. Many of these competitors have greater financial resources, larger agency networks and greater name recognition than our company. Additionally, our competitors may merge or acquire one another and further increase their combined financial resources and agency networks. 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. HCPCI and TypTap have each obtained a Demotech rating of “A Exceptional,” which is accepted by major mortgage companies operating in the state of Florida and many other states. Mortgage companies may require homeowners to obtain property insurance from an insurance company with an acceptable A.M. Best rating, which we do not currently have. Such a requirement could prevent us from expanding our business unless we obtain such rating, which may in turn limit our ability to compete with large, national insurance companies and certain regional insurance companies. 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 because of better pricing and/or terms; 10 • • • new programs or changes to existing programs in which federally or state-sponsored entities provide property insurance in catastrophe- prone areas or other alternative markets; changes in Florida’s or any other states’ regulatory climate; and the enactment 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 our insurance subsidiaries. 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 of 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. Our failure to pay claims accurately could adversely affect our insurance business, financial results and capital requirements. We rely on our claims personnel to accurately evaluate and pay the claims made under our policies. Many factors could affect our ability to accurately evaluate and pay claims, including the accuracy of our 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 personnel to ensure consistent claims handling given the input by our independent adjusters; the ability of our claims department to translate the information provided by our independent adjusters into acceptable claims settlements; and the ability of our claims personnel to maintain and update our 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. 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 as a result of any such unforeseen changes. 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, 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 write and cede. Our existing sources of funds include operations, investment holdings, and possible sales of our investment securities. Unexpected catastrophic events in our market areas, such as hurricanes, 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 can raise additional capital. 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 under an insurance policy to another insurance company, or reinsurer. 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 the occurrence of 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. 11 With respect to the reinsurance contracts we currently have in effect, our ability to recover amounts due from reinsurers is subject to such reinsurers’ 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 monitor from time to time the financial condition of our reinsurers, we rely principally on A.M. Best, our reinsurance 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. 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 these tactics. We cannot provide assurance that an unanticipated event or series of 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 generally designed to limit our exposure to known and manageable risks. 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 affect our loss experience, which changes could have a material, adverse effect on our financial condition or results of operations. Now and 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. The success of TypTap’s organic growth so far has been driven by selling our policies through independent agents. An inability to sell our products through independent agents would negatively affect our revenues. 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, including risks associated with flood insurance and other new product offerings. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, and underwriting expenses and to earn a profit. 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 thus, price our products accurately, is subject to several risks and uncertainties, some of which are outside of our control, including— • • • • • the availability of sufficient reliable 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. 12 In addition, we could underprice risks, which would negatively affect our profit margins. We could also overprice risks, which could reduce our retention, sales volume and competitiveness. The foregoing factors could materially and adversely affect our profitability. 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 income tax risks, 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. Financial risks HCI Group, Inc. depends on the ability of its subsidiaries to generate and transfer funds to meet its debt obligations. HCI Group, Inc. does not have significant revenue-generating operations of its own. Our ability to make scheduled payments on our debt obligations depends on the financial condition and operating performance of our subsidiaries. If the funds we receive from our subsidiaries, some of which are subject to regulatory restrictions on the payment of distributions, are insufficient to meet our debt obligations, we may be required to raise funds through the issuance of additional debt or equity securities, reduce or suspend dividend payments, or sell assets. 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 unfavorable to us. Equity financings could result in dilution to our shareholders, 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 affected. Our credit agreement contains restrictions that can limit our flexibility in operating our business. The agreement governing our revolving credit facility contains various covenants that limit our ability to engage in certain transactions. These covenants limit our and our subsidiaries’ ability to, among other things: • • • • • incur additional indebtedness; declare or make any restricted payments; create liens on any of our assets now owned or hereafter acquired; consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets now owned or hereafter acquired; and enter into certain transactions with our affiliates. An increase in interest rates may negatively impact our operating results and financial condition. Borrowings under our revolving credit facility have a variable rate of interest. An increase in interest rate would have a negative impact on our results of operations attributable to increased interest expense. Investment risks There may be limited markets for and restrictions on certain holdings in our investment portfolio. Certain holdings in our investment portfolio include limited partnership interests and commercial real estate. We may increase our holdings in these types of investments as we pursue further diversification. These investments may be illiquid in the near term as they are privately placed and are subject to certain restrictions or conditions that may limit our ability to immediately dispose of the investments. If it becomes necessary to sell any of these investments at a time when the fair market value is below our carrying value, we may incur significant losses which could have a material adverse effect on our net income and financial position. 13 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 available cash. The amount of income so generated is a function of our investment policy, available investment opportunities, and the amount of available cash invested. Fluctuating interest rates and other economic factors make it difficult to estimate accurately the amount of investment income that will be realized. In fact, we have realized and may in the future realize losses on sales of our investments as well as credit losses on our investment holdings. Any unfavorable change to the fair value of our equity securities will also impact our financial results. Our revenue from real estate investments may be affected by the success and economic viability of our anchor retail tenants. Our reliance on a single or significant tenant at certain properties may impact our ability to lease vacated space and adversely affect returns on the specific property. At certain retail centers, we may have tenants, commonly referred to as anchor tenants, occupying all or a large portion of the gross leasable space. In the event an anchor tenant becomes insolvent, suffers a downturn in business, ceases its operations at the retail center, or otherwise determines not to renew its lease, any reduction or cessation of rental payments to us could adversely affect the returns on our real estate investments. A lease termination or cessation of operations by an anchor tenant could also lead to the loss of other tenants at the specific retail location. We may then incur additional expenses to make improvements and prepare the vacated space to be leased to one or more new tenants. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases. Our retail and other real estate properties may be subject to impairment charges which can adversely affect our financial results. We periodically evaluate our long-lived assets and related intangible assets to determine if there has been any impairment in their carrying values. If we determine an impairment has occurred, we are required to record an impairment charge equal to the excess of the asset’s carrying value over its estimated fair value. As our real estate operations grow, there is an increased potential that the impairment of an asset could have a material adverse effect on our financial results. In addition, our fair value estimates are based on several assumptions that are subject to economic and market uncertainties including, but not limited to, demand for space, competition for tenants, changes in market rental rates and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the future cash flows estimated in our impairment analysis may not be achieved. Our ongoing investments in real estate and information technology businesses have inherent risks and could burden our financial and human resources. We have invested and expect to continue to invest in real estate and information technology. Despite our due diligence, these investments may still involve significant risks and uncertainties, including distraction of management and employees from current operations, insufficient revenues to offset liabilities assumed and incurred expenses, inadequate return of capital, and failure to realize the anticipated benefits. There can be no assurance that such investments will be successful and will not adversely affect our financial condition and operating results. Legal and regulatory risks 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 subsidiaries. Loss severity in the property and casualty insurance industry may increase and may be driven by larger court judgments. In the event legal actions and proceedings are brought on behalf of classes of complainants, this may 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. As an insurance holding company, we are currently subject to state regulation and in the future may become subject to federal regulation. 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 that 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 14 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. Regulations may vary from state to state, and states occasionally may have conflicting regulations. 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. Our insurance subsidiaries are 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. Our insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled and the states in which they transact insurance business. 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 their 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 the level of 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 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 non- compliance with regulatory requirements. 15 In certain states including Florida, insurance companies are subject to assessments levied by the states where they conduct their business. While we can recover these assessments from Florida policyholders through policy surcharges, our payment of the assessments and our recoveries may not offset each other in the same reporting period in our consolidated financial statements and may cause a material, adverse effect on our cash flows and 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 real estate operations are subject to regulation under various federal, state, and local laws concerning the environment. Our real estate operations own various properties including marina facilities, and commercial buildings. As a result, we 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 remediation 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 real estate operations. Security and fraud risks An unauthorized disclosure or loss of policyholder or employee information or other sensitive or confidential information, including by cyber-attack or other security breach, could cause a loss of data, give rise to remediation or other expenses, expose us to liability under federal and state laws, and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows, financial condition and results of operations. As part of our normal operations, we collect, process and retain certain sensitive and confidential information. We are subject to various federal and state privacy laws and rules regarding the use and disclosure of certain sensitive or confidential information. Despite the security measures we have implemented to help ensure data security and compliance with applicable laws and rules, which include firewalls, regular penetration testing and other measures, our facilities and systems, and those of our third-party service providers and vendors, may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, theft of data, misplaced or lost data, programming and human errors, physical break-ins, or other disruptions. In addition, we cannot ensure that we will be able to identify, prevent or contain the effects of possible cyber-attacks or other cybersecurity risks in the future that may bypass our security measures or disrupt our information technology systems or business. Noncompliance with any privacy or security laws and regulations, or any security breach, cyber-attack or cybersecurity breach, and any incident involving the misappropriation, loss or other unauthorized disclosure or use of, or access to, sensitive or confidential member information, could require us to expend significant capital and other resources to continue to modify or enhance our protective measures and to remediate any damage caused by such breaches. In addition, this could result in interruptions to our operations and damage to our reputation, and misappropriation of confidential information could also result in regulatory enforcement actions, material fines and penalties, litigation or other liability or actions which could have a material adverse effect on our business, cash flows, financial condition and results of operations. As the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. We rely on service providers and vendors to provide certain technology, systems and services that we use in connection with various functions of our business, including PCI DSS (Payment Card Industry Data Security Standard) compliant credit card processing, and we may entrust them with confidential information. The information systems of our third-party service providers and vendors are also vulnerable to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to these systems or our information through fraud or other means of deceiving our associates, third-party service providers or vendors. Hardware, software or applications we obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time. Ever-evolving threats mean our third-party service providers and vendors must continually evaluate and adapt their own respective systems and processes, and there is no assurance that they will be adequate to safeguard against all data security breaches or misuses of data. Any future significant compromise or breach of our data security via a third-party service provider or vendor could result in additional significant costs, lost revenues, fines, lawsuits, and damage to our reputation. 16 General risks Our operations could be materially and adversely affected by measures implemented by federal, state and local governments to cope with public health issues such as the outbreak of COVID-19, resulting in a material impact to our financial position and results of operations. On March 11, 2020, the World Health Organization (“WHO”) declared the outbreak of COVID-19 a pandemic. COVID-19 is a respiratory illness caused by a virus that can spread from person to person. To contain the spread of COVID-19 during the first half of 2020, measures were undertaken in the United States of America and elsewhere around the world. These measures included, but were not limited to, domestic and international travel restrictions, temporary closure of nonessential businesses, cessation of public activity, and work-from-home orders, which had led to significantly reduced economic activity. To prevent the U.S. economy from further deterioration, several state and local governments have relaxed or lifted some of these measures even though infection rates remain above five percent, the level at which the WHO recommends rates fall below for at least 14 days before reopening. In Florida where we are located, a statewide stay-at-home order was issued and later lifted in May 2020. In response to the pandemic, we temporarily closed our offices in Florida and India and asked employees to work from home. Since then, some employees who have gone through our health safety training are allowed to alternate their work location between home and office. As a provider of homeowners insurance, we continually prepare for disasters and catastrophic events, including events that could disrupt business continuity. As a result, we were able to quickly adjust our technologies and infrastructure to support a remote workforce and maintain business continuity. In response to the pandemic, Congress had passed three stimulus bills intended to provide fast and direct economic assistance for American workers and families, small businesses, and to preserve jobs in American industries. In addition, the authorization for use and dissemination of COVID-19 vaccines in the U.S. has brought optimism to the business community for the economic outlook for 2021, contributing to a rebound in the financial markets. However, it is still uncertain when the U.S. economy will return to pre-COVID-19 levels. Our insurance subsidiaries have not experienced and, at present, do not foresee a direct material impact from the outbreak of COVID-19 in terms of increased claims and losses. However, the resulting economic uncertainty adversely affected the results of our investment portfolios during the first half of 2020. Most of these investment portfolios have recovered. We generally hold or invest premiums collected from policyholders in the financial markets in order to earn income before claims need to be paid. In addition, our insurance subsidiaries may experience difficulties collecting premiums from some policyholders. Policyholders with financial difficulties may decide not to renew insurance policies with us. At present, there is no material impact from uncollectibility of premium. Reinsurance companies with which we have contracted may also face liquidity issues and may not timely settle reinsurance balances that become due. Reinsurance costs have increased as reinsurers pay COVID-19 related claims worldwide and face the possibility of increases in the cost of capital needed to fund their operations. Furthermore, due to the impact of the COVID-19 outbreak on retail business activities, rent payments due from our lessees may be delayed or not received. Some lessees, with the exception of all anchor tenants, have sought rent concessions in order to stay in business. In the near term, we determined there is no impairment to our real estate investments or intangible assets as the real estate market is inherently slower moving than equity and debt security markets. It is difficult to predict when the overall economy will no longer need the intervention and support of the government. As of the date of issuance of this report, the extent to which the COVID-19 pandemic may materially affect our financial condition, liquidity, or results of operations in the long-term future remains uncertain and unquantifiable. Changing climate conditions could have an adverse impact on our business, results of operations or financial condition. There is an emerging scientific consensus on climate change, which may affect the frequency and severity of storms, floods and other weather events, and negatively affect our business, results of operations, and/or financial condition. 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, winter storms and man-made events. 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 and the northeast region, which are subject to adverse weather conditions such as hurricanes, tropical storms and winter 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. 17 ITEM 1B – Unresolved Staff Comments Not applicable. ITEM 2 – Properties Real Estate Owned and Used in Operations Tampa, Florida. The real estate consists of a two-story building with gross area of approximately 67,300 square feet and will be used as the second corporate office building in Tampa, Florida. Ocala, Florida. The real estate consists of 1.6 acres of land and an office building with gross area of approximately 16,000 square feet. The facility is 100% designated for our insurance operations and will be used as an alternative location in the event a catastrophic event impacts our operations in Tampa, Florida. Investment Real Estate Treasure Island, Florida. The real estate consists of approximately 10 acres of waterfront property and land improvements, a restaurant and a marina facility. The marina facility is currently owned and operated by us. The company-operating restaurant was closed in October 2020 and the facility has been leased to an unrelated party that operates several restaurants in the area. Tierra Verde, Florida. The real estate consists of 7.1 acres of waterfront property, a dry rack storage building with gross area of 57,500 square feet, and two buildings with retail space having an aggregate gross area of approximately 23,000 square feet. This marina facility is owned and operated by us. Approximately 5% of the available retail space is occupied by us, 49% of the retail space is leased to non-affiliates, and the remaining space is available for lease. Riverview, Florida. The real estate consists of 2.57 acres of land, 1.27 acres of which is leased to Thorntons, LLC, a gas station and convenience store chain. Our retail structure with 8,400 square feet of net rentable space is situated on the remaining land. 100% of the rentable space is leased to non- affiliates. Sorrento, Florida. The real estate includes 5.42 acres of outparcel land intended for ground lease or resale and a retail shopping center with 61,400 square feet of net rentable area. Approximately 74% of the rentable space is currently leased to Publix supermarket. Approximately 96% of the rentable space is leased to non-affiliates and the remaining space is available for lease. Melbourne, Florida. The real estate includes 2.26 acres of outparcel land intended for ground lease, resale or future development and a retail shopping center with 49,995 square feet of rentable area. Approximately 42% of the rentable space is currently leased to Fresh Market supermarket. 100% of the rentable space is leased to non-affiliates. Tampa, Florida. We own investment properties in two different locations. One real estate consists of 6.69 acres of land and an office building with gross area of 68,867 square feet. The building is 100% leased to Bank of America. Another is approximately 9 acres of undeveloped land that we acquired in February 2019. Clearwater, Florida. The real estate consists of 6.08 acres of land and a retail building with approximately 57,000 square feet of rentable space. It is currently under redevelopment. Leased Property Tampa, Florida. We lease 122,000 square feet of office space and a four-level parking garage to serve as our headquarters and several subsidiaries’ offices. Noida, India. We lease 15,000 square feet of office space for our information technology operations. The lease commenced in 2013 and has an initial term of nine years. Miami Lakes, Florida. We lease approximately 5,600 square feet of office space for our claims related administration. The lease has an initial term of approximately three years. Expense under all facility leases was $1,259,000, $456,000 and $407,000 during the years ended December 31, 2020, 2019 and 2018, respectively. Expense for 2019 reflects lease expense under a new lease accounting standard adopted on January 1, 2019. 18 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 asserted against us, we do not believe that any currently pending legal proceeding 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. 19 ITEM 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Markets for Common Stock Our common stock trades on the New York Stock Exchange under the symbol “HCI.” The following table represents the high and low sales prices for our common stock as reported by the New York Stock Exchange for the periods indicated: PART II Calendar Quarter—2020 First Quarter Second Quarter Third Quarter Fourth Quarter Calendar Quarter—2019 First Quarter Second Quarter Third Quarter Fourth Quarter Common Stock Price High Low $ $ $ $ $ $ $ $ 48.24 $ 49.98 $ 62.93 $ 55.00 $ 51.93 $ 43.94 $ 43.74 $ 48.15 $ 31.61 37.73 42.97 46.30 36.72 39.33 37.04 40.01 Holders Dividends As of February 26, 2021, the market price for our common stock was $57.87 and there were 275 holders of record of our common stock. 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, the availability of cash from our subsidiaries and legal and regulatory constraints and requirements on the payment of dividends and other factors such as our board of directors deems relevant. The following table represents the frequency and amount of all cash dividends declared on our common stock for the two most recent fiscal years: Declaration Date 10/16/2020 7/2/2020 4/13/2020 1/21/2020 10/17/2019 7/2/2019 4/8/2019 1/14/2019 Payment Date 12/18/2020 9/18/2020 6/19/2020 3/20/2020 12/20/2019 9/20/2019 6/21/2019 3/15/2019 Date of Record 11/20/2020 8/21/2020 5/15/2020 2/21/2020 11/15/2019 8/16/2019 5/17/2019 2/15/2019 Per Share Amount 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 $ $ $ $ $ $ $ $ Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders unless certain requirements, which are discussed in Note 25 -- “Regulatory Requirements and Restrictions” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K, are met. Hence Florida law may limit the availability of cash from our insurance subsidiaries for the payment of dividends to our shareholders. 20 Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes our equity compensation plans as of December 31, 2020. We currently have no equity compensation plans not approved by our stockholders. Plan Category Equity Compensation Plans Approved by Stockholders Performance Graph (a) Number of Securities to be Issued Upon Exercise of Outstanding Options (b) Weighted-Average Exercise Price of Outstanding Options (c) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) 440,000 $ 45.25 1,477,976 The following graph compares the 5-year cumulative total dollar return to shareholders on our common stock relative to the cumulative total returns of the Russell 2000 Index and the NASDAQ Insurance Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2015 and its relative performance is tracked through December 31, 2020. The returns shown are based on historical results and are not intended to suggest future performance. Recent Sales of Unregistered Securities None. 21 Issuer Purchases of Equity Securities The table below summarizes the number of shares of common stock repurchased during the three months ended December 31, 2020 under the repurchase plan approved by our Board of Directors in March 2020 and also the number of shares of common stock surrendered by employees to satisfy minimum federal income tax liabilities associated with the vesting of restricted shares in December 2020 (dollar amounts in thousands, except share and per share amounts): For the Month Ended October 31, 2020 November 30, 2020 December 31, 2020 Total Number of Shares Purchased Average Price Paid Per Share — $ — $ 3,935 $ 3,935 $ — — 52.87 52.87 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs — $ — $ — $ — 16,006 16,006 16,006 See Note 20 -- “Stockholders’ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. 22 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, 2020, 2019, and 2018 and the consolidated balance sheet data at December 31, 2020 and 2019 are derived from our audited consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-K. The consolidated balance sheet data at December 31, 2018 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period. 