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.
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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—
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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;
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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.
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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:
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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—
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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.
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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:
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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.
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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
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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 —
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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.
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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.
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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