2020 Years Ended December 31, 2019 (Dollar amounts in thousands, except per share amounts) 2018 Revenue Gross premiums earned Premiums ceded Net premiums earned Net investment income Net realized investment gains (losses) Net unrealized investment gains (losses) Net other-than-temporary impairment losses Credit losses on investments Policy fee income Gain on involuntary conversion Other income Total revenue Expenses Losses and loss adjustment expenses Policy acquisition and other underwriting expenses General and administrative personnel expenses Interest expense Loss on repurchases of convertible senior notes Loss on extinguishment of debt Other operating expenses Total expenses Income before income taxes Income tax expense Net income $ $ 415,918 $ (153,458) 262,460 4,564 1,000 679 — (611) 3,522 36,969 1,854 310,437 160,036 53,859 33,829 11,734 150 98 13,803 273,509 36,928 9,348 27,580 $ 342,079 $ (125,765) 216,314 13,642 (254) 7,950 (289) — 3,229 — 1,882 242,474 107,514 42,497 31,112 13,055 — — 12,203 206,381 36,093 9,517 26,576 $ 343,065 (129,643) 213,422 16,581 6,183 (10,202) (80) — 3,389 — 1,999 231,292 109,328 38,943 25,908 18,096 — — 12,115 204,390 26,902 9,177 17,725 23 2020 As of or for the Years Ended December 31, 2019 (Dollar amounts in thousands, except per share amounts) 2018 Per Share Data: Basic earnings per share Diluted earnings per share Dividends per 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 Long-term debt Total stockholders’ equity $ $ $ 3.55 $ 3.32 $ 3.49 $ 3.31 $ 2.34 2.34 1.600 $ 1.600 $ 1.475 60.98% 43.23% 104.21% 38.48% 27.28% 65.76% 49.70% 45.70% 95.40% 31.43% 28.90% 60.33% 51.23% 44.54% 95.77% 31.87% 27.71% 59.58% $ $ $ $ $ 225,720 431,341 941,313 156,511 201,136 $ $ $ $ $ 341,486 229,218 802,609 163,695 185,543 $ $ $ $ $ 387,783 239,458 832,863 250,150 181,441 24 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, including statements about our plans, objectives, expectations, assumptions or future events, involve risks and uncertainties. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. Typically, forward-looking statements can be identified by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions. The important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited to the effect of governmental regulation; changes in insurance regulations; the frequency and extent of claims; uncertainties inherent in reserve estimates; catastrophic events; changes in the demand for, pricing of, availability of or collectability of reinsurance; restrictions on our ability to change premium rates; increased rate pressure on premiums; the impact of the novel coronavirus (“COVID-19”) pandemic; 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 Group, Inc. is a Florida-based company which through its subsidiaries is engaged in a variety of business activities, including property and casualty insurance, reinsurance, real estate and information technology. Its principal business is property and casualty insurance. We began insurance operations by participating in a “take-out program” which is a legislatively mandated program designed to encourage private companies to assume policies from Citizens, a Florida state-sponsored insurance carrier. Opportunities to acquire large numbers of policies from Citizens meeting our strict underwriting criteria have diminished in recent years. We may, however, selectively pursue additional assumption transactions with Citizens. Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. Recent Developments On January 15, 2021, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are to be paid March 19, 2021 to stockholders of record on February 19, 2021. On January 18, 2021, we entered into an agreement with United Insurance Holdings Corporation (“United”) for United’s primary insurance subsidiary, United Property & Casualty Insurance Company, to cede to us a portion of its personal lines insurance business in the states of Connecticut, New Jersey, Massachusetts and Rhode Island. Under the reinsurance agreement, we will provide 69.5% quota share reinsurance on all of United’s in-force, new and renewal policies in those states from December 31, 2020 through May 31, 2021. In exchange, we paid United an allowance of $4,400,000 towards already purchased catastrophe reinsurance and a provisional ceding commission of 25% of premium. That percentage could increase up to 31.5% depending on the direct loss ratio results from the reinsured business. Annual premiums from the assumed business approximate $125,000,000. We also entered into a renewal rights agreement with United in connection with the assumed business. Under the renewal rights agreement, we have the right to renew and/or replace United’s insurance policies at the end of their respective policy periods in the four states. Our ability to replace policies begins June 1, 2021 or at a later date as mutually agreed upon by both parties. The agreement also contains a non-compete clause that does not permit United to engage in marketing, selling, writing, renewing, or servicing any insurance contract in these states until July 1, 2024. In return, United received 100,000 shares of our common stock and a 6% commission on the aggregate replacement premium in excess of $80,000,000. The total commission will not exceed $3,100,000. On February 26, 2021, TypTap Insurance Group, Inc. (“TTIG”), our wholly-owned subsidiary, completed an investment transaction with a fund associated with Centerbridge Partners, L.P. Under the agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $0.001 par value, at a price of $10 per share for total proceeds of $100,000,000 (which is based on TTIG’s pre-transaction valuation of $850,000,000). Cumulative dividends are payable semi-annually in cash or paid-in- kind at TTIG’s option. Cash dividend rates are $0.50 per share in Year 1, $0.60 per share in Year 2, $0.75 per share in Year 3, and $0.95 in Year 4 and thereafter. The rates for paid-in-kind are $0.60 per share in Year 1 and $0.70 per share in Year 2. The holders of the Series A Preferred Stock have the right to convert the stock at 25 any time into shares of common stock with an initial conversion rate of 1 to 1. The conversion rate will be adjusted under certain conditions. Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon 1) a public offering of TTIG’s common stock with gross proceeds of not less than $250,000,000 with a price per share at least equal to 150% of the original purchase price of the shares, or 2) at the election of holders of a majority of the Series A Preferred Stock, whichever comes first. The holders of Series A Preferred Stock also have redemption rights and liquidation preference. In connection with the transaction, the lead investor was granted warrants to purchase 750,000 shares of HCI with an exercise price of $54.40 per share. The warrants will be immediately exercisable and will expire on the fourth anniversary of the date of issuance. On March 2, 2021, Gulf to Bay LM, LLC (“GTB”), our wholly-owned real estate subsidiary, received from The Kroger Co. approximately $3,100,000 in settlement of the lawsuit filed by GTB in April 2020 to enforce a guaranty of a commercial lease executed between GTB and Lucky’s Market Operating Company, LLC, which is currently in bankruptcy proceedings. After the settlement, GTB has assigned the lease to a new lessee. On March 8, 2021, we repaid the outstanding balance of $23,750,000 on our revolving credit facility. The borrowing capacity of the facility is now $65,000,000. RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 2020 with the Year Ended December 31, 2019 Our results of operations for the year ended December 31, 2020 reflect net income of $27,580,000, or $3.49 diluted earnings per share, compared with a net income of $26,576,000, or $3.31 diluted earnings per share, for the year ended December 31, 2019. The year-over-year increase was primarily attributable to a gain on involuntary conversion of $36,969,000 and an net increase in net premiums earned of $46,146,000, offset by an increase in losses and loss adjustment expenses of $52,522,000, a net decrease in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses) of $15,095,000, an increase in policy acquisition and other underwriting expenses of $11,362,000 and a $2,717,000 increase in payroll costs and other personnel expenses. Revenue Gross Premiums Earned for the years ended December 31, 2020 and 2019 were approximately $415,918,000 and $342,079,000, respectively. The increase in 2020 was primarily attributable to the policies transitioned from Anchor Property and Casualty Insurance Company (“Anchor”) and increased policies in force from the growth in TypTap’s business, offset by a normal decrease due to policy attrition. Gross premiums earned related to the Anchor policies and the growth in TypTap’s business during 2020 were approximately $27,765,000 and $47,900,000, respectively. Premiums Ceded for the years ended December 31, 2020 and 2019 were approximately $153,458,000 and $125,765,000, respectively, representing 36.9% and 36.8%, respectively, of gross premiums earned. Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses defined in a quota share arrangement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. The $27,693,000 increase was primarily attributable to increased reinsurance costs effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.” Net Premiums Written for the years ended December 31, 2020 and 2019 totaled approximately $350,696,000 and $239,190,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2020 resulted primarily from an increase in gross premiums written from the growth of TypTap business of approximately $44,600,000, the transition of policies from Anchor of approximately $30,600,000, and the assumed business from United of approximately $44,600,000. HCPCI’s and TypTap’s gross premiums written were approximately $399,299,000 and $104,855,000, respectively, for 2020 compared with approximately $304,683,000 and $60,272,000, respectively, for 2019. We had approximately 154,000 policies in force at December 31, 2020 versus approximately 131,000 policies in force at December 31, 2019. Net Premiums Earned for the years ended December 31, 2020 and 2019 were approximately $262,460,000 and $216,314,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above. 26 The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2020 and 2019 (amounts in thousands): Net Premiums Written Increase in Unearned Premiums Net Premiums Earned Years Ended December 31, 2019 2020 $ $ 350,696 $ (88,236) 262,460 $ 239,190 (22,876) 216,314 Net Investment Income for the years ended December 31, 2020 and 2019 was approximately $4,564,000 and $13,642,000, respectively. The year- over-year decrease was primarily attributable to a decrease in income from limited partnership investments of approximately $2,771,000 and lower interest income from fixed-maturity securities and cash balances by approximately $5,533,000. See Note 5 -- “Investments” under Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Net Realized Investment Gains for the year ended December 31, 2020 were approximately $1,000,000 versus net realized investment losses of approximately $254,000 for the year ended December 31, 2019. The gains in 2020 resulted primarily from sales of fixed-maturity securities. Net Unrealized Investment Gains for the years ended December 31, 2020 and 2019 were approximately $679,000 and $7,950,000, respectively. Net unrealized investment gains or losses represent the net change in the fair value of equity securities. In addition to an overall improvement in the equity market, we sold securities with unrealized gain position during the first quarter of 2020. In contrast, securities with unrealized loss position were sold during 2019. Gain on Involuntary Conversion for the year ended December 31, 2020 was approximately $36,969,000. This one-time gain resulted from the transaction with the FDOT. See Note 9 -- “Property and Equipment, Net” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Expenses Our Losses and Loss Adjustment Expenses amounted to approximately $160,036,000 and $107,514,000 for the years ended December 31, 2020 and 2019, respectively. The $52,522,000 increase was primarily attributable to $14,850,000 of losses from the addition of the Anchor policies, net losses after reinsurance recoverable for Hurricane Sally of $20,264,000 and $10,000,000 of losses specific to Tropical Storm Eta, offset by lower prior year development. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.” Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2020 and 2019 were approximately $53,859,000 and $42,497,000, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, and premium taxes. The increase was primarily attributable to higher agent commission rates, property inspection costs associated with the organic growth of TypTap business, and $1,411,000 of amortized transition costs related to Anchor policies. General and Administrative Personnel Expenses for the years ended December 31, 2020 and 2019 were approximately $33,829,000 and $31,112,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-based compensation expense, and employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the payroll costs associated with the processing and settlement of Hurricane Irma claims which are recoverable from reinsurers under reinsurance contracts. The year-over-year increase of $2,717,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees, higher stock-based compensation expense, and lower capitalized and recoverable payroll costs, offset by a decrease in employee incentive bonus. Interest Expense for the years ended December 31, 2020 and 2019 was approximately $11,734,000 and $13,055,000, respectively. The decrease primarily resulted from the repayment of our 3.875% convertible senior notes in March 2019. Income Tax Expense for the year ended December 31, 2020 was approximately $9,348,000 for federal, state, and foreign income taxes compared with income tax expense of approximately $9,517,000 for the year ended December 31, 2019, resulting in an effective tax rate of 25.3% for 2020 and 26.4% for 2019. Ratios: The loss ratio applicable to the year ended December 31, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 61.0% compared with 49.7% for the year ended December 31, 2019. The increase was primarily due to a change in the mix of business and losses related to Hurricane Sally and Tropical Storm Eta. 27 The expense ratio applicable to the year ended December 31, 2020 (defined as total expenses excluding losses and loss adjustment expenses related to net premiums earned) was 43.2% compared with 45.7% for the year ended December 31, 2019. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned, offset by the increases in policy acquisition expenses and general and administrative personnel expenses as described earlier. The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the year ended December 31, 2020 was 104.2% compared with 95.4% for the year ended December 31, 2019. The increase was primarily attributable to the increase in losses and loss adjustment expenses combined with the increases in reinsurance costs and policy acquisition and other underwriting expenses. Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the year ended December 31, 2020 was 65.8% compared with 60.3% for the year ended December 31, 2019. The increase in 2020 was primarily attributable to the increase in losses and loss adjustment expenses. Comparison of the Year Ended December 31, 2019 with the Year Ended December 31, 2018 Our results of operations for the year ended December 31, 2019 reflect net income of $26,576,000, or $3.31 diluted earnings per share, compared with a net income of $17,725,000, or $2.34 diluted earnings per share, for the year ended December 31, 2018. The year-over-year increase was primarily attributable to an increase in net premiums earned of $2,892,000, a net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses) of $8,776,000, and a $5,041,000 decrease in interest expense, offset by a $5,204,000 increase in payroll costs and other personnel expenses and an increase in policy acquisition and other underwriting expenses of $3,554,000. Revenue Gross Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $342,079,000 and $343,065,000, respectively. The decrease in 2019 was primarily attributable to a net decrease in policies in force. Although the number of policies in force and gross premiums written from TypTap business have increased steadily, these premiums have yet to be earned over the term of the policies. Premiums Ceded for the years ended December 31, 2019 and 2018 were approximately $125,765,000 and $129,643,000, respectively, representing 36.8% and 37.8%, respectively, of gross premiums earned. Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses defined in a quota share arrangement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. The $3,878,000 decrease was primarily attributable to a $6,778,000 reduction related to retrospective provisions under one reinsurance contract as opposed to a net reduction of approximately $485,000 in 2018 under the same contract. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.” Premiums ceded in the prior year also included the recognition of additional premiums ceded of approximately $1,222,000 resulting from the termination of one reinsurance contract during the second quarter of 2018 (See Note 26 -- “Related Party Transactions” to our audited consolidated financial statements under Item 8 of this Annual Report on Form 10-K for additional information). Net Premiums Written for the years ended December 31, 2019 and 2018 totaled approximately $239,190,000 and $206,813,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2019 resulted primarily from an increase in gross premiums written from the growth in TypTap business combined with the decrease in premiums ceded as described above. HCPCI’s and TypTap’s gross premiums written were approximately $304,683,000 and $60,272,000, respectively, for 2019 compared with approximately $321,939,000 and $14,517,000, respectively, for 2018. We had approximately 131,000 policies in force at December 31, 2019 versus approximately 127,000 policies in force at December 31, 2018. Net Premiums Earned for the years ended December 31, 2019 and 2018 were approximately $216,314,000 and $213,422,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above. The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2019 and 2018 (amounts in thousands): Net Premiums Written (Increase) Decrease in Unearned Premiums Net Premiums Earned Years Ended December 31, 2018 2019 $ $ 239,190 $ (22,876) 216,314 $ 206,813 6,609 213,422 Net Investment Income for the years ended December 31, 2019 and 2018 was approximately $13,642,000 and $16,581,000, respectively. The year-over-year decrease was primarily attributable to a decrease in income from limited partnership investments of 28 approximately $3,254,000. See Note 5 -- “Investments” under Net Investment Income to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Net Realized Investment Losses for the year ended December 31, 2019 were approximately $254,000 versus net unrealized investment gains of approximately $6,183,000 for the year ended December 31, 2018. The gains in 2018 resulted primarily from sales intended to rebalance our investment portfolio to mitigate the impact from the rising interest rate trend and to decrease our holdings in municipal bonds as they become less attractive in a low tax rate environment. Net Unrealized Investment Gains for the year ended December 31, 2019 were approximately $7,950,000 versus net unrealized investment losses of approximately $10,202,000 for the year ended December 31, 2018. Net unrealized investment gains or losses represent the net change in the fair value of equity securities. The increase in 2019 reflected an improvement in the fair value of equity securities compared with values prevalent during the general downturn in the securities markets in December 2018. Expenses Our Losses and Loss Adjustment Expenses amounted to approximately $107,514,000 and $109,328,000 for the years ended December 31, 2019 and 2018, respectively. Losses and loss adjustment expenses in 2019 included net losses related to a severe storm event in March 2019 of approximately $7,400,000 as well as adverse development related to Hurricane Matthew in 2016 of approximately $1,923,000 and adverse development related to non- catastrophe claims of approximately $9,100,000 primarily related to assignment of benefits litigation. During 2018, losses and loss adjustment expenses included net losses of approximately $16,520,000 for Hurricane Michael as well as adverse development related to Hurricane Matthew of approximately $2,100,000 and adverse development related to non-catastrophe claims of approximately $9,900,000 primarily related to assignment of benefits litigation. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.” Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2019 and 2018 were approximately $42,497,000 and $38,943,000, respectively. The increase from 2018 was primarily attributable to the organic growth of TypTap business resulting in increased agent commissions and property inspection costs. General and Administrative Personnel Expenses for the years ended December 31, 2019 and 2018 were approximately $31,112,000 and $25,908,000, respectively. The year-over-year increase of $5,204,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late March 2019, higher stock-based compensation expense, and an increase in employee incentive bonus. Interest Expense for the years ended December 31, 2019 and 2018 was approximately $13,055,000 and $18,096,000, respectively. The decrease resulted from the repayment of our 3.875% convertible senior notes in March 2019. Income Tax Expense for the year ended December 31, 2019 was approximately $9,517,000 for federal, state, and foreign income taxes compared with income tax expense of approximately $9,177,000 for the year ended December 31, 2018, resulting in an effective tax rate of 26.4% for 2019 and 34.1% for 2018. The decrease was primarily attributable to the negative effect of the derecognition of deferred tax assets of approximately $1,825,000 and the nondeductible expense of approximately $1,887,000, both of which occurred in 2018 and related to restricted stock awards with market conditions that were not met. (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K). Ratios: The loss ratio applicable to the year ended December 31, 2019 was 49.7% compared with 51.2% for the year ended December 31, 2018. The decrease was primarily due to the increase in net premiums earned combined with the decrease in losses and loss adjustment expenses. The expense ratio applicable to the year ended December 31, 2019 was 45.7% compared with 44.6% for the year ended December 31, 2018. The increase in our expense ratio was primarily attributable to the increases in policy acquisition expenses and other general and administrative personnel expenses, offset by the increase in net premiums earned as described earlier. The combined ratio to net premiums earned for the year ended December 31, 2019 was 95.4% compared with 95.8% for the year ended December 31, 2018. The decrease was primarily to the increase in net premiums earned as described earlier. The combined ratio to gross premiums earned for the year ended December 31, 2019 was 60.3% compared with 59.6% for the year ended December 31, 2018. The increase in 2019 was primarily attributable to the net increase in total expenses. Seasonality of Our Business Our insurance business is seasonal. Hurricanes and tropical storms affecting Florida, our primary market, typically occur during the period from June 1st through November 30th of each year. Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. Also, with our reinsurance treaty year typically effective on June 1st of 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 on June 1st of each year. 29 LIQUIDITY AND CAPITAL RESOURCES Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by insurance operations from premiums written and investment income. We may consider raising additional capital through debt and/or equity offerings to support our growth and future investment opportunities. Our insurance operations require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. Substantially all of our losses and loss adjustment expenses, excluding litigated claims, are fully settled and paid within approximately 100 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses. We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position. In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions. Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases The following table summarizes the principal and interest payment obligations for our indebtedness at December 31, 2020: 4.25% Convertible Senior Notes* 3.75% Callable Promissory Note 3.90% Promissory Note 4.55% Promissory Note Finance leases Revolving credit facility Maturity Date March 2037 Through September 2036 Through April 2032 Through August 2036 Through August 2023 Through December 2023 Payment Due Date March 1 and September 1 1st day of each month 1st day of each month 1st day of each month Various January 1, April 1, July 1, October 1 * At the option of the noteholders, we may be required to repurchase for cash all or any portion of the note on March 1, 2022, March 1, 2027 or March 1, 2032. See Note 13 -- “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Limited Partnership Investments Our limited partnership investments consist of five private equity funds managed by their general partners. Three of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Under certain circumstances, we may be required to provide additional capital for one of the two funds with expired capital commitments. At December 31, 2020, there was an aggregate unfunded capital balance of $10,304,000. See Limited Partnership Investments under Note 5 -- “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Real Estate Investment Real estate has long been a significant component of our overall investment portfolio. It helps offset the volatility of other high-risk assets. Thus, we may consider expanding our real estate investment portfolio should an opportunity arise. We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. FMKT Mel JV’s real estate portfolio consists of outparcels for ground lease or sale. We have the option to take full ownership of these outparcels by acquiring the remaining 10% interest. Alternatively, we may sell these outparcels and allocate the profits from the sale before liquidating FMKT Mel JV. Sources and Uses of Cash Our cash flows from operating, investing and financing activities for the years ended December 31, 2020, 2019 and 2018 are summarized below. 30 Cash Flows for the Year Ended December 31, 2020 Net cash provided by operating activities for the year ended December 31, 2020 was approximately $77,311,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $56,860,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $143,215,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $128,745,000, the proceeds from calls, redemptions and maturities of fixed-maturity securities of $84,459,000, $44,000,000 of compensation received for the property relinquished through eminent domain proceeding, and the distributions of $2,086,000 received from limited partnership investments, offset by the purchases of fixed-maturity and equity securities of $103,174,000, the purchases of property and equipment of $6,437,000, additional investments in limited partnership interests of $4,241,000, and the purchases of real estate investments of $3,020,000. Net cash used in financing activities totaled $16,705,000, which was primarily due to the repayment of long-term debt of $17,048,000, $6,708,000 used in our share repurchases, $4,459,000 used to repurchase a portion of our 4.25% convertible senior notes, and $12,388,000 of net cash dividend payments, offset by $14,000,000 of net borrowings from our revolving credit facility and the proceeds from issuance of a 3.90% promissory note of $10,000,000. Cash Flows for the Year Ended December 31, 2019 Net cash provided by operating activities for the year ended December 31, 2019 was approximately $54,047,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $105,676,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $50,459,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $45,616,000, the proceeds from calls, redemptions and maturities of fixed-maturity securities of $59,343,000, the proceeds from sales, redemptions and maturities of short-term and other investments of $67,398,000, and the distributions of $2,121,000 from limited partnership investments, offset by the purchases of fixed-maturity and equity securities of $107,299,000, the purchases of real estate investments of $11,481,000, the purchases of property and equipment of $2,887,000, the purchases of short-term and other investments of $1,178,000, and the investments in limited partnership interests of $1,174,000. Net cash used in financing activities totaled $114,724,000, which was primarily due to the repayment of long-term debt of $91,318,000, $20,054,000 used in our share repurchases, and $12,706,000 of net cash dividend payments, offset by $9,750,000 of borrowings from our revolving credit facility. Cash Flows for the Year Ended December 31, 2018 Net cash provided by operating activities for the year ended December 31, 2018 was approximately $28,595,000, which consisted primarily of cash received from net premiums written and reinsurance recoveries of approximately $128,300,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $17,678,000 was primarily due to the purchases of fixed-maturity and equity securities of $165,424,000, the purchases of short-term and other investments of $201,538,000, the purchases of real estate investments of $7,472,000, and the investments in limited partnership interests of $7,182,000, offset by the proceeds from sales of fixed-maturity and equity securities of $148,248,000, the proceeds from calls, redemptions and maturities of fixed-maturity securities of $82,177,000, and the proceeds from sales, redemptions and maturities of short-term and other investments of $135,256,000. Net cash used in financing activities totaled $27,288,000, which was primarily due to $21,166,000 used in our share repurchases, $10,351,000 of net cash dividend payments and the repayment of long-term debt of $1,127,000, offset by the proceeds from the issuance of a 4.55% promissory note of $6,000,000. Investments The main objective of our investment policy is to maximize our after-tax investment income with a reasonable level of risk given the current financial market. Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities. At December 31, 2020, we had $122,852,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition. In the future, we may alter our investment policy with regard to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations. OFF-BALANCE SHEET ARRANGEMENTS As of December 31, 2020, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the consolidated financial statements but are required to be disclosed in the notes to the consolidated financial statements. See Note 23 -- “Commitments and Contingencies” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. 31 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 (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments to develop amounts reflected and disclosed in our consolidated 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 we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates. We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective provisions, deferred income taxes, and stock-based compensation expense involve our most significant judgments and estimates material to our consolidated financial statements. Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (LAE). Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to us (“IBNR”). Reserves established by us represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of our company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, we give careful consideration to all available data and actuarial analyses. Currently, our estimated ultimate liability is calculated using the principles and procedures described in Note 15 -- “Losses and Loss Adjustment Expenses” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K, which are applied to the lines of business written. However, because the establishment of loss and LAE reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss and LAE 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 and LAE reserves. However, management believes that a reasonably likely increase or decrease in the severity of claims could impact our net loss and LAE reserves. The table below summarizes the effect on net loss and LAE reserves and equity in the event of reasonably likely changes in the severity of claims considered in establishing loss and LAE 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 and LAE 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, 2020 Change in Reserves -20.0% -15.0% -10.0% -5.0% Base 5.0% 10.0% 15.0% 20.0% Percentage Change in Equity, Net of Tax 15.10% 11.32% 7.55% 3.77% — (3.77)% (7.55)% (11.32)% (15.10)% Reserves 169,735 180,344 190,952 201,561 212,169 222,777 233,386 243,994 254,603 Reinsurance Recoverable. Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss adjustment expenses that is recoverable from reinsurers. This estimate is determined in a manner consistent with the terms of the applicable reinsurance contracts and based on the ultimate losses and loss adjustment expenses we expect to incur. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimate may vary significantly from the eventual outcome. Economic Impact of Reinsurance Contract with Retrospective Provisions. One of our reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with U.S. GAAP, we will recognize an asset in the period in which the absence of loss experience obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term. 32 For the year ended December 31, 2020, we accrued benefits of $15,120,000. For the year ended December 31, 2019, we accrued benefits of $6,344,000 and recognized a reduction in ceded premiums of $434,000. For the year ended December 31, 2018, we recognized a net increase in accrued benefits of $743,000 and a net increase in ceded premiums of $258,000. In combination, for the years ended December 31, 2020 and 2019, we recognized decreases in ceded premiums of $15,120,000 and $6,778,000, respectively. For the year ended December 31, 2018, we recognized a net reduction in ceded premiums of $485,000. As of December 31, 2020, we had $10,920,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement. In June 2020, we received a $13,680,000 premium refund under the retrospective reinsurance contract that ended May 31, 2020. Accrued benefits related to this expired contract were $9,480,000 at December 31, 2019. We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the reinsurer’s financial position and the reinsurer’s demonstrated ability to comply with contract terms. Income Taxes. We account 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. 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 the related interest and penalties, if any, as income tax expense as permitted by current accounting standards. Stock-Based Compensation. We account for stock-based compensation awards under our stockholder-approved incentive plans in accordance with the fair value recognition provisions of U.S. GAAP, which require the measurement, and recognition of compensation for all stock-based awards made to employees and non-employee 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. Limited Partnership Investments. The valuation of our limited partnership investments is prepared by the general partner of each fund. We use net asset value (“NAV”) provided by the general partner to estimate our share of the fair value of these investments. However, the timing of the delivery of the fund’s financial statements and NAV information is on a three-month lag which results in a three-month delay in the recognition of our share of the limited partnership’s earnings or losses. But because this is the best information available, we use it as an estimate for the fair value at our reporting dates, unless conditions have changed significantly in the economy or securities markets since the previous quarter due to an event such as the onset of the COVID-19 virus. In such case, we will adjust our estimate with the assistance from the general partner. ITEM 7A Quantitative and Qualitative Disclosures About Market Risk Our investment portfolios at December 31, 2020 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our board of directors. From time to time, our investment committee may decide to invest in low risk assets such as U.S. government bonds. Our investment portfolios are exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios. We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. In addition, we recognize any unrealized gains and losses related to our equity securities in our statement of income. As a result, our results of operations can be materially affected by the volatility in the equity market. Interest Rate Risk Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs. 33 The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 2020 (amounts 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 Change in Estimated Fair Value 68,132 $ 69,328 70,525 72,417 72,747 72,913 (3,591) (2,395) (1,198) 694 1,024 1,190 Percentage Increase (Decrease) in Estimated Fair Value -5.01% -3.34% -1.67% 0.97% 1.43% 1.66% Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed- maturity securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio. The following table presents the composition of our fixed-maturity securities, by rating, at December 31, 2020 (amounts in thousands): Comparable Rating AA+, AA, AA- A+, A, A- BBB+, BBB, BBB- BB+, BB, BB- CCC+, CC and Not rated Total Equity Price Risk Cost or Amortized Cost % of Total Amortized Cost Estimated Fair Value % of Total Estimated Fair Value 16,847 27,464 19,085 2,226 4,643 70,265 $ 24 39 27 3 7 100 $ 17,130 28,024 19,983 2,393 4,192 71,722 24 39 28 3 6 100 Our equity investment portfolio at December 31, 2020 included common stocks, perpetual preferred stocks, mutual funds and exchange traded funds. 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 mix. The following table illustrates the composition of our equity securities at December 31, 2020 (amounts in thousands): Stocks by sector: Financial Consumer Other (1) Mutual funds and Exchange traded funds by type: Debt Equity Total (1) Represents an aggregate of less than 5% sectors. 34 Estimated Fair Value % of Total Estimated Fair Value $ $ 12,877 4,563 8,053 25,493 23,047 2,590 25,637 51,130 25 9 16 50 45 5 50 100 Foreign Currency Exchange Risk At December 31, 2020, we did not have any material exposure to foreign currency related risk. 35 ITEM 8 – Financial Statements and Supplementary Data Index to Financial Statements Reports of Dixon Hughes Goodman LLP, Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 Page 37-39 40-41 42 43 44-46 47-49 Notes to Consolidated Financial Statements for the Years Ended December 31, 2020, 2019 and 2018 50-100 36 Report of Independent Registered Public Accounting Firm Stockholders and the Board of Directors HCI Group, Inc. and Subsidiaries Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of HCI Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Reserves for Losses and Loss Adjustment Expenses As described in Note 2 - Summary of Significant Accounting Policies and Note 15 - Losses and Loss Adjustment Expenses to the consolidated financial statements, the Company’s reserves for losses and loss adjustment expenses (“LAE”) reported in the consolidated balance sheet were $212.2 million at December 31, 2020. Reserves for losses and LAE reflect management’s best estimate regarding the Company’s ultimate losses, resulting in a liability for claims that have been incurred, but not yet paid, and claims that have been incurred but not yet reported. The reserves are based on the application of actuarial techniques and other projection methodologies, taking into consideration other facts and circumstances known at the balance sheet date. The methods used by management in determining the reserves for losses and LAE are complex and subjective with various key inputs and assumptions. Judgement is required to determine the inputs and assumptions used and these can significantly impact the reserves recognized. The most significant judgments include the choice of the appropriate standard actuarial reserving methods, the selection of loss development factors that place reliance on actual historical loss experience, current claim trends, and the prevailing social, economic and legal environments, and reserves derived specific to catastrophe events. The principal considerations for our determination of the reserves for losses and LAE as a critical audit matter are the complexity and subjectivity of the estimates and assumptions that management utilized in determining their ultimate loss estimates, and the involvement of an actuarial specialist to assist in performing audit procedures. This required a high degree of effort and judgment in selecting the 37 auditor procedures to evaluate management’s estimates and assumptions as it relates to the reserves for losses and LAE, including the use of a specialist. The primary procedures we performed to address this critical audit matter included: • We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to management’s determination of the reserves for losses and LAE, including controls over the actuarial methods and assumptions utilized to support the reserve calculations, and controls over the completeness and accuracy of historical loss data utilized in the reserve calculations. • We tested the completeness and accuracy of the historical loss data used in the development of the reserves. • We performed analytical procedures over the Company’s recorded reserves in relation to the Company’s consulting actuary’s range of reserve estimates. • We engaged an independent actuary as an auditor’s specialist to independently assess the Company’s consulting actuary’s selection of actuarial methods and assumptions and the resulting reserve ranges and point estimates. Valuation of Limited Partnership Investments As described in Note 2 - Summary of Significant Accounting Policies and Note 5 – Investments to the consolidated financial statements, the Company’s limited partnership investments reported in the consolidated balance sheet were $27.7 million at December 31, 2020. For the investments with ownership interest at five percent or less, the Company uses the net asset value method to estimate the fair value of these investments. Due to a reporting lag, the Company may record an adjustment to the Company’s most recent share of net asset value when the amount can be reasonably estimated and a significant adverse impact on the net asset value is expected as a result of a major economic event. The methods used by management in determining if an adjustment to the Company’s most recent share of net asset value is necessary are complex and subjective based on the judgement that is required to determine the key inputs and assumptions which can significantly impact the adjustments recognized. The principal considerations for our determination of the valuation of limited partnership investments as a critical audit matter are the subjectivity of the inputs and assumptions that management utilized in determining the adjustment to the Company’s most recent share of net asset value, and the involvement of a valuation specialist to assist in performing audit procedures. This required a high degree of effort and judgment in selecting the auditor procedures to evaluate management’s estimates and assumptions as it relates to the valuation of limited partnership investments, including the use of a specialist. The primary procedures we performed to address this critical audit matter included: • We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the valuation of limited partnership investments, including controls over management’s estimate of the adjustment to the Company’s most recent share of net asset value of the limited partnership investments. • We tested the completeness and accuracy of the data utilized by management and evaluated the reasonableness of management’s assumptions used to develop an estimate of fair value. • We engaged a specialist to develop an independent estimate of fair value of the limited partnership investments and comparison of management’s estimate to the independently developed estimate of fair value. /s/ Dixon Hughes Goodman LLP We have served as the Company’s auditor since 2013. Tampa, Florida March 12, 2021 38 Report of Independent Registered Public Accounting Firm on Internal Control Stockholders and the Board of Directors HCI Group, Inc. and Subsidiaries Opinion on Internal Control Over Financial Reporting We have audited HCI Group, Inc. and Subsidiaries (the “Company”)’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company for each of the three years in the period ended December 31, 2020, and our report dated March 12, 2021, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion 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’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting 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. 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. /s/ Dixon Hughes Goodman LLP Tampa, Florida March 12, 2021 39 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar amounts in thousands) Assets Fixed-maturity securities, available for sale, at fair value (amortized cost: $70,265 and $199,954, respectively and allowance for credit losses: $588 and $0, respectively) Equity securities, at fair value (cost: $47,029 and $31,863, respectively) Short-term investments, at fair value Limited partnership investments, at equity Investment in unconsolidated joint venture, at equity Real estate investments Total investments Cash and cash equivalents Restricted cash Accrued interest and dividends receivable Income taxes receivable Premiums receivable, net Prepaid reinsurance premiums Reinsurance recoverable, net of allowance for credit losses: Paid losses and loss adjustment expenses (allowance: $0 in 2020 and 2019) Unpaid losses and loss adjustment expenses (allowance: $85 and $0, respectively) Deferred policy acquisition costs Property and equipment, net Right-of-use assets - operating leases Intangible assets, net Other assets Total assets 40 December 31, 2020 2019 $ $ 71,722 $ 51,130 — 27,691 705 74,472 225,720 431,341 2,400 588 4,554 68,382 36,376 14,127 71,019 43,858 12,767 4,002 3,568 22,611 941,313 $ 202,839 35,285 491 28,346 762 73,763 341,486 229,218 700 1,616 1,040 20,255 17,983 16,155 116,523 21,663 14,698 484 4,192 16,596 802,609 (continued) HCI GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets – (Continued) (Dollar amounts in thousands) Liabilities and Stockholders’ Equity December 31, 2020 2019 Losses and loss adjustment expenses Unearned premiums Advance premiums Assumed reinsurance balances payable Accrued expenses Deferred income taxes, net Revolving credit facility Long-term debt Lease liabilities - operating leases Other liabilities Total liabilities Commitments and contingencies (Note 23) Stockholders’ equity: 7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued and outstanding) Series B junior participating preferred stock (no par value, 400,000 shares authorized, no shares issued or outstanding) Preferred stock (no par value, 18,100,000 shares authorized, no shares issued or outstanding) Common stock (no par value, 40,000,000 shares authorized, 7,785,617 and 7,764,564 shares issued and outstanding in 2020 and 2019, respectively) Additional paid-in capital Retained income Accumulated other comprehensive income, net of taxes Total stockholders’ equity Total liabilities and stockholders’ equity $ $ 212,169 $ 269,399 11,370 87 10,181 11,925 23,750 156,511 4,014 40,771 740,177 — — — — — 199,592 1,544 201,136 941,313 $ 214,697 181,163 5,589 76 10,059 4,008 9,750 163,695 513 27,516 617,066 — — — — — 183,365 2,178 185,543 802,609 See accompanying Notes to Consolidated Financial Statements. 41 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollar amounts in thousands, except per share amounts) Revenue Gross premiums earned Premiums ceded Net premiums earned Net investment income Net realized investment gains (losses) Net unrealized investment gains (losses) Net other-than-temporary impairment losses Credit losses on investments Policy fee income Gain on involuntary conversion Other Total revenue Expenses Losses and loss adjustment expenses Policy acquisition and other underwriting expenses General and administrative personnel expenses Interest expense Loss on repurchases of convertible senior notes Loss on extinguishment of debt Other operating expenses Total expenses Income before income taxes Income tax expense Net income Basic earnings per share Diluted earnings per share 2020 Years Ended December 31, 2019 2018 415,918 $ (153,458) 262,460 4,564 1,000 679 — (611) 3,522 36,969 1,854 310,437 160,036 53,859 33,829 11,734 150 98 13,803 273,509 36,928 9,348 27,580 $ 342,079 $ (125,765) 216,314 13,642 (254) 7,950 (289) — 3,229 — 1,882 242,474 107,514 42,497 31,112 13,055 — — 12,203 206,381 36,093 9,517 26,576 $ 3.55 $ 3.32 $ 3.49 $ 3.31 $ 343,065 (129,643) 213,422 16,581 6,183 (10,202) (80) — 3,389 — 1,999 231,292 109,328 38,943 25,908 18,096 — — 12,115 204,390 26,902 9,177 17,725 2.34 2.34 $ $ $ $ See accompanying Notes to Consolidated Financial Statements. 42 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Amounts in thousands) Net income Other comprehensive (loss) income: Change in unrealized gain (loss) on investments: Net unrealized gains (losses) arising during the period Other-than-temporary impairment losses charged to income Credit losses charged to income Call and repayment gains charged to investment income Reclassification adjustment for net realized gains Net change in unrealized (losses) gains Deferred income taxes on above change Total other comprehensive (loss) income, net of income taxes Comprehensive income 2020 Years Ended December 31, 2019 2018 $ 27,580 $ 26,576 $ 17,725 86 — 611 (374) (1,163) (840) 206 (634) 26,946 $ 4,902 289 — (141) (218) 4,832 (1,201) 3,631 30,207 $ (3,137) 80 — (18) (723) (3,798) 963 (2,835) 14,890 $ See accompanying Notes to Consolidated Financial Statements. 43 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity For the Year Ended December 31, 2020 (Dollar amounts in thousands, except per share amounts) Balance at December 31, 2019 Net income Total other comprehensive loss, net of income taxes Cumulative effect on adoption of credit loss standard Exercise of common stock options Issuance of restricted stock Forfeiture of restricted stock Repurchase and retirement of common stock Repurchase and retirement of common stock under share repurchase plan Common stock dividends ($1.60 per share) Stock-based compensation Additional paid-in capital shortfall allocated to retained income Balance at December 31, 2020 Common Stock Shares Amount 7,764,564 $ — — — 10,000 192,680 (18,852) (33,633) (129,142) — — — $ — — — — — — — — — — Additional Paid-In Capital Retained Income 183,365 $ 27,580 — $ — Accumulated Other Comprehensive Income, Net of Tax Total Stockholders’ Equity 185,543 27,580 2,178 $ — — — 63 — — (1,547) — (453) — — — — (634) — — — — — (634) (453) 63 — — (1,547) (5,161) — 8,133 — (12,388) — — — — (5,161) (12,388) 8,133 — 7,785,617 $ — — $ (1,488) — $ 1,488 199,592 $ — 1,544 $ — 201,136 44 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity – (Continued) For the Year Ended December 31, 2019 (Dollar amounts in thousands, except per share amounts) Balance at December 31, 2018 Net income Total other comprehensive income, net of income taxes Exercise of common stock options Issuance of restricted stock Forfeiture of restricted stock Repurchase and retirement of common stock Repurchase and retirement of common stock under share repurchase plan Common stock dividends ($1.60 per share) Stock-based compensation Tax basis adjustment on equity method investment Additional paid-in capital shortfall allocated to retained income Balance at December 31, 2019 Common Stock Shares Amount 8,356,730 $ — — 10,000 180,404 (299,776) (28,784) (454,010) — — — — $ — — — — — — — — — — Additional Paid-In Capital Retained Income 182,894 $ 26,576 — $ — Accumulated Other Comprehensive (Loss) Income, Net of Tax Total Stockholders’ Equity 181,441 26,576 (1,453) $ — — 63 — — (1,203) — — — — — 3,631 — — — — 3,631 63 — — (1,203) (18,851) — 6,460 132 — (12,706) — — — — — — (18,851) (12,706) 6,460 132 — 7,764,564 $ — — $ 13,399 — $ (13,399) 183,365 $ — 2,178 $ — 185,543 45 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity – (Continued) For the Year Ended December 31, 2018 (Dollar amounts in thousands, except per share amounts) Balance at December 31, 2017 Net income Total other comprehensive loss, net of income taxes Cumulative effect adjustments for adoption of new accounting standards: Reclassification of after-tax net unrealized holding gains related to equity securities Reclassification of stranded tax effects related to available-for-sale fixed-maturity and equity securities Issuance of restricted stock Forfeiture of restricted stock Repurchase and retirement of common stock Repurchase and retirement of common stock under share repurchase plan Purchase of noncontrolling interest Common stock dividends ($1.475 per share) Stock-based compensation Additional paid-in capital shortfall allocated to retained income Balance at December 31, 2018 Common Stock Shares Amount 8,762,416 $ — — — $ — — Additional Paid-In Capital Retained Income 189,409 $ 17,725 — — $ — — Accumulated Other Comprehensive Income (Loss), Net of Tax Total Stockholders’ Equity 193,975 17,725 (2,835) 4,566 $ — (2,835) — — — 4,168 (4,168) — — 189,860 (56,637) (27,281) (511,628) — — — — — — — — — — — — — — (1,151) (984) — — — (20,015) (539) — 4,632 — — (10,351) — 984 — — — — — — — — — — (1,151) (20,015) (539) (10,351) 4,632 — 8,356,730 $ — — $ 17,073 — $ (17,073) 182,894 $ — (1,453) $ — 181,441 See accompanying Notes to Consolidated Financial Statements. 46 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation Net (accretion of discount) amortization of premiums on investments in fixed-maturity securities Depreciation and amortization Deferred income tax expense Net realized investment (gains) losses Net unrealized investment (gains) losses Other-than-temporary impairment losses Credit loss expense - investments Credit loss expense - reinsurance recoverable Loss (income) from unconsolidated joint venture Distribution received from unconsolidated joint venture Loss on repurchases of convertible senior notes Loss on extinguishment of debt Gain on involuntary conversion Net loss (income) from limited partnership interests Distributions received from limited partnership interests Foreign currency remeasurement loss Other non-cash items Changes in operating assets and liabilities: Accrued interest and dividends receivable Income taxes Premiums receivable Prepaid reinsurance premiums Reinsurance recoverable Deferred policy acquisition costs Other assets Losses and loss adjustment expenses Unearned premiums Advance premiums Assumed reinsurance balances payable Reinsurance recovered in advance on unpaid losses Accrued expenses and other liabilities Net cash provided by operating activities 47 2020 Years Ended December 31, 2019 2018 $ 27,580 $ 26,576 $ 17,725 8,133 (100) 8,747 8,123 (1,000) (679) — 611 (368) 57 — 150 98 (36,969) 1,595 1,215 32 46 1,028 (3,514) (48,127) (18,393) 47,447 (22,195) (4,578) (2,528) 88,236 5,781 11 — 16,872 77,311 6,460 50 8,942 1,871 254 (7,950) 289 — — 83 — — — — (1,176) 4,176 57 290 176 (69) (3,588) (51) (8,767) (5,156) (7,837) 7,111 23,434 (603) 62 — 9,413 54,047 4,632 761 10,996 141 (6,183) 10,202 80 — — (304) 68 — — — (4,430) 2,345 135 72 191 15,221 1,140 4,354 (20,807) 205 408 9,008 (7,167) 1,244 (1) (13,885) 2,444 28,595 (continued) HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows – (Continued) (Amounts in thousands) 2020 Years Ended December 31, 2019 2018 Cash flows from investing activities: Investments in limited partnership interests Distributions received from limited partnership interests Distribution from unconsolidated joint venture Purchase of property and equipment Purchase of intangible assets Purchase of real estate investments Purchase of fixed-maturity securities Purchase of equity securities Purchase of short-term and other investments Compensation received for property relinquished through eminent domain proceedings Proceeds from sales of fixed-maturity securities Proceeds from calls, repayments and maturities of fixed-maturity securities Proceeds from sales of equity securities Proceeds from sales, redemptions and maturities of short-term and other investments Net cash provided by (used in) investing activities Cash flows from financing activities: Net borrowing under revolving credit facility Cash dividends paid Cash dividends received under share repurchase forward contract Proceeds from exercise of common stock options Proceeds from the issuance of long-term debt Repurchases of convertible senior notes Repayment of long-term debt Repurchases of common stock Repurchases of common stock under share repurchase plan Purchase of non-controlling interest Debt issuance costs Net cash used in financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at beginning of year Cash, cash equivalents and restricted cash at end of year (4,241) 2,086 — (6,437) — (3,020) (34,951) (68,223) (200) 44,000 81,433 84,459 47,312 997 143,215 14,000 (12,694) 306 63 10,000 (4,459) (17,048) (1,547) (5,161) — (165) (16,705) 2 203,823 229,918 433,741 $ (1,174) 2,121 — (2,887) — (11,481) (82,662) (24,637) (1,178) — 7,947 59,343 37,669 67,398 50,459 9,750 (13,012) 306 63 — — (91,318) (1,203) (18,851) — (459) (114,724) (22) (10,240) 240,158 229,918 $ (7,182) 158 695 (2,187) (409) (7,472) (113,174) (52,250) (201,538) — 81,809 82,177 66,439 135,256 (17,678) — (11,318) 967 — 6,000 — (1,127) (1,151) (20,015) (539) (105) (27,288) (164) (16,535) 256,693 240,158 (continued) $ 48 HCI GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows – (Continued) (Amounts in thousands) Supplemental disclosure of cash flow information: Cash paid for income taxes Cash paid for interest Non-cash investing and financing activities: Unrealized (loss) gain on investments in available-for-sale securities, net of tax Receivable from sales of equity securities Payable on purchases of equity securities Addition to property and equipment under finance lease 2020 Years Ended December 31, 2019 2018 6,202 $ 7,713 $ 3,655 7,476 $ 9,386 $ 10,720 (634) $ 3,631 $ (2,835) 5,240 $ 7 $ — $ — $ — $ 18 $ — — 61 $ $ $ $ $ $ See accompanying Notes to Consolidated Financial Statements. 49 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 1 -- Nature of Operations HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). HCPCI is authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida. HCPCI also offers flood-endorsed and wind-only policies to Florida customers and has regulatory approval to underwrite residential property and casualty insurance in various other states. HCPCI has issued insurance policies in other states, however, Florida is still its primary market. TypTap offers standalone flood and homeowners multi-peril policies to Florida homeowners. In October 2020, TypTap began applying for approval to offer homeowners coverage in 23 states outside of Florida. Since then, TypTap has received approvals from ten states. The operations of both insurance subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. In particular, the Company is currently using internally developed technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries. In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the businesses of owning and leasing real estate and operating marina facilities. On February 5, 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”). Under the agreement, Anchor cancelled all its policies as of April 1, 2020 and HCPCI offered short-term replacement policies to those policyholders, who were under no obligation to accept them. The replacement policies had substantially the same terms and rates as the cancelled policies and would expire on the same dates the cancelled policies would have expired had they not been cancelled. Upon expiration of the replacement policies, HCPCI will offer, but is not obligated to offer, renewals to those policyholders at its own rates and terms. Total replacement policies issued by the Company on April 1, 2020 approximated 40,000. In December 2020, the Company reached an agreement in principle with United Insurance Holdings Corporation (“United”) for United’s primary insurance subsidiary, United Property & Casualty Insurance Company, to cede a portion of its personal lines insurance business in the states of Connecticut, New Jersey, Massachusetts and Rhode Island and subsequently sell its policy renewal rights to HCPCI. The agreement was later finalized on January 18, 2021. Under the reinsurance agreement, HCPCI will provide 69.5% quota share reinsurance on all of United’s in-force, new and renewal policies in those states from December 31, 2020 through May 31, 2021. In exchange, HCPCI paid United an allowance of $4,400 towards already purchased catastrophe reinsurance and a provisional ceding commission of 25% of premium. That percentage could increase up to 31.5% depending on the direct loss ratio results from the reinsured business. Annual premiums from the assumed business approximate $125,000. After the reinsurance agreement expires, the Company has the ability to renew and/or replace United’s insurance policies under a renewal rights agreement. See Note 28 -- “Subsequent Events” for information concerning the acquisition of the renewal rights from United. Note 2 -- Summary of Significant Accounting Policies Basis of Presentation. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Adoption of New Accounting Standards. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments – Credit Losses (Topic 326), effective January 1, 2020. This update amends guidance on the recognition and measurement of credit losses for assets held at amortized cost and available-for-sale debt securities. For assets held at amortized cost, ASU 2016-13 eliminates the probable initial recognition threshold and, instead, requires credit losses to be measured using the Current Expected Credit Loss (“CECL”) model. The CECL model requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. The incurred loss model previously used to estimate credit losses is replaced with the CECL model for premiums receivable and reinsurance recoverable. For available-for-sale debt securities, credit losses will continue to be measured in a manner similar to the current standard. See also “Allowance for Credit Losses” within this note. Effective January 1, 2020, the Company used a modified retrospective method for transition to the CECL model. The Company recognized a cumulative-effect adjustment of $453 related to reinsurance recoverable to beginning retained income with a corresponding entry to an allowance for credit losses account. Any subsequent changes to the expected credit losses will be recognized in the Company’s consolidated statement of income. 50 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Principles of Consolidation. The accompanying consolidated financial statements include the accounts of HCI Group, Inc. and its majority- owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships or investments for consolidation pursuant to authoritative accounting guidance related to the consolidation of variable interest entities under the Variable Interest Model prescribed by the FASB. A variable interest entity is consolidated when the Company has the power to direct activities that most significantly impact the economic performance of the variable interest entity and has the obligation to absorb losses or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity. When a variable interest entity is not consolidated, the Company uses the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income. Use of Estimates. The preparation of the consolidated financial statements in conformity with 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 primarily related to losses and loss adjustment expenses, reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, limited partnership investments and stock- based compensation expense. 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, 2020 and 2019, cash and cash equivalents consisted of cash on deposit with financial institutions and securities brokerage firms, and certificates of deposit. Available-for-Sale Fixed-Maturity Securities. Fixed-maturity securities that are available for sale include debt securities and redeemable preferred stock. The Company’s available-for-sale securities are carried at fair value. Changes in the fair value of available-for-sale securities representing unrealized gains or losses, other than impairments, are excluded from net investment 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 first-in first-out (“FIFO”) 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 fixed-maturity securities for impairment on a monthly basis. Effective January 1, 2020, net unrealized loss in the fair value of an available-for-sale fixed-maturity security is evaluated for impairment. When reviewing impaired securities, the Company considers its ability and intent to hold these securities and whether it is probable that the Company will be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intends to sell or it is probable that the Company will have to sell before recovery or maturity, the unrealized losses are recognized currently as impairment losses in income. Impaired securities where the Company has the ability and intent to hold until recovery and believes it is not probable that the Company will be required to sell these securities prior to their anticipated recovery or maturity, are evaluated for the existence of credit-related losses. When determining impairment due to a credit-related loss, the Company carefully considers factors such as the issuer’s financial ratios and condition, the security’s current ratings and maturity date, the failure of the issuer to make a scheduled payment, and overall market conditions in estimating the cash flows expected to be collected. The expected cash flows discounted at the effective interest rate of the security implicit at the date of acquisition is then compared with the security’s amortized cost at the measurement date. A credit loss is incurred when the present value of the expected cash flows is less than the security’s amortized cost. If such credit-related losses exist, an allowance for credit losses is established with a charge in the statement of income. Subsequent changes in the allowance, whether favorable or unfavorable, are recorded on the statement of income. See additional information in the Allowance for Credit Losses section within this note. Any remaining impairment loss related to other non-credit factors such as changes in interest rates or market conditions is reflected as a component of accumulated other comprehensive income (loss). Prior to January 1, 2020, when the fair value of any investment was lower than its cost, an assessment was made to determine whether the decline was temporary or other-than-temporary. If the decline was determined to be other-than-temporary, the investment was written down to fair value and an impairment loss was recognized in income in the period in which the Company made such determination. When reviewing impaired securities, the Company considered its ability and intent to hold these securities and whether it was probable that the Company would be required to sell these securities prior to their anticipated recovery or maturity. For the fixed-maturity securities that the Company intended to sell or it was probable that the Company would have to sell before recovery or maturity, the unrealized losses were recognized as other-than-temporary losses in income. In instances where there were credit-related losses associated with the impaired fixed-maturity securities for which the Company asserted that it did not have the intent to sell, and it was probable that the Company would not be required to sell until a market price recovery or maturity, the amount of the other-than-temporary impairment loss related to credit losses was recognized in income, and the amount of the other-than-temporary 51 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) impairment loss related to other non-credit factors such as changes in interest rates or market conditions was recorded as a component of accumulated other comprehensive income (loss). Allowance for Credit Losses. Allowance for credit losses represents an estimation of potential losses that the Company may experience due to credit risk. The allowance for credit losses account is a contra account of a financial asset to reflect the net amount expected to be collected. Any increase or decrease in the allowance for credit losses related to investments is recognized and reflected as credit losses on investments in the Company’s consolidated statements of income. For all other financial assets, credit loss expense is included in other operating expenses. When the risk of credit loss becomes certain, the allowance for credit losses account will be written off against the financial asset. Under the CECL model, the Company measures all expected credit losses related to relevant financial assets based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. The Company primarily uses a discounted cash flow method and a rating-based method in estimating credit losses at a reporting date for financial assets under the scope of the CECL model. The discounted cash flow method is a valuation method used to estimate the value of a financial asset based on its future cash flows. The Company uses this method to determine the expected credit losses for available-for-sale fixed-maturity securities. In addition, the Company elected not to measure an allowance for credit losses for accrued interest receivable as any uncollectible amount is adjusted to interest income on a monthly basis. For certain financial assets related to insurance business such as reinsurance recoverable and reinsurance receivable for premium refund, the Company uses a rating-based method, which is a modified version of the probability of default method. It requires two key inputs: a) the liquidation rate and b) the amount of loss exposure. The liquidation rate, which is published annually, is the ratio of impaired insurance companies that were eventually liquidated to the group of insurance companies considered by A.M. Best in its study. The amount of loss exposure represents the future billing balance, net of any collateral, spread over the projected periods that are based on the Company’s historical claim payment pattern. The rating-based method measures credit losses by multiplying the future billings grouped by insurance rating over the projected periods by their corresponding liquidation rates by insurance rating. At present, the exposure to credit losses for certain financial assets related to non-insurance business is considered immaterial to the Company’s financial position. Equity Securities. Equity securities represent ownership interests held by the Company in entities for investment purposes. Unrealized holding gains and losses related to equity securities are reported in the consolidated statement of income as net unrealized investment gains and losses. Realized investment gains and losses from sales are recorded on the trade date and are determined using the FIFO method (see Equity Securities in Note 5 -- “Investments”). Short-Term Investments. Short-term investments include certificates of deposit issued by financial institutions with original maturities of more than three months but less than one year at date of acquisition. These short-term investments are carried at cost or amortized cost, which approximates fair value. Limited Partnership Investments. The Company has interests in limited partnerships that are not registered under the United States Securities Act of 1933, as amended, the securities laws of any state or the securities laws of any other jurisdictions. The partnership interests cannot be resold in the public market and any withdrawal is subject to the terms and conditions of the partnership agreement. The Company has no influence over partnership operating and financial policies. The Company uses the equity method to account for the investments with ownership interest greater than five percent. For the investments with ownership interest at five percent or less, the Company uses the net asset value method to estimate the fair value of these investments. The Company generally recognizes its share of the limited partnership’s earnings or losses on a three-month lag. Due to the lag, the Company may record an adjustment to the Company’s most recent share of net asset value when the amount can be reasonably estimated and a significant adverse impact on the net asset value is expected as a result of a major economic event. Net investment income or loss from limited partnerships represents a net aggregate amount of operating results allocated to the Company based on the percentage of ownership interest in each limited partnership. Pursuant to U.S. GAAP, these limited partnerships which are private equity funds must measure their investments at fair value and reflect the unrealized gains and losses in the fair value of their investments on their statement of income. As a result, the carrying value of limited partnership investments at each reporting date approximates their estimated fair value. 52 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Investment in Unconsolidated Joint Venture. The Company has a 90% equity interest in a limited liability company (treated as a joint venture under U.S. GAAP) that owns land for lease or for sale. The joint venture was determined to be a variable interest entity as it lacks sufficient equity to finance its activities without additional subordinated financial support. Despite having a majority equity interest, the Company does not have the power to direct the activities that most significantly impact the economic performance of the joint venture and, accordingly, is not required to consolidate the joint venture as its primary beneficiary. As a result, the Company uses the equity method to account for this investment. When evidence indicates an impairment may occur, the Company evaluates whether a decline in value is other than temporary. Evidence may include continuing operating losses of the joint venture, a declining occupancy rate, a decrease in real estate value, and an oversupply of rental property in close vicinity to the investment property. Should available evidence indicate the recovery of the initial investment is less likely, the Company would compare the carrying value of the investment with its expected residual value and recognize an impairment loss in earnings. Assets Held for Sale. Assets held for sale are valued at the lower of the carrying value or fair value less costs to sell. Assets are classified as held for sale when the following criteria are met: (i) management has the authority and commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the asset has been initiated; (iv) the sale of the asset is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made. In determining the fair value of the assets less costs to sell, the Company primarily relies on the value determined by an independent appraiser. If the estimated fair value less costs to sell is less than the carrying value of the asset, the asset is written down to its estimated fair value less costs to sell and an impairment loss is recognized in the consolidated statement of income. Depreciation is not recorded while assets are classified as held for sale. Real Estate Investments. Real estate investments include real estate and the related assets purchased for investment purposes (see Note 5 -- “Investments”). Real estate and the related depreciable assets are carried at cost, net of accumulated depreciation, which is included in net investment income and allocated over the estimated useful life of the asset using the straight-line method of depreciation. Land is not depreciated. Real estate is evaluated for impairment when events or circumstances indicate the carrying value of the real estate may not be recoverable. Deferred Policy Acquisition Costs. Deferred policy acquisition costs (“DAC”) represent direct costs to acquire insurance contracts and consist of premium taxes and commissions paid to outside agents at the time of collection of the policy premium. DAC also includes a cash bonus and other related expenses in association with the successful transition of policies from Anchor for the replacement policies and issuance of renewal policies under the Company’s own rates and terms. DAC is amortized over the life of the related policy in relation to the amount of gross premiums earned. Ceding commission and related costs paid to United under the quota share reinsurance agreement are also deferred and amortized over the life of the reinsurance agreement. The method followed in computing DAC limits the amount of such deferred costs to their estimated realizable value, which gives effect to the gross premium earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned. DAC is reviewed to determine if it is recoverable from future premium income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimates of total gross premium earned 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 gross premium earned estimates discussed above are revised. Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization, which is included in other operating expenses. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building, 39 years; computer hardware and software, three years; and furniture and office equipment, three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Land is not depreciated. 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. The Company capitalizes both internal and external costs for internally developed software during the application development stage. During the preliminary project and post-implementation stage, internal-use software development costs are expensed as incurred. Capitalized software costs are depreciated on a straight-line basis over the estimated useful life of seven years. 53 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, are reviewed for impairment annually or 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. Intangible Assets. Intangibles consist of the value attributable to the acquired in-place leases and the primary, or anchor, tenant relationships. The value attributable to the anchor tenant relationship represents the economic benefits of having a nationally recognized retailer as the lead tenant, which draws consumer traffic and other tenants to the retail center. These intangibles are amortized to expense over the related lease term. Amortization of the intangibles related to real estate investments is reflected in net investment income in the consolidated statement of income. The Company reviews these intangible assets for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable. In the event the Company determines the carrying value is not recoverable, an impairment loss is recorded in the Company’s consolidated statement of income. Leases. The Company leases office equipment, storage units, and office space from non-affiliates under terms ranging from one month up to ten years. In assessing whether a contract is or contains a lease, the Company first determines whether there is an identified asset in the contract. The Company then determines whether the contract conveys the right to obtain substantially all of the economic benefits from use of the identified asset or the right to direct the use of the identified asset. The Company elects not to record any lease with a term of 12 months or less on the consolidated balance sheet. For such short-term leases, the Company recognizes the lease payments in expense on a straight-line basis over the lease term. If the contract is or contains a lease and the Company has the right to control the use of the identified asset, the right-of-use (“ROU”) asset and the lease liability is measured from the lease component of the contract and recognized on the consolidated balance sheet. In measuring the lease liability, the Company uses its incremental borrowing rate for a loan secured by a similar asset that has a term similar to the lease term to discount the lease payments. The contract is further evaluated to determine the classification of the lease as to whether it is finance or operating. If the lease is a finance lease, the ROU asset is depreciated to depreciation expense over the shorter of the useful life of the asset or the lease term. Interest expense is recorded in connection with the lease liability using the effective interest method. If the lease is an operating lease, the ROU asset is amortized to lease expense on a straight-line basis over the lease term. For the presentation of finance leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with property and equipment, net, and long-term debt, respectively. For the presentation of operating leases on the Company’s consolidated balance sheet, ROU assets are presented as right-of-use assets – operating leases and corresponding lease liabilities are reflected as lease liabilities – operating leases. The Company as a lessor leases its commercial and retail properties, boat slips, and docks to non-affiliates at various terms. If the contract gives the Company’s customer the right to control the use of the identified asset, revenue is recognized on a straight-line basis over the lease term. Initial direct costs incurred by the Company are deferred and amortized on a straight-line basis over the lease term. The Company also records an unbilled receivable, which is the amount by which straight-line revenue exceeds the amount billed in accordance with the lease. Lease Acquisition Costs. Lease acquisition costs represent capitalized costs of finding and acquiring tenants such as leasing commissions, legal, and marketing expenses. The costs are included in other assets on the consolidated balance sheet. The Company amortizes these costs in other operating expenses on a straight-line basis over the term of a lease. Long-Term Debt. Long-term debt includes debt instruments and finance lease obligations. A debt instrument is generally classified as a liability and carried at amortized cost, net of any discount and issuance costs. At issuance, a debt instrument with embedded features such as conversion and redemption options is evaluated to determine whether bifurcation and derivative accounting is applicable. If such instrument is not subject to derivative accounting, it is further evaluated to determine if the Company is required to separately account for the liability and equity components. To determine the carrying values of the liability and equity components at issuance, the Company measures the fair value of a similar liability, including any embedded features other than the conversion option, and assigns such value to the liability component. The liability component’s fair value is then subtracted from the initial proceeds to determine the carrying value of the debt instrument’s equity component, which is included in additional paid-in capital. 54 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Any embedded feature other than the conversion option is evaluated at issuance to determine if it is probable that such embedded feature will be exercised. If the Company concludes that the exercisability of that embedded feature is not probable, the embedded feature is considered to be non- substantive and would not impact the initial measurement and expected life of the debt instrument’s liability component. Transaction costs related to issuing a debt instrument that embodies both liability and equity components are allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs are capitalized and presented as a deduction from the carrying value of the debt. Both debt discount and deferred debt issuance costs are amortized to interest expense over the expected life of the debt instrument using the effective interest method. Equity issuance costs are a reduction to the proceeds allocated to the equity component. Prepaid Share Repurchase Forward Contract. A prepaid share repurchase forward contract is generally a contract that allows the Company to buy from the counterparty a specified number of common shares at a specific time at a given forward price. The Company entered into such a contract and evaluated the characteristics of the forward contract to determine whether it met the definition of a derivative financial instrument pursuant to U.S. GAAP. The Company determined the forward contract is an equity contract on the Company’s common shares requiring physical settlement in common shares of the Company. As such, the transaction is recognized as a component of stockholders’ equity with a charge to additional paid-in capital equal to the prepayment amount, which represents the cash paid to the counterparty. There will be no recognition in earnings for changes in fair value in subsequent periods. 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. Losses and LAE ceded to or recovered from reinsurers are recorded as a reduction to losses and LAE on the consolidated statement of income. Advance Premiums. Premium payments received prior to the policy effective date are recorded as advance premiums. Once the policy is in force, the premiums are recorded as described under “Premium Revenue” below. Premium Receivable. Premium receivable represents the amount of premiums due from policyholders for insurance coverage. Premiums are recorded as receivable in the Company’s general ledger on the effective date of the policy. Premiums are billed to the policyholder 45-60 days in advance of the effective date. The policyholder is given a 30-day grace period after the effective date to pay the premium before the insurance coverage is cancelled. If the policyholder does not pay the premium, the Company can cancel the policy and has no obligation to provide insurance coverage. Unpaid renewal policies are cancelled at midnight on the last day of the period for which the policyholder has paid. The unearned premium liability for the cancelled policy is reversed along with the premium receivable balance. Therefore, there is no unpaid earned premium and credit loss associated with the cancelled policy. However, when the 30-day grace period falls between two reporting periods, the premium receivable balance at the end of the first reporting period may potentially be overstated for not considering the policy that is subsequently cancelled during the following reporting period. To mitigate the overstatement issue, the Company estimates the monetary impact from the subsequent policy cancellation by multiplying the historical cancellation rate to the premium receivable balance at the reporting date. The premium receivable balance, together with the unearned premium liability, is then reduced by the computed amount. At December 31, 2020 and 2019, allowances for uncollectible premiums were $2,053 and $528, respectively. 55 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Reinsurance. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions. Amounts recoverable from reinsurers are estimated in a manner consistent with the applicable reinsurance contract or contracts. 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 gross premiums earned. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers. One of the Company’s current reinsurance contracts contains retrospective provisions including terms and conditions that adjust premiums based on the loss experience under the contracts. In such cases, a with-and-without method is used to estimate the asset or liability amount to be recognized at each reporting date. The amount of the estimate is the difference between the net contract costs before and after the loss experience under the contract. Estimates related to premium adjustments are recognized in ceded premiums earned. These estimates are reviewed monthly based on the loss experience to date and as adjustments become necessary. Such adjustments are reflected in the Company’s current operations and recorded in other assets until received upon the expiration of the contracts. The Company receives ceding commissions from ceding gross written premiums to a third-party reinsurer under one flood quota share reinsurance contract. The ceding commissions represent the reimbursement of the Company’s policy acquisition, underwriting and other operating expenses. Ceding commissions received cover a portion of premium taxes and agent commissions capitalized by the Company and a portion of non- capitalized acquisition costs and other underwriting expenses. Ceding commissions are recognized as income on a pro-rata basis over the terms of the policies reinsured, the amount of which is included in policy acquisition and other underwriting expenses in the consolidated statement of income. The unearned portion of ceding commissions that represents recovery of capitalized acquisition costs is classified as a reduction of DAC whereas the remaining unearned balance is classified as deferred revenue in other liabilities. Premium Revenue. Premium revenue is earned on a daily pro-rata basis over the term of the policies and is included in gross premiums earned. Unearned premiums represent the portion of the premiums attributable to the unexpired policy term. The Company reviews its policy detail and establishes an allowance for any amount outstanding for more than 90 days. 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. Policy fees are recognized ratably over the policy coverage period. Insurance Guaranty Association Assessments. The Company’s insurance subsidiaries may be assessed by state associations such as the Florida 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. An insurer is generally permitted 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 other operating expenses. Income Taxes. The Company files consolidated federal and state income tax returns and allocates taxes among its wholly owned subsidiaries in accordance with a written tax-allocation agreement. The Company accounts for income taxes in accordance with U.S. GAAP, resulting in two components of income tax expense and benefit: current and deferred. Current income tax expense and benefit 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. 56 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Deferred income tax expense and benefit 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, 2020, management is not aware of any uncertain tax positions that would have a material effect on the Company’s consolidated financial statements. Fair Value of Financial Instruments. The carrying amounts for the Company’s cash and cash equivalents approximate their fair values at December 31, 2020 and 2019. Fair values for securities or financial instruments are based on the framework for measuring fair value established by U.S. GAAP (see Note 7 -- “Fair Value Measurements”). Stock-Based Compensation. The Company accounts for stock-based compensation under the fair value recognition provisions of U.S. GAAP which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors based on estimated fair values. In accordance with U.S. GAAP, the fair value of stock-based awards is generally recognized as compensation expense over the requisite service period, which is defined as the period during which a recipient is required to provide service in exchange for an award. Forfeitures of the Company’s stock- based awards are accounted for as they occur. The Company uses a straight-line attribution method for all grants that include only a service condition. The Company’s outstanding stock-based awards include stock options and restricted stock awards with service conditions. Compensation expense related to all awards is included in general and administrative personnel expenses. The Company receives a windfall tax benefit for certain stock option exercises and for restricted stock awards if these awards vest at a higher value than the value used to recognize compensation expense. In the event the restricted stock awards vest at a lower value than the value used to recognize compensation expense, the Company experiences a tax shortfall. The Company recognizes tax windfalls and shortfalls in the consolidated statement of income. 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. In addition, the intrinsic value of restricted stock declines when the Company experiences operating losses. As a result, holders of the Company’s restricted stock are allocated a proportional share of net income and loss determined by dividing total weighted-average shares of restricted stock by the sum of total weighted-average common shares and shares of restricted stock (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. During loss periods, common stock equivalents such as stock options and convertible debt are excluded from the calculation of diluted loss per share, as the inclusion would have an anti-dilutive effect. See Note 19 -- “Earnings Per Share” for potentially dilutive securities at December 31, 2020, 2019 and 2018. Statutory Accounting Practices. The Company’s U.S. insurance subsidiaries comply with statutory accounting practices prescribed by the National Association of Insurance Commissioners. There are no state prescribed or permitted practices that have been adopted by the Company’s U.S. subsidiaries. In addition, the Company’s Bermuda insurance subsidiary prepares and files financial statements in accordance with the prescribed regulatory accounting practices of the Bermuda Monetary Authority. Reclassification. Certain prior year amounts have been reclassified to conform to the current year presentation. ROU assets and corresponding lease liabilities - operating leases were reclassified out of other assets and other liabilities, respectively, at December 31, 2019. Note 3 -- Recent Accounting Pronouncements Accounting Standards Update No. 2020-01. In January 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-01 (“ASU 2020-01”) Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This update, among others, clarifies the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 when there is a change in level of ownership or degree of influence. ASU 2020-01 is effective for the Company beginning with the first quarter of 2021 and will be applied prospectively. Early adoption is permitted. This guidance will not have a material impact on the Company’s consolidated financial statements. 57 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Accounting Standards Update No. 2020-06. In August 2020, the FASB issued Accounting Standards Update No. 2020-06 (“ASU 2020- 06”) Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815- 40). ASU 2020-06 removes certain bifurcation models for convertible debt instruments and convertible preferred stock. Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. The amendments also remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amend the derivative scope exception guidance for contracts in an entity’s own equity. In addition, the amendments expand disclosure requirements for convertible instruments and simplify areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments. ASU 2020-06 is effective for public companies beginning with the first quarter of 2022 and shall be applied prospectively. Early adoption is permitted. The Company will early adopt this update in the first quarter of 2021 using the modified retrospective method. The adoption of this update will increase long-term debt by $4,000 and simultaneously decrease beginning retained income and deferred income tax liabilities by $3,019 and $981, respectively. Accounting Standards Update No. 2020-08. In October 2020, the FASB issued Accounting Standards Update No. 2020-08 (“ASU 2020- 08”) Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. ASU 2020-08 states that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of ASC 310-20-35-33 for each reporting period. Securities within the scope are those that have explicit, noncontingent call options that are callable at fixed prices and on preset dates at prices less than the amortized cost basis of the security. ASC 310-20-35-33 requires that for each reporting period, to the extent the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess should be amortized to the next call date, unless the guidance in ASC 310-20- 35-26 applies. ASU 2020-08 is effective for the Company beginning with the first quarter of 2021 and will be applied prospectively. Early adoption is not permitted. This guidance will not have a material impact on the Company’s consolidated financial statements. Note 4 -- Cash, Cash Equivalents, and Restricted Cash The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows. Cash and cash equivalents Restricted cash Total December 31, 2020 2019 $ $ 431,341 $ 2,400 433,741 $ 229,218 700 229,918 At December 31, 2020, $317,420 or 73.6% of the Company’s cash and cash equivalents were deposited at six national banks and included $141,481 in two custodial accounts. At December 31, 2019, $126,347 or 55.1% of the Company’s cash and cash equivalents were deposited at three national banks and included $12,188 in two custodial accounts. At December 31, 2020 and 2019, the Company’s cash deposits at any one bank generally exceed the Federal Deposit Insurance Corporation’s $250 coverage limit for insured deposit accounts. 58 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 5 -- Investments a) Available-for-Sale Fixed-Maturity Securities The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At December 31, 2020 and 2019, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows: As of December 31, 2020 U.S. Treasury and U.S. government agencies Corporate bonds State, municipalities, and political subdivisions Exchange-traded debt Redeemable preferred stock Total As of December 31, 2019 U.S. Treasury and U.S. government agencies Corporate bonds State, municipalities, and political subdivisions Exchange-traded debt Redeemable preferred stock Total Cost or Amortized Cost Allowance for Credit Loss Gross Gross Unrealized Unrealized Gain Loss Estimated Fair Value $ $ $ $ 13,759 $ 49,957 3,023 3,491 35 70,265 $ 26,220 157,155 7,763 8,698 118 199,954 — $ (579) — (9) — (588) $ 210 $ 1,570 60 230 — 2,070 $ $ 78 $ 2,212 149 462 5 2,906 $ $ (1) $ (17) (2) (5) — (25) $ (3) $ (3) — (15) — (21) $ 13,968 50,931 3,081 3,707 35 71,722 26,295 159,364 7,912 9,145 123 202,839 Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities at December 31, 2020 and 2019 are as follows: 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 December 31, 2020 2019 Cost or Amortized Cost Estimated Fair Value Cost or Amortized Cost Estimated Fair Value $ $ 21,122 $ 43,561 2,731 2,851 70,265 $ 21,258 $ 44,339 3,060 3,065 71,722 $ 63,135 $ 125,833 6,896 4,090 199,954 $ 63,429 127,660 7,350 4,400 202,839 Sales of Available-for-Sale Fixed-Maturity Securities Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the years ended December 31, 2020, 2019 and 2018 were as follows: Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2018 $ $ $ Proceeds 81,433 $ 7,947 $ 81,809 $ Gross Realized Gains Gross Realized Losses 1,773 $ 221 $ 1,293 $ (610) (3) (570) 59 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities Securities with gross unrealized loss positions at December 31, 2020 and 2019, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows: As of December 31, 2020 U.S. Treasury and U.S. government agencies Corporate bonds States, municipalities, and political subdivisions Exchange-traded debt Total available-for-sale securities As of December 31, 2019 U.S. Treasury and U.S. government agencies Corporate bonds Exchange-traded debt Total available-for-sale securities Less Than Twelve Months Estimated Gross Fair Unrealized Value Loss Twelve Months or Longer Estimated Gross Fair Unrealized Value Loss Total Gross Unrealized Loss Estimated Fair Value (1) $ (17) (2) (5) (25) $ 1,337 $ 3,085 1,268 336 6,026 $ — $ — — — — $ — $ — — — — $ (1) $ (17) (2) (5) (25) $ 1,337 3,085 1,268 336 6,026 Less Than Twelve Months Estimated Gross Fair Unrealized Value Loss Twelve Months or Longer Estimated Gross Fair Unrealized Value Loss Total Gross Unrealized Loss Estimated Fair Value (3) $ (3) (15) (21) $ 2,292 $ 4,597 345 7,234 $ — $ — — — $ — $ — — — $ (3) $ (3) (15) (21) $ 2,292 4,597 345 7,234 $ $ $ $ At December 31, 2020 and 2019, there were twelve and eight securities, respectively, in an unrealized loss position. Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities The Company regularly reviews its individual investment securities for credit impairment. The Company considers various factors in determining whether a credit loss exists for each individual security, including- • • • • • the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; the extent to which the market value of the security has been below its cost or amortized cost; general market conditions and industry or sector specific factors and other qualitative factors; nonpayment by the issuer of its contractually obligated interest and principal payments; and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs. The table below summarized the activity in the allowance for credit losses of available-for-sale fixed-maturity securities for the year ended on December 31, 2020: Balance at January 1 Credit loss expense Reductions for securities sold Balance at December 31 2020 — 611 (23) 588 $ $ For the year ended December 31, 2020, the Company recognized $611 of credit loss expense on two fixed-maturity securities in the consolidated statement of income compared with $289 of credit-related impairment loss on one fixed-maturity security for the year ended December 31, 2019. The Company recognized $80 of non-credit related impairment loss pertaining to one fixed-maturity security for the year ended December 31, 2018. At December 31, 2019 and 2018, the Company had cumulative credit loss balances of $289 and $0, respectively. 60 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) b) Equity Securities The Company holds investments in equity securities measured at fair values which are readily determinable. At December 31, 2020 and 2019, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows: December 31, 2020 December 31, 2019 Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value $ $ 47,029 $ 31,863 $ 4,649 $ 3,652 $ (548) $ (230) $ 51,130 35,285 The table below presents the portion of unrealized gains and losses in the Company’s consolidated statements of income related to equity securities still held. Net gains (losses) recognized Exclude: Net realized (losses) gains recognized for securities sold Net unrealized gains (losses) recognized Years Ended December 31, 2019 2020 2018 $ 435 $ 7,424 $ (4,811) (244) 679 $ (526) 7,950 $ 5,391 (10,202) $ Sales of Equity Securities Proceeds received, and the gross realized gains and losses from sales of equity securities, for the years ended December 31, 2020, 2019 and 2018 were as follows: Year ended December 31, 2020 Year ended December 31, 2019 Year ended December 31, 2018 Proceeds $ $ $ 47,312 $ 37,669 $ 66,439 $ Gross Realized Gains Gross Realized Losses 2,868 $ 2,448 $ 7,324 $ (3,112) (2,974) (1,933) 61 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) c) Limited Partnership Investments The Company has interests in limited partnerships that are not registered or readily tradeable on a securities exchange. These partnerships are private equity funds managed by general partners who make decisions with regard to financial policies and operations. As such, the Company is not the primary beneficiary and does not consolidate these partnerships. The following table provides information related to the Company’s investments in limited partnerships: Investment Strategy Primarily in senior secured loans and, to a limited extent, in other debt and equity securities of private U.S. lower- middle-market companies. (b)(c)(e) Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e) High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g) Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i) Value-oriented investments in mature real estate private equity funds and portfolios globally. (b)(j) Total Carrying Value December 31, 2020 Unfunded Balance (%) (a) Carrying Value December 31, 2019 Unfunded Balance (%) (a) $ 8,131 $ 2,085 15.37 $ 9,659 $ 2,085 15.37 5,512 — 1.76 5,985 — 1.76 6,513 1,401 0.18 9,188 1,391 0.18 4,262 — 0.47 1,602 3,106 0.47 3,273 27,691 $ 6,818 10,304 $ 2.24 $ 1,912 28,346 $ 8,548 15,130 2.24 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Represents the Company’s percentage investment in the fund at each balance sheet date. Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated. Expected to have a ten-year term. Although the capital commitment has expired, follow-on investments and pending commitments may require additional fundings. Expected to have a three-year term from June 30, 2018. Although the capital commitment period has ended, the general partner could still request an additional funding of approximately $843 under certain circumstances. At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods. Expected to have a ten-year term. The capital commitment period has expired but the general partner may request additional funding for follow-on investment. With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods. Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners. The capital commitment has expired in December 2020. Expected to have an eight-year term from November 27, 2019. The following is the summary of aggregated unaudited financial information of limited partnerships included in the investment strategy table above, which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. The financial statements of these limited partnerships are audited annually. Operating results: Total income Total expenses Net (loss) income 2020 Years Ended December 31, 2019 2018 $ $ (1,432,907) $ 133,281 (1,566,188) $ 27,171 $ 139,252 (112,081) $ 1,821,935 146,079 1,675,856 62 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Balance sheet: Total assets Total liabilities December 31, 2020 2019 $ $ 5,529,199 $ 612,048 $ 6,850,913 549,562 For the year ended December 31, 2020, the Company recognized net investment loss of $1,595 compared with the investment income of $1,176 and $4,430 for the years ended December 31, 2019 and 2018, respectively, for these investments. At December 31, 2020 and 2019, the Company’s net cumulative contributed capital to the partnerships existing at each respective balance sheet date totaled $29,272 and $27,117, respectively, and the Company’s maximum exposure to loss aggregated $27,691 and $28,346, respectively. During the year ended December 31, 2020, the Company received in cash a return on investment of $1,215 and a return of capital of $2,086 compared with a return on investment of $4,176 and a return of capital of $2,121 during the year ended December 31, 2019. During the year ended December 31, 2018, the Company received total cash distributions of $2,503, representing $2,345 of return on investment and $158 of returned capital. d) Investment in Unconsolidated Joint Venture Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At December 31, 2020 and 2019, the Company’s maximum exposure to loss relating to this variable interest entity was $705 and $762, respectively, representing the carrying value of the investment. At December 31, 2020, 2019 and 2018, there was no undistributed income from this equity method investment. For the years ended December 31, 2020 and 2019, the Company did not receive any cash distributions. For the year ended December 31, 2018, the Company received a cash distribution of $763, representing a combined distribution of $68 in earnings and $695 in capital. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions: Operating results: Total revenues Total expenses Net (loss) income The Company’s share of net (loss) income* 2020 Years Ended December 31, 2019 2018 $ $ $ — $ 64 (64) $ (57) $ 2 $ 93 (91) $ (83) $ 438 100 338 304 * Included in net investment income in the Company’s consolidated statements of income. Balance sheet: Property and equipment, net Cash Other Total assets Other liabilities Members’ capital Total liabilities and members’ capital Investment in unconsolidated joint venture, at equity** ** Includes the 90% share of FMKT Mel JV’s operating results. 63 December 31, 2020 2019 $ $ $ $ $ 705 $ 70 13 788 $ 5 $ 783 788 $ 705 $ 741 102 4 847 — 847 847 762 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) e) Assets Held for Sale On April 9, 2020, Greenleaf Capital, LLC decided to offer for sale its investment property in Riverview, Florida. The proceeds from the sale are expected to exceed the property’s carrying value of $4,519 and, accordingly, no impairment loss was recognized on the classification of this property as held for sale. Although this property has drawn interest from several potential buyers since the listing, the Company has yet to receive an offer with acceptable terms. The Company will continue to market the property but can no longer reasonably assume a sale will occur within a year. Accordingly, in December 2020 the property was reclassified back to real estate investments at its carrying value before it was classified as held for sale. The carrying value of $4,748, including additional improvement costs of $229, was then adjusted for catch-up depreciation expense of $68, which is included in net investment income in the Company’s consolidated statement of income. f) Real Estate Investments Real estate investments include land, buildings with office and retail space for lease, outparcels, and marinas. Real estate investments consist of the following as of December 31, 2020 and 2019: Land Land improvements Building Tenant and leasehold improvements Other Total, at cost Less: accumulated depreciation and amortization Real estate investments December 31, 2020 2019 39,069 $ 11,917 29,115 1,487 1,465 83,053 (8,581) 74,472 $ 39,511 11,907 24,086 1,487 3,489 80,480 (6,717) 73,763 $ $ In July 2020, a portion of undeveloped land with a carrying value of $443 was acquired by the Florida Department of Transportation (“FDOT”) as part of the agreement described in Note 9 -- “Property and Equipment, Net.” Depreciation and amortization expense related to real estate investments was $1,864, $1,782 and $1,536, respectively, for the years ended December 31, 2020, 2019 and 2018 and was included in net investment income on the consolidated statements of income. g) Net Investment Income Net investment income (loss), by source, is summarized as follows: Available-for-sale fixed-maturity securities Equity securities Investment expense Limited partnership investments Real estate investments (Loss) income from unconsolidated joint venture Cash and cash equivalents Short-term investments Net investment income 2020 Years Ended December 31, 2019 2018 4,252 $ 1,388 (497) (1,595) (620) (57) 1,691 2 4,564 $ 6,506 $ 1,333 (465) 1,176 (211) (83) 4,970 416 13,642 $ 5,097 2,131 (581) 4,430 340 304 3,485 1,375 16,581 $ $ 64 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 6 -- Comprehensive Income (Loss) Comprehensive income (loss) includes net income (loss) and other comprehensive income or loss, which for the Company includes changes in unrealized gains or losses of investments carried at fair value and changes to the credit losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows: Unrealized gain arising during the period Credit losses on investments Call and repayment gains charged to investment income Reclassification adjustment for realized gains Total other comprehensive loss Unrealized gain arising during the period Other-than-temporary impairment loss Call and repayment gains charged to investment income Reclassification adjustment for realized gains Total other comprehensive income Unrealized loss arising during the period Other-than-temporary impairment loss Call and repayment losses charged to investment income Reclassification adjustment for realized gains Total other comprehensive loss $ $ $ $ $ $ Year Ended December 31, 2020 Income Tax Effect Net of Tax Before Tax 86 $ 611 (374) (1,163) (840) $ 21 $ 150 (92) (285) (206) $ 65 461 (282) (878) (634) Year Ended December 31, 2019 Income Tax Effect Net of Tax Before Tax 4,902 $ 289 (141) (218) 4,832 $ 1,219 $ 71 (35) (54) 1,201 $ 3,683 218 (106) (164) 3,631 Year Ended December 31, 2018 Income Tax Effect Net of Tax Before Tax (3,137) $ 80 (18) (723) (3,798) $ (795) $ 20 (5) (183) (963) $ (2,342) 60 (13) (540) (2,835) Note 7 -- Fair Value Measurements The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 Unadjusted quoted prices in active markets for identical assets. Level 2 Other inputs that are observable for the assets, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset. Level 3 Inputs that are unobservable. Valuation Methodology Cash and cash equivalents Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds. Restricted cash Restricted cash represents cash held by state authorities and the carrying value approximates fair value. 65 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Short-term investments Short-term investments consist of certificates of deposit and zero-coupon commercial paper with maturities of 91 to 365 days. Due to their short maturity, the carrying value approximates fair value. Fixed-maturity and equity securities Estimated fair values are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not available, fair values are measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies, and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values. Revolving credit facility The Company’s revolving credit facility is a variable-rate loan. The interest rate is periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, its carrying value approximates fair value. Long-term debt The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values: 4.25% Convertible Senior Notes 3.90% Promissory Note 4.00% Promissory Note 3.75% Callable Promissory Note 4.55% Promissory Note 3.95% Promissory Note Maturity Date Valuation Methodology 2037 Quoted price 2032 Discounted cash flow method/Level 3 inputs 2031 Discounted cash flow method/Level 3 inputs 2036 Discounted cash flow method/Level 3 inputs 2036 Discounted cash flow method/Level 3 inputs 2020 Discounted cash flow method/Level 3 inputs 66 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Assets Measured and Recorded at Estimated Fair Value on a Recurring Basis The following tables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The tables indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of December 31, 2020 and 2019: As of December 31, 2020 Financial Assets: Cash and cash equivalents Restricted cash Fixed-maturity securities: U.S. Treasury and U.S. government agencies Corporate bonds States, municipalities, and political subdivisions Exchange-traded debt Redeemable preferred stock Total available-for-sale securities Equity securities As of December 31, 2019 Financial Assets: Cash and cash equivalents Restricted cash Short-term investments Fixed-maturity securities: U.S. Treasury and U.S. government agencies Corporate bonds States, municipalities, and political subdivisions Exchange-traded debt Redeemable preferred stock Total available-for-sale securities Equity securities $ $ $ $ $ $ $ $ $ $ $ 67 (Level 1) Fair Value Measurements Using (Level 2) (Level 3) 431,341 $ 2,400 $ 11,236 $ 50,931 — 3,707 35 65,909 $ 51,130 $ — $ — $ 2,732 $ — 3,081 — — 5,813 $ — $ (Level 1) Fair Value Measurements Using (Level 2) (Level 3) 229,218 $ 700 $ 491 $ 25,294 $ 159,364 — 9,145 123 193,926 $ 35,285 $ — $ — $ — $ 1,001 $ — 7,912 — — 8,913 $ — $ Total 431,341 2,400 13,968 50,931 3,081 3,707 35 71,722 51,130 Total 229,218 700 491 26,295 159,364 7,912 9,145 123 202,839 35,285 — $ — $ — $ — — — — — $ — $ — $ — $ — $ — $ — — — — — $ — $ HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Assets and Liabilities Carried at Other Than Fair Value The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of December 31, 2020 and 2019: As of December 31, 2020 Financial Liabilities: Revolving credit facility Long-term debt: 4.25% Convertible senior notes 3.90% Promissory note 3.75% Callable promissory note 4.55% Promissory note Total long-term debt As of December 31, 2019 Financial Liabilities: Revolving credit facility Long-term debt: 4.25% Convertible senior notes 3.95% Promissory note 4.00% Promissory note 3.75% Callable promissory note 4.55% Promissory note Total long-term debt $ $ $ $ $ $ $ Carrying Value (Level 1) Fair Value Measurements Using (Level 2) (Level 3) Estimated Fair Value 23,750 $ — $ 23,750 $ — $ 23,750 133,964 $ 9,617 7,502 5,385 156,468 $ Carrying Value — $ — — — — $ 147,236 $ — — — 147,236 $ — $ 10,044 7,747 5,809 23,600 $ 147,236 10,044 7,747 5,809 170,836 Fair Value Measurements Using (Level 2) (Level 3) (Level 1) Estimated Fair Value 9,750 $ — $ 9,750 $ — $ 9,750 134,075 $ 8,875 $ 7,237 7,837 5,611 163,635 $ — $ — $ — — — — $ 147,375 $ — $ — — — 147,375 $ — $ 8,887 $ 7,409 7,861 5,802 29,959 $ 147,375 8,887 7,409 7,861 5,802 177,334 Note 8 -- Deferred Policy Acquisition Costs The following table summarizes the activity with respect to deferred policy acquisition costs: Beginning balance Policy acquisition costs deferred Amortization Ending balance December 31, 2020 2019 21,663 $ 71,320 (49,125) 43,858 $ 16,507 42,302 (37,146) 21,663 $ $ The amount of policy acquisition costs amortized and included in policy acquisition and other underwriting expenses for the years ended December 31, 2020, 2019 and 2018 was $49,125, $37,146 and $35,204, respectively. In connection with the transition of insurance policies from Anchor described in Note 1 -- “Nature of Operations,” the Company incurred $3,023 of direct costs, consisting of a bonus to Anchor of $2,898 and other related expenses of $125. The Company agreed to pay Anchor a cash bonus of $50 per $1,000 of premium for all policies in force at June 1, 2020 that were in compliance with the conditions stated in the agreement. Furthermore, as described in Note 1 -- “Nature of Operations” with regard to the quota share agreement, the Company incurred $15,557 of direct costs attributable to the assumption of insurance policies from United. 68 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 9 -- Property and Equipment, Net Property and equipment, net consists of the following: Land Building Computer hardware and software Office furniture and equipment Tenant and leasehold improvements Other Total, at cost Less: accumulated depreciation and amortization Property and equipment, net December 31, 2020 2019 2,134 $ 3,997 11,072 2,255 620 1,267 21,345 (8,578) 12,767 $ 1,642 8,101 6,770 2,154 3,388 3,377 25,432 (10,734) 14,698 $ $ Depreciation and amortization expense under property and equipment was $1,854, $1,550 and $1,370, respectively, for the years ended December 31, 2020, 2019 and 2018. On April 2, 2020, Greenleaf Capital, LLC entered into a purchase and sale agreement with Tampa-Coconut Palms Office Building Exchange, LLC to acquire an office building in Tampa, Florida for a purchase price of $4,000 in cash. The building is currently used as the Company’s secondary site in the Tampa Bay area. The transaction was completed on May 18, 2020 and accounted for as an asset acquisition. On July 24, 2020, the FDOT exercised the power of eminent domain under the Florida Constitution in order to acquire for a highway expansion project the property in Tampa, Florida where the Company’s headquarters is located for compensation of $44,000, net of $3,500 in legal and related expenses. Under the terms of the agreement, the FDOT assumed all contracts associated with this property, including the leases with existing tenants. In addition, the Company agreed to donate a small portion of a separate tract of nearby undeveloped land it owned to the FDOT for the same expansion project. The Company will have no later than July 24, 2023 to vacate the property. In connection with this transaction, the Company recognized a gain from involuntary conversion of $36,969. In addition, the Company used a portion of the proceeds to repay the 4% Promissory Note as described in Note 13 -- “Long-Term Debt.” Note 10 -- Intangible Assets, Net The Company’s intangible assets, net consist of the following: Anchor tenant relationships* In-place leases Total, at cost Less: accumulated amortization Intangible assets, net December 31, 2020 2019 1,761 $ 4,215 5,976 (2,408) 3,568 $ 1,761 4,215 5,976 (1,784) 4,192 $ $ * An anchor tenant is a tenant that attracts more customers than other tenants. For the years ended December 31, 2020, 2019 and 2018, amortization expense associated with intangible assets was $624, $608 and $604, respectively. The remaining weighted-average amortization period as of December 31, 2020 was 13.3 years and 10.0 years for anchor tenant relationships and in-place leases, respectively, or a combined weighted average of 11.3 years. 69 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Amortization expense for intangible assets after December 31, 2020 is as follows: Year 2021 2022 2023 2024 2025 Thereafter Total Amount 519 445 337 333 333 1,601 3,568 $ $ Note 11 -- Other Assets The following table summarizes the Company’s other assets: Benefits receivable related to retrospective reinsurance contracts Prepaid expenses Deposits Lease acquisition costs, net Other Total other assets December 31, 2020 2019 $ $ 10,920 $ 2,365 445 453 8,428 22,611 $ 9,480 2,107 1,678 566 2,765 16,596 Note 12 -- Revolving Credit Facility The Company has a secured revolving credit agreement (“Credit Agreement”) with Fifth Third Bank that initially expires on December 5, 2021. The Credit Agreement provides the Company with borrowing capacity of up to $65,000 and bears interest at an annual rate equal to monthly-determined LIBOR plus a margin based on the type of collateral used to secure each borrowing. The interest payment is due quarterly in arrears on January 1, April 1, July 1, and October 1. The Credit Agreement contains affirmative and negative covenants as well as customary events of defaults. Under the terms of the Credit Agreement, the Company must comply with certain financial and non-financial covenants and agree to pay a fee equal to the product of the unused line fee rate and the average of the daily unused available credit balances. The unused line fee rate is determined monthly based on the average daily deposit balances. During 2020, the Company borrowed a net additional amount of $14,000 for general business purposes. For the years ended December 31, 2020 and 2019, interest expense was $501 and $452, respectively, including $158 and $157 of amortization of issuance costs, respectively. At December 31, 2020, the Company was in compliance with all required covenants, and there were $23,750 of borrowings outstanding. On January 22, 2021, the expiry date of the Credit Agreement was extended to December 31, 2023 and new collateral specified in the amended Credit Agreement was added in lieu of the Company’s headquarters property which was sold in 2020. 70 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 13 -- Long-Term Debt The following table summarizes the Company’s long-term debt: 4.25% Convertible Senior Notes, due March 1, 2037 3.95% Promissory note, due through February 17, 2020 4.00% Promissory note, due through February 1, 2031 3.90% Promissory note, due through April 1, 2032 3.75% Promissory note, due through September 1, 2036 4.55% Promissory note, due through August 1, 2036 Finance lease liabilities, due through August 15, 2023 Total principal amount Less: unamortized discount and issuance costs Total long-term debt December 31, 2020 2019 139,200 $ — — 9,777 7,607 5,470 43 162,097 (5,586) 156,511 $ 143,750 8,881 7,345 — 7,955 5,704 60 173,695 (10,000) 163,695 $ $ The following table summarizes future maturities of long-term debt as of December 31, 2020, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date: Due in 12 months following December 31, 2020 2021 2022 2023 2024 Thereafter Total $ $ 970 140,207 1,041 1,074 1,117 17,688 162,097 Information with respect to interest expense related to long-term debt is as follows: Interest Expense: Contractual interest Non-cash expense (a) Capitalized interest (b) Total (a) (b) Represents amortization of debt discount and issuance costs. Interest was capitalized for construction projects. Convertible Senior Notes 4.25% Convertible Senior Notes 2020 Years Ended December 31, 2019 2018 $ $ 7,083 $ 4,247 (97) 11,233 $ 8,061 $ 4,845 (303) 12,603 $ 10,740 7,487 (131) 18,096 The Company has 4.25% Convertible Senior Notes that mature March 1, 2037. The cash interest is payable semiannually in arrears on March 1 and September 1 of each year. The Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. These Convertible Senior Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Convertible Senior Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in the indenture. These Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. 71 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Embedded Conversion Feature The conversion feature of these Convertible Senior Notes is subject to conversion rate adjustments upon the occurrence of specified events (including payment of dividends above a specified amount) but will not be adjusted for any accrued and unpaid interest. When the Company’s cash dividends on common stock exceed $0.35 per share, it will result in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of December 31, 2020, the conversion rate of the Company’s 4.25% Convertible Notes was 16.43 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.85 per share. The holders of the Convertible Senior Notes may convert all or a portion of their Convertible Senior Notes during specified periods as follows: (1) during any calendar quarter commencing after the calendar quarter ending on the dates specified in the indenture, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten consecutive trading-day period in which the trading price per $1 principal amount of the Convertible Senior Notes is less than 98% of the product of the last reported sale price and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; or (4) at any time on or after the dates specified in the indenture. The note holders who elect to convert their Convertible Senior Notes in connection with a fundamental change as described in the indentures will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has options to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of December 31, 2020, none of the conditions allowing the holders of the Convertible Senior Notes to convert had been met. The Company determined that the Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument but rather is required to be separately accounted for in equity because the Company may elect to settle the conversion option entirely or partially in cash. At issuance, the Company accounted for the equity component of the embedded conversion feature as a reduction in the carrying amount of the debt and an increase in additional paid-in capital. Embedded Redemption Feature – Fundamental Change The note holders have the right to require the Company to repurchase for cash all or any portion of the Convertible Senior Notes at par prior to the maturity date should any of the fundamental change events described in the indenture occur. The Company concluded that this embedded redemption feature is not a derivative financial instrument and that it is not probable at issuance that any of the specified fundamental change events will occur. Therefore, this embedded redemption feature is not substantive and will not affect the expected life of the liability component. Embedded Redemption Feature – Put Option of the Note Holder At the option of the holders of the Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the Convertible Senior Notes at par on March 1, 2022, March 1, 2027 or March 1, 2032. The Company concluded that this embedded feature is not a derivative financial instrument. In addition, based on economic factors at the time when the Convertible Senior Notes were issued, the Company determined it is probable that the note holders will exercise this option. Thus, the Company amortizes the liability component and related issuance costs associated with the Convertible Senior Notes over the period from March 3, 2017 to March 1, 2022. The effective interest rate for the Convertible Senior Notes, taking into account both cash and non-cash components, approximates 7.6%. Had a 20-year term been used for the amortization of the liability component and issuance costs, the annual effective interest rate charged to earnings would have decreased to approximately 5.4%. As of December 31, 2020, the remaining amortization period of the debt discount was expected to be 1.17 years. 72 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) The following table summarizes information regarding the equity and liability components of the Convertible Senior Notes: Principal amount Unamortized discount Liability component – net carrying value before issuance costs Equity component – conversion, net of offering costs December 31, 2020 2019 139,200 $ (4,083) 135,117 $ 15,151 $ 143,750 (7,545) 136,205 15,151 $ $ $ Promissory Notes 3.95% Promissory Note In February 2020, the Company repaid its 3.95% Promissory Note for $8,891 including principal and unpaid interest payable at maturity date. The note was collateralized by a retail shopping center in Melbourne, Florida. 3.90% Promissory Note On February 28, 2020, the Company entered into a loan agreement with American Equity Investment Life Insurance Company for gross proceeds of $10,000. The agreement bears interest at a fixed rate of 3.90% and is secured by the Company’s shopping center property in Melbourne, Florida and the assignment of associated lease agreements. Approximately $60 of principal and interest is payable in 143 monthly installments beginning April 1, 2020 plus a final balloon payment of $5,007 including principal and unpaid interest payable on March 1, 2032. The promissory note may be repaid in full at any time as long as the Company provides at least 60 days’ written notice and pays a prepayment premium and processing fee. The proceeds were primarily used to repay the 3.95% Promissory Note due in February 2020. On March 19, 2020, the loan agreement was modified to revise the due dates for the first and last installments to May 1, 2020 and April 1, 2032, respectively, while other terms and conditions remain intact. 3.75% Callable Promissory Note The loan bears interest at a fixed annual rate of 3.75% and is collateralized by a retail shopping center in Sorrento, Florida and the lease agreements associated with this property. Approximately $53 of principal and interest is payable in 240 monthly installments. The promissory note may be repaid in full as long as the Company provides at least 60 days’ written notice and pays a prepayment premium as specified in the loan agreement. In addition, the lender may require full payment of the outstanding principal and unpaid interest on September 1, 2031 provided a written notice of its intention to call the note is given at least six months in advance. 4.00% Promissory Note On July 29, 2020, the Company made an early repayment of its 4.00% Promissory Note totaling $7,062 in principal plus accrued interest. As a result, the Company incurred $98 of loss on extinguishment of debt. The note was collateralized by the Company’s Tampa, Florida headquarters which was acquired by the FDOT in the eminent domain proceedings as described in Note 9 -- “Property and Equipment, Net.” 4.55% Promissory Note On July 6, 2018, Century Park Holdings, LLC, a subsidiary of the Company, entered into an 18-year loan agreement for $6,000 secured by commercial real estate in Tampa, Florida and an associated lease agreement. The loan bears interest at a fixed annual rate of 4.55%. Approximately $41 of principal and interest is payable in 216 monthly installments. The promissory note may be repaid in full or in part after September 1, 2020 as long as the Company provides at least 30 days’ written notice and pays a prepayment consideration as specified in the loan agreement. 73 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 14 -- Reinsurance The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30% ceding commission on ceded premiums written. The reinsurance premiums under one multi-year flood catastrophe excess of loss reinsurance contract are generally determined on a quarterly basis based on the premiums associated with the applicable flood total insured value in force on the last day of the preceding quarter. The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions. The impact of the reinsurance treaties on premiums written and earned is as follows: Premiums Written: Direct Assumed Gross written Ceded Net premiums written Premiums Earned: Direct Assumed Gross earned Ceded Net premiums earned 2020 Years Ended December 31, 2019 2018 $ $ $ $ 459,615 $ 44,539 504,154 (153,458) 350,696 $ 412,999 $ 2,919 415,918 (153,458) 262,460 $ 360,525 $ 4,430 364,955 (125,765) 239,190 $ 340,656 $ 1,423 342,079 (125,765) 216,314 $ 336,565 (109) 336,456 (129,643) 206,813 340,966 2,099 343,065 (129,643) 213,422 During the years ended December 31, 2020, 2019, and 2018, ceded losses of $9,413, $114,443, and $149,120, respectively, were recognized as reductions in losses and LAE. For 2020, ceded losses related to Hurricane Irma, Hurricane Michael, Hurricane Sally, and other non-catastrophe claims were $362, $4,000, $88, and $4,963, respectively. Ceded losses related to Hurricane Irma, Hurricane Michael, and other non-catastrophe claims were $103,613, $10,750, and $80, respectively, for 2019. Ceded losses related to Hurricane Irma and Hurricane Michael were $143,890 and $5,230, respectively, for 2018. Ceded losses recognized in 2018 included $7,400 attributable to Oxbridge Reinsurance Limited, a related party. At December 31, 2020 and 2019, there were 38 and 31 reinsurers, respectively, participating in the Company’s reinsurance program. Total gross amounts recoverable and receivable from reinsurers at December 31, 2020 and 2019 were $85,146 and $132,678, respectively. Approximately 75.8% of the reinsurance recoverable balance at December 31, 2020 was receivable from four reinsurers, one of which was the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on all available information considered in the rating-based method described in Note 2 -- “Summary of Significant Accounting Policies,” the Company recognized a decrease in credit loss expense of $368 for the year ended December 31, 2020. Allowances for credit losses related to the reinsurance recoverable balance were $85 and $0 at December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, assumed premiums written attributable to United’s insurance policies were $44,600. The ratio of assumed premiums earned to net premiums earned for the years ended December 31, 2020, 2019 and 2018 was 1.11%, 0.66%, and 0.98%, respectively. One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the years ended December 31, 2020 and 2019, the Company recognized reductions in ceded premiums of $15,120 and $6,778, respectively. For the year ended December 31, 2018, the Company recognized a net reduction in ceded premiums of $485. Included in these adjustments attributable to the Company’s contract with Oxbridge for the year ended December 31, 2018 was $448 of net increase in ceded premiums. Amounts receivable pursuant to retrospective provisions are reflected in other assets. At December 31, 2020 and 2019, other assets included $10,920 and $9,480, respectively. Management believes the credit risk associated with the collectability of these accrued 74 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition. Note 15 -- Losses and Loss Adjustment Expenses The Company establishes reserves for the estimated total unpaid costs of losses including LAE. Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to the Company (“IBNR”). Reserves established by management represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of the Company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, the Company gives careful consideration to all available data and actuarial analyses. When a claim is reported to the Company, the claims personnel establish a “case reserve” for the estimated amount of the ultimate amount payable to settle the claim. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the claims adjuster. 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 as more information becomes available. It is the Company’s policy to settle each claim as expeditiously as possible. 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 the Company continues to expand historical data regarding paid and incurred losses, the data is used to develop expected ultimate loss and LAE ratios, then these expected loss and LAE ratios are applied to earned premium to derive a reserve level for each line of business. In connection with the determination of these reserves, other specific factors such as recent weather-related losses, trends in historical reported and paid losses, and litigation and judicial trends regarding liability will also be considered. Therefore, the loss ratio method, among other methods, is used 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. The Company maintains IBNR reserves to provide for claims that have been incurred but have not been reported and subsequent development on reported claims. The IBNR reserve is determined by estimating the 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 and LAE Reserve Estimation Methods. The Company applies the following general methods in projecting reserves for losses and LAE: • • • • • • • • Reported loss development; Paid loss development; Paid Bornhuetter-Ferguson method; Reported Experience-Modified Bornhuetter-Ferguson method; Paid Experience-Modified Bornhuetter-Ferguson method; Loss ratio method; Several variations of the Frequency-Severity method, depending on exposure; and A factor load to loss and allocated LAE reserves for the unallocated LAE. Selected reserves are based on a review of the indications from these methods as well as other considerations such as emergence since the most recent evaluation and number of open claims for a given accident period. Currently, the estimated ultimate liability is calculated using the principles and procedures described above, which are applied to the lines of business written. However, because the establishment of loss and LAE reserves is an inherently uncertain process, ultimate losses and LAE may exceed the established loss and LAE 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. 75 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) The Company’s reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine the net loss reserves. However, it is believed that a reasonably likely increase or decrease in the severity of claims could impact our net loss reserves. Activity in the liability for losses and LAE is summarized as follows: Net balance, beginning of year* Incurred, net of reinsurance, related to: Current year Prior years Total incurred, net of reinsurance Paid, net of reinsurance, related to: Current year Prior years Total paid, net of reinsurance Net balance, end of year Add: reinsurance recoverable Gross balance, end of year 2020 Years Ended December 31, 2019 2018 $ 98,174 $ 94,826 $ 97,818 158,236 1,800 160,036 96,955 10,559 107,514 (71,772) (45,373) (117,145) 141,065 71,104 212,169 $ (48,456) (55,710) (104,166) 98,174 116,523 214,697 $ $ 96,860 12,468 109,328 (54,698) (57,622) (112,320) 94,826 112,760 207,586 * Net balance represents beginning-of-period liability for unpaid losses and LAE less beginning-of-period reinsurance recoverable for unpaid losses and LAE. The establishment of loss and LAE reserves is an inherently uncertain process and changes in loss and LAE reserve estimates are expected as these estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are adjusted. During the year ended December 31, 2020, the Company recognized losses related to prior years of $1,800, which were primarily attributable to unfavorable development resulting from litigation. Losses and LAE for the 2020 loss year included estimated losses of $20,264, net of reinsurance, pertaining to Hurricane Sally, $14,850 related to policies transitioned from Anchor, and $10,000 specific to Tropical Storm Eta. The following is information about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2015 to 2012 is presented as supplementary information and is unaudited. 76 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Homeowners Multi-peril and Dwelling Fire Insurance (a) Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 $ 66,425 2014 $ 64,083 2013 $ 62,742 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2015 2016 $ 66,505 69,906 81,773 78,017 — — — — — 2018 $ 67,220 73,763 90,084 101,272 92,684 88,937 79,436 — — 2017 $ 66,465 71,604 88,053 96,173 90,879 91,443 — — — — 67,579 69,932 — 75,810 — — — — — — — — — — — — — — — — — — — $ 67,058 72,015 84,917 90,902 81,446 — — — — 2019 $ 67,469 74,043 92,454 102,149 92,986 89,652 83,976 95,467 — 2020 $ 67,869 74,543 92,945 102,587 92,752 90,958 83,123 94,018 133,908 $ 832,703 Reported Claims As of December 31, 2020 Total of IBNR Plus Expected Development Cumulative Number of Reported Claims (Not in Dollar Amounts)(b) 6,620 7,008 7,661 7,661 6,931 5,764 4,756 5,314 8,008 405 226 1 129 1,325 6,165 9,461 20,026 59,502 2012 36,914 $ $ — — — — — — — — $ $ $ Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2017 2016 65,903 64,667 70,224 68,106 82,463 77,712 87,784 76,042 73,037 51,663 43,039 — — — — — — — 2014 59,041 57,374 47,650 — — — — — — 2015 62,836 64,257 68,897 50,939 — — — — — 67,059 72,492 87,125 95,179 83,311 66,996 41,014 — — 2013 53,225 40,240 — — — — — — — 2018 $ $ $ Total All outstanding liabilities before 2012, net of reinsurance Liabilities for loss and LAE, net of reinsurance 2019 2020 $ 67,203 73,420 90,707 99,200 89,144 78,808 63,958 47,471 — $ $ 67,430 73,986 92,264 101,424 90,989 83,383 71,809 70,182 58,396 709,863 898 123,738 (a) (b) Excludes losses from Wind-only insurance (2012 through 2020) and any hurricane event prior to 2020. The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. 77 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Homeowners Wind-only Insurance (a) * Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2013 2014 2015 2016 2017 2018 2019 2020 401 $ 569 $ 692 $ 605 $ 582 $ Year 2015 2016 2017 2018 2019 2020 Total 2012 $ — — — — — — $ — $ — $ — — — — — — — — — — 308 $ — — — — — 1,005 — — — — 1,314 1,529 — — — 1,814 1,119 798 — — 1,853 815 708 1,132 — 1,837 792 1,061 1,501 2,293 $ 8,066 Reported Claims As of December 31, 2020 Total of IBNR Plus Expected Development Cumulative Number of Reported Claims (Not in Dollar Amounts)(b) 100 228 156 136 152 248 — 13 — 249 165 1,213 2012 2013 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2017 2016 2014 2015 2018 2019 2020 Year 2015 2016 2017 2018 2019 2020 $ $ — — — — — — — $ — — — — — — $ — — — — — 156 $ — — — — — 332 $ 689 — — — — Total Liabilities for loss and LAE, net of reinsurance 465 $ 582 $ 582 $ 1,155 484 — — — 1,405 786 216 — — 1,772 789 607 828 — $ $ 582 1,821 792 745 1,290 750 5,980 2,086 The Company began writing Homeowners Wind-only insurance in 2015. * (a) Excludes losses from multi-peril and dwelling fire insurance (2012 through 2020) and any hurricane event prior to 2020. (b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. 78 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Losses Specific to Any Hurricane Event prior to 2020 As of December 31, 2020 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2012 2013 2014 $ — $ — $ — $ — — — — — — — — — — — — 2015 2016 2017 2019 2018 — $ 21,414 $ 24,126 $ 26,211 $ 28,133 $ 27,634 $ — — — — 53,557 16,532 — — 53,602 — — — 54,080 16,543 — — — — — — 2020 53,624 16,532 — — $ 97,790 Total of IBNR Plus Expected Development Reported Claims Cumulative Number of Reported Claims (Not in Dollar Amounts)(b) 2,420 21,765 1,715 144 42 1,179 4,198 95 — — 2012 2013 $ $ — — — — — 2015 2014 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2017 2016 20,025 $ 12,227 $ 43,905 — — — — — — — 2018 23,316 $ 47,514 13,391 — — — $ — — — — — $ — — — — — $ — — — — Total Liabilities for loss and LAE, net of reinsurance 2019 25,849 $ 47,524 15,992 — — $ $ 2020 26,098 49,425 16,436 — — 91,959 5,831 Year 2016 2017 2018 2019 2020 Total Year 2016 2017 2018 2019 2020 (b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. 79 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Losses Specific to Hurricane Sally (2020) As of December 31, 2020 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2012 $ — Year 2020 Total 2013 2014 2015 2016 2017 2018 $ — $ — $ — $ — $ — $ — $ 2019 2020 — $ 20,264 $ $ 20,264 Total of IBNR Plus Expected Development Reported Claims 6,716 Cumulative Number of Reported Claims (Not in Dollar Amounts)(b) 1,685 Year 2020 Total Liabilities for loss and LAE, net of reinsurance Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, 2016 2019 2015 2013 2018 2017 2014 2020 2012 $ — $ — $ — $ — $ — $ — $ — $ — $ 11,834 $ 11,834 $ 8,430 (b) The cumulative number of reported claims is measured as the number of per-policyholder, per-event claims for all coverages regardless of whether the claim results in loss or expense to the Company. 80 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) The reconciliation of the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses is as follows: Net outstanding liabilities Homeowners multi-peril and dwelling fire insurance Homeowners Wind-only insurance Losses specific to any hurricane event prior to 2020 Losses specific to Hurricane Sally (2020) Other short-duration insurance lines Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance Reinsurance recoverables Total gross liability for unpaid losses and loss adjustment expenses December 31, 2020 2019 $ $ 123,738 $ 2,086 5,831 8,430 980 141,065 71,104 212,169 $ 88,583 535 8,857 — 199 98,174 116,523 214,697 The following is supplementary and unaudited information about average historical claims duration as of December 31, 2020: Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance Years Homeowners multi-peril and dwelling fire insurance Homeowners Wind-only insurance Other short-duration insurance lines Losses specific to any hurricane prior to 2020 Losses specific to Hurricane Sally (2020) 1 2 3 4 5 6 7 8 9 53.1% 38.7% 52.4% 70.9% 58.4% 20.5% 22.3% 15.2% 14.5% — 8.9% 6.5% 0.2% 3.9% 0.6% 2.0% 0.0% 4.5% 1.7% 0.6% 0.0% 0.3% — — — 1.1% 0.0% — — — 0.1% * — — — 0.0% * — — — 0.0% * — — — * The Company began writing Homeowners Wind-only insurance in 2015. 81 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 16 -- Segment Information The Company identifies its operating divisions based on organizational structure and revenue source. Currently, the Company has three reportable segments: insurance operations, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance division are grouped together into one reportable segment under insurance operations. The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and other segment represents the activities of the holding companies, the information technology division, and other companies that do not meet the quantitative thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performance based on revenue and operating income. For the years ended December 31, 2020, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 88.4%, 95.0% and 95.0%, respectively, of total revenues of all operating segments. At December 31, 2020 and 2019, insurance operations’ total assets represented 84.2% and 85.5%, respectively, of the combined assets of all operating segments. See Note 1 -- “Nature of Operations” for a description of the Company’s insurance operations. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below. For the Year Ended December 31, 2020 Revenue: Net premiums earned Net investment income (loss) Net realized investment gains Net unrealized investment gains Credit losses on investments Policy fee income Gain on involuntary conversion Other Total revenue Expenses: Losses and loss adjustment expenses Amortization of deferred policy acquisition costs Interest expense Depreciation and amortization Other Total expenses Income (loss) before income taxes Total revenue from non-affiliates(c) Insurance Operations Real Estate(a) Corporate/ Other(b) Reclassification/ Elimination Consolidated $ $ $ 262,460 $ 6,655 670 450 (591) 3,522 — 1,067 274,233 160,036 49,125 2 115 32,184 241,462 32,771 $ — $ 3 — — — — 36,969 9,502 46,474 — — 1,947 2,526 5,486 9,959 36,515 $ — $ (492) 330 229 (20) — — 2,831 2,878 — — 10,710 1,706 22,820 35,236 (32,358) $ — $ (1,602) — — — — — (11,546) (13,148) — — (925) (2,494) (9,729) (13,148) — $ 262,460 4,564 1,000 679 (611) 3,522 36,969 1,854 310,437 160,036 49,125 11,734 1,853 50,761 273,509 36,928 274,233 $ 44,709 $ 848 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses. (c) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation. 82 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) For the Year Ended December 31, 2019 Revenue: Net premiums earned Net investment income Net realized investment gains (losses) Net unrealized investment gains Net other-than-temporary impairment losses Policy fee income Other Total revenue Expenses: Losses and loss adjustment expenses Amortization of deferred policy acquisition costs Interest expense Depreciation and amortization Other Total expenses Income (loss) before income taxes Total revenue from non-affiliates(c) Insurance Operations Real Estate(a) Corporate/ Other(b) Reclassification/ Elimination Consolidated $ $ $ 216,314 $ 12,230 286 6,565 (289) 3,229 762 239,097 107,514 37,146 2 113 30,590 175,365 63,732 $ 239,097 $ — $ 1 — — — — 9,366 9,367 — — 1,653 2,542 5,168 9,363 4 $ 7,738 $ — $ 2,348 (540) 1,385 — — 5,738 8,931 — — 12,043 1,285 23,246 36,574 (27,643) $ 7,176 — $ (937) — — — — (13,984) (14,921) — — (643) (2,390) (11,888) (14,921) — $ 216,314 13,642 (254) 7,950 (289) 3,229 1,882 242,474 107,514 37,146 13,055 1,550 47,116 206,381 36,093 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses. (c) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation. For the Year Ended December 31, 2018 Revenue: Net premiums earned Net investment income Net realized investment gains Net unrealized investment losses Net other-than-temporary impairment losses Policy fee income Other Total revenue Expenses: Losses and loss adjustment expenses Amortization of deferred policy acquisition costs Interest expense Depreciation and amortization Other Total expenses Income (loss) before income taxes Total revenue from non-affiliates(c) Insurance Operations Real Estate(a) Corporate/ Other(b) Reclassification/ Elimination Consolidated $ $ $ 213,422 $ 10,862 4,639 (8,688) — 3,389 583 224,207 109,328 35,204 1 125 25,797 170,455 53,752 $ 224,207 $ — $ 1 — — — — 9,324 9,325 — — 1,568 2,373 4,254 8,195 1,130 $ 7,718 $ — $ 5,554 1,544 (1,514) (80) — 4,999 10,503 — — 17,008 1,011 20,464 38,483 (27,980) $ 9,331 — $ 164 — — — — (12,907) (12,743) — — (481) (2,140) (10,122) (12,743) — $ 213,422 16,581 6,183 (10,202) (80) 3,389 1,999 231,292 109,328 35,204 18,096 1,369 40,393 204,390 26,902 (a) Other revenue under real estate primarily consisted of rental income from investment properties. (b) Other revenue under corporate and other primarily consisted of revenue from restaurant and marina businesses. (c) Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation. 83 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) The following table presents segment assets reconciled to the Company’s total assets on the consolidated balance sheets. Segment: Insurance Operations Real Estate Operations Corporate and Other Consolidation and Elimination Total assets December 31, 2020 2019 $ $ 799,299 $ 128,383 38,548 (24,917) 941,313 $ 663,280 93,727 60,662 (15,060) 802,609 After the balance sheet date, the composition of reportable segments was changed to present TypTap Insurance Group, Inc. (“TTIG”) and its subsidiaries as a separate segment. See Note 28 -- “Subsequent Events.” Note 17 -- Leases The table below summarizes the Company’s ROU assets and corresponding liabilities for operating and finance leases: Operating leases: ROU assets Liabilities Finance leases: ROU assets Liabilities December 31 2020 2019 $ $ $ $ 4,002 $ 4,014 $ 79 $ 43 $ 484 513 79 60 As a result of the change in ownership of the Company’s headquarters building through the eminent domain proceeding described in Note 9 -- “Property and Equipment, Net,” all existing intercompany operating leases related to this building that were previously eliminated on consolidation are now reflected on the balance sheet. These leases were determined to be at market rates on the date of the ownership change. In December 2020, the Company, as a lessee, terminated one of its operating leases for office space in Tampa, Florida. There was no gain or loss recognized for this early termination. The following table summarizes the Company’s operating and finance leases in which the Company is a lessee: Class of Assets Operating lease: Office equipment Office space Finance lease: Office equipment Initial Term 1 to 63 months 3 to 10 years Renewal Option Yes Yes 3 to 5 years Not applicable Other Terms and Conditions (a), (b) (b), (c) (d) (a) (b) (c) (d) At the end of the lease term, the Company can purchase the equipment at fair market value. There are no variable lease payments. Rent escalation provisions exist. There is a bargain purchase option. 84 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) As of December 31, 2020, maturities of lease liabilities were as follows: 19 17 9 45 2 43 15 2 314 198 529 2 318 14 Due in Year 2021 2022 2023 Total lease payments Less: interest and foreign taxes Total lease obligations Leases Operating Finance $ $ 1,724 $ 1,536 887 4,147 133 4,014 $ The following table provides quantitative information with regard to the Company’s operating and finance leases: Lease costs: Finance lease costs: Amortization – ROU assets* Interest expense Operating lease costs* Short-term lease costs* Total lease costs Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows – finance leases Operating cash flows – operating leases Financing cash flows – finance leases Weighted-average remaining lease term: Finance leases (in years) Operating leases (in years) Weighted-average discount rate: Finance leases Operating leases Years Ended December 31, 2020 2019 $ $ $ $ $ 18 2 1,123 167 1,310 $ $ 2 1,132 17 $ $ $ December 31, 2020 2.7 2.8 3.7% 2.8% * Included in other operating expenses on the consolidated statements of income. The following table summarizes the Company’s operating leases in which the Company is a lessor: Class of Assets Operating lease: Office space Retail space Boat docks/wet slips (e) There are no purchase options. Initial Term Renewal Option Other Terms and Conditions 1 to 3 years 3 to 20 years 1 to 12 months Yes Yes Yes (e) (e) (e) 85 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 18 -- Income Taxes A summary of income tax expense is as follows: Current: Federal State Foreign Total current taxes Deferred: Federal State Foreign Total deferred taxes Income tax expense 2020 Years Ended December 31, 2019 2018 $ $ 1,089 $ 30 106 1,225 6,694 1,436 (7) 8,123 9,348 $ 6,177 $ 1,362 107 7,646 1,586 287 (2) 1,871 9,517 $ 7,443 1,490 104 9,037 (245) 392 (7) 140 9,177 The reasons for the differences between the statutory federal income tax rate and the effective tax rate are summarized as follows: Income taxes at statutory rate Increase (decrease) in income taxes resulting from: State income taxes, net of federal tax benefits Effects of tax rate changes Stock-based compensation Non-deductible executive compensation Other Income tax expense $ 2020 Years Ended December 31, 2019 2018 Amount % Amount % Amount % $ 7,755 21.0 $ 7,579 21.0 $ 5,649 21.0 1,364 — (296) 757 (232) 9,348 3.7 — (0.8) 2.0 (0.6) 25.3 $ 1,362 (37) (159) 685 87 9,517 3.8 — (0.4) 1.9 0.1 26.4 $ 1,303 — 2,156 306 (237) 9,177 4.8 — 8.0 1.1 (0.8) 34.1 The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. The tax returns filed for the years ending December 31, 2019, 2018, and 2017 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify interest and penalties, if any, arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There have been no material amounts of interest or penalties for the years ended December 31, 2020, 2019 and 2018. For the years ended December 31, 2020, 2019 and 2018, the Company recorded income taxes of $9,348, $9,517 and $9,177, respectively, resulting in effective tax rates of 25.3%, 26.4% and 34.1%, respectively. The decrease in the effective tax rate in 2019 as compared with 2018 was primarily attributable to the unfavorable factors in 2018 consisting of the negative effect of the derecognition of deferred tax assets of $1,825 for restricted stock awards of which market conditions would not be met prior to their expiry date, the disallowance of the deductibility of the $1,887 expense representing dividends cumulatively paid on such restricted stock awards which were reclassified from retained income (see Restricted Stock Awards in Note 21 -- “Stock-Based Compensation”), offset by an increase in nondeductible performance-based compensation expenses for 2019. 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. 86 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Significant components of the Company’s net deferred income tax liabilities are as follows: $ Deferred tax assets: Unearned premiums Losses and loss adjustment expenses Stock-based compensation Unearned revenue Accrued expenses Credit losses Organizational costs Bad debt reserve Total deferred tax assets Deferred tax liabilities: Gain on involuntary conversion Deferred policy acquisition costs Intangible assets Basis difference related to partnership investments Prepaid expenses Net unrealized investment gains Property and equipment Basis difference related to convertible senior notes Other Total deferred tax liabilities Net deferred tax liabilities $ December 31, 2020 2019 9,687 $ 2,902 1,084 335 146 120 76 52 14,402 (9,066) (9,459) (2,226) (1,578) (454) (1,507) (1,262) (242) (533) (26,327) (11,925) $ 6,272 2,838 878 120 86 77 63 9 10,343 — (5,469) (2,214) (1,188) (392) (1,547) (1,661) (1,256) (624) (14,351) (4,008) A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred 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. Thus, the Company did not have a valuation allowance established as of December 31, 2020 or 2019. Note 19 -- Earnings Per Share U.S. GAAP requires the Company to use the two-class method in computing basic earnings (loss) per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings (loss) per share during periods of net income (loss). 87 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) A summary of the numerator and denominator of the basic and fully diluted earnings (loss) per common share is presented below: Year Ended December 31, 2020 Net income Less: Income attributable to participating securities Basic Earnings Per Share: Income allocated to common stockholders Effect of Dilutive Securities: Stock options Convertible senior notes Diluted Earnings Per Share: Income available to common stockholders and assumed conversions (a) Shares in thousands. Year Ended December 31, 2019 Net income Less: Income attributable to participating securities Basic Earnings Per Share: Income allocated to common stockholders Effect of Dilutive Securities: Stock options Convertible senior notes Diluted Earnings Per Share: Income available to common stockholders and assumed conversions (a) Shares in thousands. Year Ended December 31, 2018 Net income Less: Loss attributable to participating securities* Basic Earnings Per Share: Income allocated to common stockholders Effect of Dilutive Securities:** Stock options Diluted Earnings Per Share: Income available to common stockholders and assumed conversions (a) Shares in thousands. 88 Income (Numerator) Shares (a) (Denominator) Per Share Amount $ 27,580 (1,462) 26,118 7,351 $ 3.55 — 7,705 23 2,320 $ 33,823 9,694 $ 3.49 Income (Numerator) Shares (a) (Denominator) Per Share Amount $ 26,576 (1,448) 25,128 7,580 $ 3.32 — 8,748 12 2,646 $ 33,876 10,238 $ 3.31 Income (Numerator) Shares (a) (Denominator) Per Share Amount $ 17,725 717 18,442 7,878 $ 2.34 — 17 $ 18,442 7,895 $ 2.34 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) * ** Loss attributable to participating securities included the reclassification of cumulative dividends paid on certain restricted stock with market based vesting conditions from retained income to expense. See Restricted Stock Awards in Note 21 -- “Stock-Based Compensation” for additional information. Convertible senior notes were excluded due to antidilutive effect. Note 20 -- Stockholders’ Equity Common Stock On December 19, 2019, the Board of Directors decided to extend the term of the 2019 stock repurchase plan to March 15, 2020. On March 13, 2020, the Board approved a stock repurchase plan for 2020 to repurchase up to $20,000 of the Company’s common shares before commissions and fees. The shares may be purchased for cash in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. There is no share repurchase plan approved by the Board for 2021. During the years ended December 31, 2020, 2019 and 2018, the Company repurchased and retired 129,142, 454,010 and 511,628 shares, respectively, at weighted average prices per share of $39.93, $41.49 and $39.09, respectively. The total costs of shares repurchased, inclusive of fees and commissions, during the years ended December 31, 2020, 2019 and 2018 were $5,161, $18,851 and $20,015, respectively, or $39.96, $41.52 and $39.12 per share, respectively. On October 16, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on December 18, 2020 to stockholders of record on November 20, 2020. Prepaid Share Repurchase Forward Contracts The Company has one outstanding prepaid share repurchase forward contract entered into with Societe Generale, a forward counterparty. The Company entered into this forward contract in conjunction with the issuance of the 4.25% Convertible Notes as described in Note 13 -- “Long-Term Debt” under Convertible Senior Notes. Under the forward contract, 191,000 shares of the Company’s common stock will be delivered to the Company over a settlement period in 2022. The forward contract is subject to early settlement, in whole or in part, at any time prior to the final settlement date at the option of the forward counterparty, as well as early settlement or settlement with alternative consideration in the event of certain corporate transactions. In the event the Company pays any cash dividends on its common shares, the forward counterparty will pay an equivalent amount to the Company. The shares to be purchased under the forward contract will be treated as retired for financial statement purposes as of the effective date of the forward contract, but will remain outstanding for corporate law purposes, including for purposes of any future stockholder votes. The Company determined that the forward contract does not meet the characteristics of a derivative instrument and, as such, the transaction resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted earnings (loss) per share. Preferred Stock On May 15, 2020, the Company amended its Articles of Incorporation, effective on the same date, to cancel the designation of 1,500,000 shares of the Company’s authorized preferred stock as Series A Cumulative Redeemable Preferred Stock, and the designation of 400,000 shares of the Company’s authorized preferred stock as Series B Junior Participating Preferred Stock. As a result, all 20,000,000 authorized shares of the Company’s preferred stock are undesignated. Since the designation of these types of preferred stock, none have ever been issued by the Company. Note 21 -- Stock-Based Compensation Incentive Plan The Company currently has outstanding stock-based awards granted under its 2007 Stock Option and Incentive Plan and 2012 Omnibus Incentive Plan. Only the 2012 Plan is active and available for future grants. With respect to the 2012 Plan, the Company may grant stock-based awards to employees, directors, consultants, and advisors of the Company. At December 31, 2020, there were 1,477,976 shares available for grant. 89 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Stock Options Stock options granted and outstanding under the incentive plans vest over periods ranging from immediately vested to five years and are exercisable over the contractual term of ten years. A summary of the stock option activity for the years ended December 31, 2020, 2019 and 2018 is as follows (option amounts not in thousands): Outstanding at January 1, 2018 Granted Outstanding at December 31, 2018 Granted Exercised Outstanding at December 31, 2019 Granted Exercised Outstanding at December 31, 2020 Number of Options Weighted Average Exercise Price 130,000 $ 34.82 Weighted Average Remaining Contractual Term 8.2 years $ Aggregate Intrinsic Value 472 110,000 $ 240,000 $ 110,000 $ (10,000) $ 340,000 $ 110,000 $ (10,000) $ 440,000 $ 40.00 37.19 53.00 6.30 43.21 48.00 6.30 45.25 8.8 years $ 3,278 7.9 years $ 1,657 7.6 years $ 3,113 Exercisable at December 31, 2020 165,000 $ 42.17 6.7 years $ 1,664 The following table summarizes information about options exercised for the years ended December 31, 2020, 2019 and 2018 (option amounts not in thousands): Options exercised Total intrinsic value of exercised options Tax benefits realized 2020 2019 2018 10,000 288 $ 71 $ 10,000 347 $ 85 $ $ $ — — — For the years ended December 31, 2020, 2019 and 2018, the Company recognized $1,180, $870 and $521, respectively, of compensation expense which was included in general and administrative personnel expenses. Deferred tax benefits related to stock options were $76, $22 and $79 for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020 and 2019, there was $1,889 and $1,835, respectively, of unrecognized compensation expense related to nonvested stock options. The Company expects to recognize the remaining compensation expense over a weighted- average period of 2.4 years. The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the years ended December 31, 2020, 2019 and 2018: Expected dividend yield Expected volatility Risk-free interest rate Expected life (in years) 2020 2019 2018 3.48% 38.68% 1.63% 5 3.34% 40.17% 2.53% 5 4.00% 42.22% 2.57% 5 90 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Restricted Stock Awards From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants include only service conditions. The determination of fair value with respect to the awards with only service-based conditions is based on the market value of the Company’s stock on the grant date. Information with respect to the activity of unvested restricted stock awards during the years ended December 31, 2020, 2019 and 2018 is as follows: Nonvested at January 1, 2018 Granted Vested Forfeited Nonvested at December 31, 2018 Granted Vested Forfeited Nonvested at December 31, 2019 Granted Vested Forfeited Nonvested at December 31, 2020 Number of Restricted Stock Awards Weighted Average Grant Date Fair Value 597,690 $ 189,860 $ (98,617) $ (56,637) $ 632,296 $ 180,404 $ (116,164) $ (299,776) $ 396,760 $ 192,680 $ (146,801) $ (18,852) $ 423,787 $ 32.82 41.81 40.82 36.46 33.33 42.79 40.10 25.31 41.71 45.57 40.54 43.60 43.79 The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $6,953, $5,590 and $4,111 for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020 and 2019, there was approximately $13,666 and $12,661, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.3 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the years ended December 31, 2020, 2019 and 2018. Deferred tax benefits recognized Tax benefits realized for restricted stock and paid dividends Fair value of vested restricted stock 2020 2019 2018 $ $ $ 1,296 $ 1,448 $ 5,952 $ 1,075 $ 1,129 $ 4,658 $ 862 1,086 4,025 During 2019, 284,000 shares of the Company’s restricted stock awards granted to employee and nonemployee directors were forfeited for not meeting their market-based vesting conditions. Any dividend payment associated with these awards during 2019 was expensed when declared. As a result, for the year ended December 31, 2019, the Company recognized dividends of $237 in general and administrative personnel expenses for $170 and in other operating expenses for $67. During 2018, the Company reclassified from retained income dividends of $1,887 cumulatively paid on unvested restricted stock awards with market based vesting conditions to general and administrative personnel expenses for $1,346 and to other operating expenses for $541. These awards, of which the market conditions would not have been met, were granted to the Company’s employee and nonemployee directors during 2013. As a result, for the year ended December 31, 2018, the Company recognized dividends of $195 related to these awards in general and administrative personnel expenses for $159 and in other operating expenses for $36. During the years ended December 31, 2020, 2019 and 2018, no awards were issued with other than service-based vesting conditions. 91 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 22 -- Employee Benefit Plan The Company has a 401(k) Safe Harbor Profit Sharing Plan (“401(k) Plan”) that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees are eligible for company matching and discretionary profit sharing contributions. Plan participants may elect to defer up to one hundred percent of their pre-tax gross wages, subject to annual limitations. The Company’s matching contribution is limited to a maximum of four percent of the employee’s annual salary or wage and is fully vested when contributed. Eligibility and vesting of the Company’s discretionary profit sharing contribution is subject to the plan participant’s years of service. During the years ended December 31, 2020, 2019 and 2018, the Company contributed approximately $731, $638 and $536, respectively, in matching contributions, which are included in general and administrative personnel expenses. There has been no discretionary profit sharing contribution since the plan’s inception. The Company also maintains benefit plans for its employees in India including a statutory post-employment benefit plan, or gratuity plan, providing defined, lump-sum benefits. The Company’s liability for the gratuity plan reflects the undiscounted benefit obligation payable as of the balance sheet date, which was based upon the employees’ salary and years of service. At December 31, 2020 and 2019, the amounts accrued under the gratuity plan were $130 and $89, respectively. In addition, the Company provides matching contributions with respect to two defined contribution plans: the Provident Fund and the Employees State Insurance Fund, both of which are available to qualifying employees in India. Expense recognized by the Company for all benefit plans in India was $41, $17 and $14, respectively, for the years ended December 31, 2020, 2019 and 2018. Note 23 -- Commitments and Contingencies Rental Income The Company leases available space at the Company’s various investment properties to non-affiliates at various terms. In addition, the Company leases boat slips and docks on a long-term basis. Expected annual rental income due under non-cancellable operating leases for all properties owned at December 31, 2020 is as follows: Year 2021 2022 2023 2024 2025 Thereafter Total Amount 3,706 3,537 3,428 3,414 3,335 13,710 31,130 $ $ Capital Commitment As described in Note 5 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At December 31, 2020, there was an aggregate unfunded balance of $10,304. Litigation On April 1, 2020, Gulf to Bay LM, LLC (“GTB”), a wholly-owned real estate subsidiary of the Company, sued The Kroger Co. in federal district court to enforce a guaranty of a commercial lease executed between GTB and Lucky’s Market Operating Company, LLC which filed for bankruptcy in the first quarter of 2020. See Note 28 -- “Subsequent Events.” 92 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 24 -- Quarterly Results of Operations (Unaudited) The tables below summarize unaudited quarterly results of operations for 2020, 2019 and 2018. Net premiums earned Total revenue Losses and loss adjustment expenses Policy acquisition and other underwriting expenses Interest expense Total expenses Income before income taxes Net income Comprehensive (loss) income Earnings per share: Basic Diluted* 03/31/20 06/30/20 09/30/20 12/31/20 Three Months Ended $ 61,646 $ 55,380 28,078 11,826 2,970 54,723 657 547 (1,585) 73,449 $ 80,717 39,843 12,991 3,020 68,894 11,823 8,936 10,286 62,463 $ 104,027 51,743 14,210 2,856 82,491 21,536 15,390 15,634 $ $ 0.07 $ 0.07 $ 1.16 $ 1.08 $ 1.97 $ 1.68 $ 64,902 70,313 40,372 14,832 2,888 67,401 2,912 2,707 2,611 0.35 0.35 * During the quarters ended March 31, 2020 and December 31, 2020, the convertible senior notes were antidilutive. Net premiums earned Total revenue Losses and loss adjustment expenses Policy acquisition and other underwriting expenses Interest expense Total expenses Income before income taxes Net income Comprehensive income Earnings per share: Basic Diluted** 03/31/19 06/30/19 09/30/19 12/31/19 Three Months Ended $ 51,184 $ 60,634 26,996 9,673 4,337 51,351 9,283 6,738 8,732 51,998 $ 58,630 24,293 10,077 2,884 48,315 10,315 7,553 8,767 54,434 $ 59,979 27,327 10,988 2,907 52,260 7,719 5,853 6,189 $ $ 0.82 $ 0.82 $ 0.93 $ 0.90 $ 0.73 $ 0.73 $ 58,698 63,231 28,898 11,759 2,927 54,455 8,776 6,432 6,519 0.84 0.82 ** During the quarters ended March 31, 2019 and September 30, 2019, the convertible senior notes were antidilutive. Net premiums earned Total revenue Losses and loss adjustment expenses Policy acquisition and other underwriting expenses Interest expense Total expenses Income (loss) before income taxes Net income (loss) Comprehensive income (loss) Earnings (loss) per share: Basic Diluted*** $ 03/31/18 06/30/18 09/30/18 12/31/18 Three Months Ended 53,522 $ 57,739 19,655 9,360 4,470 42,935 14,804 10,791 8,340 52,965 $ 58,813 21,803 9,959 4,505 47,293 11,520 6,403 6,413 54,177 $ 61,743 25,769 9,829 4,552 49,820 11,923 8,997 8,955 52,758 52,997 42,101 9,795 4,569 64,342 (11,345) (8,466) (8,818) $ $ 1.25 $ 1.11 $ 0.96 $ 0.92 $ 1.08 $ 1.00 $ (0.95) (0.95) *** During the quarter ended December 31, 2018, the convertible senior notes and stock options were antidilutive. 93 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 25 -- Regulatory Requirements and Restrictions The Company has no restrictions on the payment of dividends to its shareholders except those restrictions imposed by the Florida Business Corporation Act and those restrictions imposed by insurance statutes and regulations applicable to the Company’s insurance subsidiaries. As of December 2020, without prior regulatory approval, $139,670 of the Company’s consolidated retained earnings was free from restriction under the insurance statutes and regulations and available for the payment of dividends in 2021. The following briefly describes certain related and other requirements and restrictions imposed by the states or jurisdiction in which the Company’s insurance subsidiaries are incorporated. Florida HCPCI and TypTap, which are domiciled in Florida, prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the Florida Department of Financial Services, Office of Insurance Regulation (“FLOIR”), which Florida utilizes for determining solvency under the Florida Insurance Code (the “Code”). The commissioner of the FLOIR has the right to permit other practices that may deviate from prescribed practices. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in Florida. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from entity to entity within a state, and may change in the future. The Code requires HCPCI and TypTap to maintain capital and surplus equal to the greater of 10% of their respective liabilities or a statutory minimum as defined in the Code. At December 31, 2020, HCPCI and TypTap were required to maintain minimum capital and surplus of $31,140 and $10,000, respectively. At December 31, 2019, HCPCI and TypTap were required to maintain minimum capital and surplus of $21,700 and $10,000, respectively. HCPCI and TypTap were in compliance with these requirements at December 31, 2020 and 2019. U.S. GAAP differs in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory-basis). These entities’ statutory-basis financial statements are presented on the basis of accounting practices prescribed or permitted by the FLOIR. The FLOIR has adopted the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual as the basis of its statutory accounting practices. At December 31, 2020 and 2019, HCPCI’s statutory-basis capital and surplus was approximately $119,900 and $159,000, respectively. For the year ended December 31, 2020, HCPCI had a statutory-basis net loss of approximately $28,780 as opposed to statutory-basis net income of approximately $18,400 and $20,700 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2020 and 2019, TypTap’s statutory-basis capital and surplus was approximately $38,500 and $27,200, respectively. For the years ended December 31, 2020 and 2019, TypTap’s statutory-basis net loss was approximately $10,900 and $5,200, respectively, as opposed to statutory-basis net income of approximately $2,034 for the year ended December 31, 2018. Statutory-basis 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 to September 2020, HCPCI and TypTap have each maintained a cash deposit with the Insurance Commissioner of the State of Florida in the amount of $300 to meet regulatory requirements. TypTap later increased its cash deposit to $2,000 and placed a U.S. Government security in the amount of $310 with the State during the fourth quarter of 2020 in connection with its current expansion. 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 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. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the FLOIR if (1) the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards to policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (2) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (3) the insurer files a notice of the 94 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) dividend or distribution with the FLOIR at least ten business days prior to the dividend payment or distribution and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (1) subject to prior approval by the FLOIR or (2) 30 days after the FLOIR has received notice of such dividend or distribution and has not disapproved it within such time. As a result, only HCPCI was qualified to make dividend payments at December 31, 2020, 2019 and 2018. Without prior written approval from the FLOIR, TypTap was not permitted to make any dividend payments. In addition, Florida property and casualty insurance companies are required to adhere to prescribed premium-to-capital surplus ratios. Florida state law requires that the ratio of 90% of written premiums divided by surplus as to policyholders does not exceed 10 to 1 for gross written premiums or 4 to 1 for net written premiums. The required ratio of gross and net written premium to surplus, which the Company’s insurance companies had exceeded, is summarized below: HCPCI: Gross Net TypTap: Gross Net Bermuda Years Ended December 31, 2019 2020 2018 3.02 to 1 1.84 to 1 2.47 to 1 1.50 to 1 1.92 to 1 1.15 to 1 2.23 to 1 1.63 to 1 2.17 to 1 1.27 to 1 0.57 to 1 0.38 to 1 The Bermuda Monetary Authority requires Claddaugh Casualty Insurance Company, Ltd. (“Claddaugh”), the Company’s Bermuda domiciled reinsurance subsidiary, to maintain minimum capital and surplus of $2,000. At December 31, 2020 and 2019, Claddaugh’s statutory capital and surplus was approximately $58,300 and $34,500, respectively. For the years ended December 31, 2020, Claddaugh reported statutory net income of approximately of $1,400 as opposed to statutory net losses of approximately $4,400 and $8,100 for the years ended December 31, 2019 and 2018, respectively. During 2020, the Company contributed approximately $22,600 of capital to Claddaugh versus $6,000 and $10,000 of capital returned by Claddaugh during 2019 and 2018, respectively. HCPCI and TypTap are subject to risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of minimum capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risks related to it. Pursuant to the RBC requirements, insurers having less statutory capital than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. At December 31, 2020 and 2019, the Company’s insurance subsidiaries individually exceeded any applicable minimum risk-based capital requirements and no corrective actions have been required. As of December 31, 2020, the combined statutory capital and surplus and minimum capital and surplus of the Company’s U.S. insurance subsidiaries were approximately $158,430 and $122,959, respectively. At December 31, 2020 and 2019, restricted net assets represented by the Company’s insurance subsidiaries amounted to $160,710 and $191,210, respectively. Note 26 -- Related Party Transactions Claddaugh had a reinsurance agreement with Oxbridge Reinsurance Limited (“Oxbridge”) whereby a portion of the business assumed from the Company’s insurance subsidiary, HCPCI, was ceded by Claddaugh to Oxbridge. On May 28, 2018, Claddaugh terminated its multi-year reinsurance contract with Oxbridge, effective June 1, 2018. Upon termination, Claddaugh agreed to pay Oxbridge a settlement fee of $600 and derecognized the benefits accrued in connection with retrospective provisions. The settlement fee and the derecognition of the $622 of accrued benefits were recorded in premiums ceded. With respect to the period from June 1, 2017 through May 31, 2018, Oxbridge assumed $7,400 of the total covered exposure for approximately $3,400 in premiums. Among the Oxbridge shareholders were Paresh Patel, the Company’s chief executive officer, and members of his immediate family and three of the Company’s non-employee directors including Sanjay Madhu who served as Oxbridge’s president and chief executive officer. In March 2018, the Company purchased six-month certificates of deposit totaling approximately $15,094 from First Home Bank, a local bank in the Tampa Bay area where two of the Company’s directors are members of the bank’s board of directors. In May 95 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) 2018, the Company moved the funds from the certificate of deposit accounts to a money market account. The interest rates and terms of the accounts were comparable to those offered at the time to other clients of the bank. All accounts with this bank were closed during 2019. Note 27 -- Condensed Financial Information of HCI Group, Inc. Condensed financial information of HCI Group, Inc. is as follows: Balance Sheets Assets Cash and cash equivalents Fixed-maturity securities, available for sale, at fair value Equity securities, at fair value Limited partnership investments, at equity Note receivable – related party Investment in subsidiaries Property and equipment, net Right-of-use assets - operating leases Income tax receivable Other assets Total assets Liabilities and Stockholders’ Equity Accrued expenses and other liabilities Lease liabilities - operating leases Income tax payable Deferred income taxes, net Revolving credit facility Long-term debt Due to related parties Total liabilities Total stockholders’ equity Total liabilities and stockholders’ equity 96 December 31, 2020 2019 $ $ $ $ 13,944 $ 216 9,496 20,542 23,280 304,816 753 7,118 8,348 4,036 392,549 $ 6,660 $ 4,319 — 1,645 23,750 133,967 21,072 191,413 201,136 392,549 $ 17,738 745 6,689 21,405 1,280 290,675 345 2,023 — 2,443 343,343 5,813 713 1,443 2,587 9,750 134,080 3,414 157,800 185,543 343,343 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Statements of Income Net investment (loss) income Net realized investment gains (losses) Net unrealized investment gains (losses) Net other-than-temporary impairment losses Credit losses on investments Loss on repurchases of convertible senior notes Interest expense 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 97 2020 Years Ended December 31, 2019 2018 $ $ (676) $ 330 229 — (20) (150) (10,710) (6,887) (17,884) 4,024 (13,860) 41,440 27,580 $ 2,295 $ (541) 1,385 — — — (12,042) (6,353) (15,256) 3,092 (12,164) 38,740 26,576 $ 5,348 1,544 (1,514) (80) — — (17,007) (5,429) (17,138) 1,856 (15,282) 33,007 17,725 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Statements of Cash Flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used in operating activities: Stock-based compensation Net realized investment (gains) losses Net unrealized investment (gains) losses Net (accretion of discount) amortization of premiums on investments in fixed-maturity securities Depreciation and amortization Net income from limited partnership investments Distributions from limited partnership interests Other-than-temporary impairment losses Credit losses on investments Loss on repurchases of convertible senior notes Equity in income of subsidiaries Deferred income taxes Changes in operating assets and liabilities: Income taxes Other assets Accrued expenses and other liabilities Due to related parties Net cash provided by (used in) operating activities Cash flows from investing activities: Investment in limited partnership interest Investment in note receivable – related party Purchase of fixed-maturity securities Purchase of equity securities Purchase of short-term and other investments Purchase of property and equipment Proceeds from sales of fixed-maturity securities Proceeds from calls, repayments and maturities of fixed-maturity securities Proceeds from sales of equity securities Proceeds from sales, redemptions and maturities of short-term and other investments Collection of note receivable – related party Distributions from limited partnership interests Dividends received from subsidiary Return of capital from subsidiary Investment in subsidiaries Net cash provided by investing activities 2020 Years Ended December 31, 2019 2018 $ 27,580 $ 26,576 $ 17,725 4,488 (330) (229) (42) 4,686 1,781 844 — 20 150 (41,440) (935) (9,791) (629) 1,096 17,438 4,687 (3,376) (22,000) (7) (35,855) (200) (742) 447 27 30,688 537 — 1,614 52,500 9 (22,629) 1,013 3,638 541 (1,385) 66 5,194 (701) 1,661 — — — (38,740) (916) 4,462 (3,042) 1,750 (16,754) (17,650) (1,602) — (234) (8,733) (187) (176) 477 35,361 9,906 25,733 — 948 44,000 6,000 (5,000) 106,493 2,550 (1,544) 1,514 (3) 7,737 (3,007) 1,495 80 — — (33,007) 1,075 4 (144) 273 (2,600) (7,852) (5,125) — (5,864) (16,913) (50,510) (154) 2,215 — 20,698 25,401 6,000 158 42,000 10,000 — 27,906 98 (continued) HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Statements of Cash Flows - (Continued) Cash flows from financing activities: Repurchases of common stock Repurchases of common stock under share repurchase plan Repurchases of convertible senior notes Debt issuance costs paid Cash dividends paid to stockholders Cash dividends received under share repurchase forward contract Net borrowing under revolving credit facility Proceeds from exercise of stock options Repayment of long-term debt Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2020 Years Ended December 31, 2019 2018 (1,547) (5,161) (4,459) — (12,694) 306 14,000 63 (2) (9,494) (3,794) 17,738 13,944 $ (1,203) (18,851) — (459) (13,012) 306 9,750 63 (89,991) (113,397) (24,554) 42,292 17,738 $ (1,151) (20,015) — — (11,318) 967 — — — (31,517) (11,463) 53,755 42,292 $ 99 HCI GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in thousands, except share and per share amounts, unless otherwise stated) Note 28 -- Subsequent Events On January 15, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on March 19, 2021 to stockholders of record on February 19, 2021. On January 18, 2021, the Company entered into a renewal rights agreement with United in connection with the assumed business described in Note 1 -- “Nature of Operations.” Under the agreement, the Company acquired all rights to renew and/or replace United’s insurance policies at the end of their respective policy periods in the states of Connecticut, Massachusetts, New Jersey and Rhode Island. The policy replacement date is June 1, 2021 or later as mutually agreed by both parties. The agreement also contains a non-compete clause that does not permit United to engage in marketing, selling, writing, renewing, or servicing any insurance contract in these states until July 1, 2024. In return, United received 100,000 shares of HCI’s common stock and a 6% commission on the aggregate replacement premium in excess of $80,000. The total commission will not exceed $3,100. On February 12, 2021, the Company committed to provide a revolving line of credit with borrowing capacity of up to $60,000 to TypTap Insurance Group, Inc., a wholly-owned subsidiary. The credit line was available until the earlier of June 30, 2022 and the securing of alternative financing. This commitment has ended on February 26, 2021 after the investment transaction described below. On February 26, 2021, TTIG, the Company’s wholly-owned subsidiary, completed an investment transaction with a fund associated with Centerbridge Partners, L.P. Under the agreement, TTIG issued 9,000,000 voting shares of its Series A-1 Preferred Stock and 1,000,000 non-voting shares of its Series A-2 Preferred Stock (together “Series A Preferred Stock”), $0.001 par value, at a price of $10 per share for total proceeds of $100,000. Cumulative dividends are payable semi-annually in cash or paid-in-kind at TTIG’s option. Cash dividend rates are $0.50 per share in Year 1, $0.60 per share in Year 2, $0.75 per share in Year 3, and $0.95 in Year 4 and thereafter. The rates for paid-in-kind are $0.60 per share in Year 1 and $0.70 per share in Year 2. The holders of the Series A Preferred Stock have the right to convert the stock at any time into shares of common stock with an initial conversion rate of 1 to 1. The conversion rate will be adjusted under certain conditions. Unless converted earlier, all shares of Series A Preferred Stock will be automatically converted into shares of TTIG’s common stock at the then-applicable conversion rate upon 1) a public offering of TTIG’s common stock with gross proceeds of not less than $250,000 with a price per share at least equal to 150% of the original purchase price of the shares, or 2) at the election of holders of a majority of the Series A Preferred Stock, whichever comes first. The holders of Series A Preferred Stock also have redemption rights and liquidation preference. In connection with the transaction, the lead investor was granted warrants to purchase 750,000 shares of HCI with an exercise price of $54.40 per share. The warrants will be immediately exercisable and will expire on the fourth anniversary of the date of issuance. On March 2, 2021, GTB received from Kroger Co. approximately $3,100 in settlement of the lawsuit filed by GTB to enforce the guaranty described in Note 23 -- “Commitments and Contingencies.” GTB recorded this settlement in 2021. On March 8, 2021, the Company repaid the outstanding balance of $23,750 on its revolving credit facility. The borrowing capacity of the facility is now $65,000. 100 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, 2020). 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. 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 (2013) 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, 2020, our internal control over financial reporting was effective. Dixon Hughes Goodman, LLP, an independent registered public accounting firm, has audited the 2020 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. 101 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.hcigroup.com. Select “Investor Information” on the top 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, 2020. 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, 2020. ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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, 2020. 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 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, 2020. ITEM 14 – Principal Accounting Fees and Services The following table sets forth the aggregate fees for services related to the years ended December 31, 2020 and 2019 provided by Dixon Hughes Goodman, LLP, our principal accountant (in thousands): Audit fees (a) All other fees (b) 2020 2019 454 $ 98 552 $ 390 — 390 $ $ (a) (b) 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. All other fees represent fees billed for services provided to us not otherwise included in the category above. The Audit Committee pre-approved all 2020 engagements and fees for services provided by our principal accountant. 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, 2020. 102 ITEM 15 – Exhibits, Financial Statement Schedules (a) Financial Statements, Financial Statement Schedules and Exhibits PART IV (1) (2) Consolidated Financial Statements: See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. 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 or is not applicable. (3) Exhibits: See the exhibit listing set forth below: The following documents are filed as part of this report: EXHIBIT NUMBER DESCRIPTION 3.1 3.1.1 3.2 4.1 4.2 4.6 4.8 4.9 4.10 4.11 10.1 10.2 10.3 10.4 Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013. Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed October 18, 2013. Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed September 13, 2019. Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed November 7, 2013. Common Stock Purchase Warrant, dated February 26, 2021, issued by HCI Group, Inc. to CB Snowbird Holdings, L.P. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 1, 2021. Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended. Indenture, dated December 11, 2013, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. (including Global Note). Incorporated by reference to Exhibit 4.1 to our Form 8-K filed December 12, 2013. See Exhibits 3.1, 3.1.1 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining certain rights of security holders. Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017. Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017. Preferred Stock Purchase Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., HCI Group, Inc., and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021. Amended and Restated Articles of Incorporation of TypTap Insurance Group, Inc. filed February 26, 2021. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021. Shareholders Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., CB Snowbird Holdings, L.P., HCI Group, Inc., and the other shareholders party thereto. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021. Parent Guaranty Agreement, dated February 26, 2021, between HCI Group, Inc. and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021. 10.5** Restated HCI Group, Inc. 2012 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.1 of our Form 8-K filed March 23, 2017. 10.6** 10.7** HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 29, 2008. Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017. 103 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2016, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers (National Fire). Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 3, 2016. Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) (Arch), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (Chubb), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe First Excess of Loss Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe First Excess of Loss Reinsurance Contract (Endurance), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (Fidelis), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe First Excess of Loss Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) (Hiscox), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10- Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For Cat Excess) (Hiscox), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For Working Layer Cat) (Hiscox), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10- Q filed August 7, 2020. 104 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 Reinstatement Premium Protection Reinsurance Contract (Horseshoe), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe Excess of Loss Reinsurance Contract (Munich), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Top Layer Property Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reinstatement Premium Protection Reinsurance Contract (Transatlantic), effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Endorsement No. 1 to the Flood Catastrophe Excess of Loss Reinsurance Contract, effective: July 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by National Liability and Fire Insurance Company. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Working Layer Catastrophe Excess of Loss Reinsurance Contract, effective: June 1, 2020, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reimbursement Contract effective June 1, 2020 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Reimbursement Contract effective June 1, 2020 between TypTap Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2020. Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Joinder, Second Amendment to Credit Agreement and Modification of Other Loan Documents. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed January 28, 2021. 105 10.40 10.41 10.42 10.43 10.44 10.45 10.46** 10.47 Top Layer Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Reinstatement Premium Protection Reinsurance Contract effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR000D) effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Reinstatement Premium Protection Reinsurance Contract (For Excess Cat U8GR0008) effective June 1, 2019 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Reimbursement Contract effective June 1, 2019 between Homeowners Choice Property & Casualty Insurance Company and the State Board of Administration which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 7, 2019. Written Description of Non-Employee Director Compensation Arrangement adopted September 9, 2019 establishing compensation of our non- employee directors. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 6, 2019. Policy Replacement Agreement, dated February 12, 2020, by and between Homeowners Choice Property & Casualty Insurance Company, Inc. and Anchor Property & Casualty Insurance Company together with Anchor Insurance Managers, Inc. Incorporated by reference to Exhibit 99.1 of our Form 8-K filed February 14, 2020. 10.48** TypTap Insurance Group, Inc. 2021 Equity Incentive Plan. Incorporated by reference to Exhibit 10.5 of our Form 8-K filed March 1, 2021. 10.49** Form of Restricted Stock Award Agreement of TypTap Insurance Group, Inc. Incorporated by reference to Exhibit 10.6 of our Form 8-K filed March 1, 2021. 10.57 10.58 10.59 10.60 10.88** 10.89** 10.99** Form of executive restricted stock award contract. Incorporated by reference to Exhibit 10.57 of our Form 10-Q for the quarter ended March 31, 2014 filed May 1, 2014. Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc., as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed February 28, 2017. Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed March 3, 2017. Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank. Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018. Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.2 to our Form 8-K filed January 11, 2017. Employment Agreement between Paresh Patel and HCI Group, Inc. dated December 30, 2016. Incorporated by reference to the exhibit numbered 99.1 to our Form 8-K filed December 30, 2016. Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to exhibit 99.1 to our Form 8-K filed January 11, 2017. 10.100** Restricted Stock Award Contract between Mark Harmsworth and HCI Group, Inc. dated December 5, 2016. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017. 106 10.101** Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.1 to our Form 8-K filed February 14, 2018. 10.102** Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to exhibit 99.2 to our Form 8-K filed February 14, 2018. 10.103** Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.1 to our Form 8-K filed January 22, 2019. 10.104** Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to exhibit 99.2 to our Form 8-K filed January 22, 2019. 10.105** Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. date January 16, 2020. Incorporated by reference to exhibit 99.1 to our Form 8-K filed January 23, 2020. 10.106** Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to exhibit 99.2 to our Form 8-K filed January 23, 2020. 14 21 23.1 31.1 31.2 32.1 32.2 Code of Conduct of HCI Group, Inc. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013. Subsidiaries of HCI Group, Inc. Consent of Dixon Hughes Goodman LLP. 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 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase. 101.DEF Inline XBRL Definition Linkbase. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase. ** Management contract or compensatory plan. EX-104 Cover Page Interactive Data File (embedded within the Inline XBRL document) 107 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. SIGNATURES March 12, 2021 HCI GROUP, 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 12, 2021 March 12, 2021 March 12, 2021 March 12, 2021 March 12, 2021 March 12, 2021 March 12, 2021 By By By By By By By /s/ Paresh Patel Paresh Patel, Chief Executive Officer and Chairman of The Board of Directors (Principal Executive Officer) /s/ James Mark Harmsworth James Mark Harmsworth, Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Wayne Burks Wayne Burks, Director /s/ Sanjay Madhu Sanjay Madhu, Director /s/ Gregory Politis Gregory Politis, Director /s/ Anthony Saravanos Anthony Saravanos, Director /s/ Susan Watts Susan Watts, Director A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 108 Exhibit 4.6 Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended As of December 31, 2020, HCI Group, Inc. (the “Company,” “we,” “us,” and “our”) had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, our common stock, no par value. The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Articles of Incorporation, as amended, and our Bylaws, each of which appears as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and is incorporated by reference herein. We encourage you to read our Articles of Incorporation, our Bylaws and the applicable provisions of the Florida Business Corporations Act for additional information. Authorized Capital Stock. Under our Articles of Incorporation, we are authorized to issue 40,000,000 shares of common stock, no par value, and 20,000,000 shares of preferred stock, no par value, in one or more series designated by our board of directors. Voting Rights. The holders of our common stock are entitled to one vote per share on each matter submitted for a vote. Holders of our common stock are not entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by shareholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all holders of common stock present in person or represented by proxy, voting together as a single class. Dividends. Holders of our common stock will share ratably (based on the number of shares of common stock held) if and when any dividend is declared by the board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends by us and subject to any restrictions or preferential rights on the payment of dividends imposed by the terms of any outstanding series of preferred stock. Liquidation Rights. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets of the Company remaining after the payment of its liabilities, subject to the prior distribution rights of any series of preferred stock then outstanding. Other Rights. Our common stock is not subject to redemption nor do holders of our common stock have any preemptive rights to purchase additional shares of common stock. Holders of shares of our common stock do not have subscription, redemption or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. All of the outstanding shares of common stock are validly issued, fully paid and non-assessable. Listing on The New York Stock Exchange. Our common stock is listed on The New York Stock Exchange under the symbol “HCI.” As of December 31, 2020, the Company had the following active subsidiaries: HCI GROUP, INC. Subsidiaries Wholly-owned subsidiaries of HCI Group, 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. Greenleaf Capital LLC Omega Insurance Agency, Inc. Southern Administration, Inc. TypTap Insurance Company TypTap Management Company Enclave Services, Inc. HCI Insurance Administration Services, Inc. TypTap Insurance Group, Inc. Wholly-owned subsidiaries of Greenleaf Capital 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 Melbourne FMA, LLC FMKT Mel Owner LLC HCPCI Holdings LLC Sorrento PBX LLC Greenleaf Essence, LLC Century Park Holdings, LLC Gulf To Bay LM, LLC Westview Holdings, LLC Mirama Property Holdings, LLC Wholly-owned subsidiary of HCI Insurance Administration Services, Inc. Griston Claim Services, Inc. Griston Claim Management, Inc. 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 Florida Florida Florida Florida State or Sovereign Power of Incorporation Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida Florida State or Sovereign Power of Incorporation Florida Florida State or Sovereign Power of Incorporation India Consent of Dixon Hughes Goodman LLP Independent Registered Public Accounting Firm Exhibit 23.1 To the Board of Directors HCI Group, Inc. and Subsidiaries: We consent to the incorporation by reference in the registration statements (Nos. 333-180322 and 333-185228) on Form S-3 and registration statements (Nos. 333-154436 and 333-184227) on Form S-8 of HCI Group, Inc. of our reports dated March 12, 2021, with respect to the consolidated financial statements of HCI Group, Inc. and Subsidiaries and the effectiveness of internal control over financial reporting, which reports appear in HCI Group, Inc.’s 2020 Annual Report on Form 10-K. /s/ Dixon Hughes Goodman LLP DIXON HUGHES GOODMAN, LLP Tampa, Florida March 12, 2021 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.1 I, Paresh Patel, certify that: 1. I have reviewed this annual report on Form 10-K of HCI Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 12, 2021 /s/ PARESH PATEL Paresh Patel President and Chief Executive Officer (Principal Executive Officer) A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 I, James Mark Harmsworth, certify that: 1. I have reviewed this annual report on Form 10-K of HCI Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 12, 2021 /s/ JAMES MARK HARMSWORTH James Mark Harmsworth Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 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 HCI Group, 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, 2020 as filed with the Securities and Exchange Commission on March 12, 2021 (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. A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ PARESH PATEL Paresh Patel President and Chief Executive Officer March 12, 2021 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 HCI Group, 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, 2020 as filed with the Securities and Exchange Commission on March 12, 2021 (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. A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ JAMES MARK HARMSWORTH James Mark Harmsworth Chief Financial Officer March 12, 2021

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