Company Quick10K Filing
Quick10K
HCI Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$41.12 9 $350
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-09-09 Amend Bylaw, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-06-01 Enter Agreement
8-K 2019-05-30 Shareholder Vote
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-04-09 Officers
8-K 2019-04-08 Officers
8-K 2019-03-15 Other Events, Exhibits
8-K 2019-03-07 Earnings, Exhibits
8-K 2019-02-09 Officers
8-K 2018-12-17 Enter Agreement, Officers, Exhibits
8-K 2018-12-05 Enter Agreement, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-11-06 Other Events, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-01 Enter Agreement
8-K 2018-05-24 Shareholder Vote
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-04-17 Officers
8-K 2018-03-06 Earnings, Exhibits
8-K 2018-02-08 Enter Agreement, Officers, Exhibits
AIG American International Group 45,619
MKL Markel 15,734
AXS Axis Capital Holdings 5,431
MTG MGIC Investment 4,471
MCY Mercury General 2,905
PRA Proassurance 2,052
AMSF Amerisafe 1,316
ICCH ICC Holdings 53
AFH Atlas Financial Holdings 5
ALL Allstate Life Insurance 2
HCI 2019-06-30
Part I - Financial Information
Item 1 - Financial Statements
Note 1 - Summary of Significant Accounting Policies
Note 2 - Recent Accounting Pronouncements
Note 3 - Cash, Cash Equivalents, and Restricted Cash
Note 4 - Investments
Note 5 - Comprehensive Income (Loss)
Note 6 - Fair Value Measurements
Note 7 - Other Assets
Note 8 - Revolving Credit Facility
Note 9 - Long-Term Debt
Note 10 - Reinsurance
Note 11 - Losses and Loss Adjustment Expenses
Note 12 - Segment Information
Note 13 - Leases
Note 14 - Income Taxes
Note 15 - Earnings per Share
Note 16 - Stockholders' Equity
Note 17 - Stock-Based Compensation
Note 18 - Commitments and Contingencies
Note 19 - Subsequent Events
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-10.31 d648468dex1031.htm
EX-10.32 d648468dex1032.htm
EX-10.33 d648468dex1033.htm
EX-10.40 d648468dex1040.htm
EX-10.41 d648468dex1041.htm
EX-10.42 d648468dex1042.htm
EX-10.43 d648468dex1043.htm
EX-10.44 d648468dex1044.htm
EX-10.45 d648468dex1045.htm
EX-31.1 d648468dex311.htm
EX-31.2 d648468dex312.htm
EX-32.1 d648468dex321.htm
EX-32.2 d648468dex322.htm

HCI Group Earnings 2019-06-30

HCI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d648468d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended June 30, 2019

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   20-5961396
(State of Incorporation)   (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

 

Trading

Symbol

 

Name of Each Exchange

on Which Registered

Common Shares, no par value   HCI   New York Stock Exchange

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

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

 

Large accelerated filer      Accelerated filer  
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate number of shares of the Registrant’s Common Stock, no par value, outstanding on July 31, 2019 was 8,180,174.

 

 

 


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page  
   PART I — FINANCIAL INFORMATION  

Item 1

   Financial Statements  
   Consolidated Balance Sheets:  
  

June 30, 2019 (unaudited) and December 31, 2018

    1-2  
   Consolidated Statements of Income:  
  

Three and six months ended June 30, 2019 and 2018 (unaudited)

    3  
   Consolidated Statements of Comprehensive Income:  
  

Three and six months ended June 30, 2019 and 2018 (unaudited)

    4  
   Consolidated Statements of Stockholders’ Equity:  
  

Three and six months ended June 30, 2019 and 2018 (unaudited)

    5-8  
   Consolidated Statements of Cash Flows:  
  

Six months ended June 30, 2019 and 2018 (unaudited)

    9-10  
   Notes to Consolidated Financial Statements (unaudited)     11-42  

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations     43-56  

Item 3

   Quantitative and Qualitative Disclosures about Market Risk     57-58  

Item 4

   Controls and Procedures     59  
   PART II — OTHER INFORMATION  

Item 1

   Legal Proceedings     59  

Item 1A

   Risk Factors     59-60  

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds     60-61  

Item 3

   Defaults upon Senior Securities     61  

Item 4

   Mine Safety Disclosures     61  

Item 5

   Other Information     61  

Item 6

   Exhibits     62-69  

Signatures

    70  

Certifications

 

 


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

 

     June 30,
2019
     December 31,
2018
 
     (Unaudited)         

Assets

     

Fixed-maturity securities, available for sale, at fair value (amortized cost: $207,563 and $184,670, respectively)

   $ 209,914      $ 182,723  

Equity securities, at fair value (cost: $27,770 and $45,671, respectively)

     29,861        41,143  

Short-term investments, at fair value

     508        66,479  

Limited partnership investments, at equity

     30,790        32,293  

Investment in unconsolidated joint venture, at equity

     791        845  

Assets held for sale

     10,025        9,810  

Real estate investments

     63,228        54,490  
  

 

 

    

 

 

 

Total investments

     345,117        387,783  

Cash and cash equivalents

     217,153        239,458  

Restricted cash

     700        700  

Accrued interest and dividends receivable

     1,682        1,792  

Income taxes receivable

     1,511        971  

Premiums receivable

     26,398        16,667  

Prepaid reinsurance premiums

     29,543        17,932  

Reinsurance recoverable:

     

Paid losses and loss adjustment expenses

     19,183        11,151  

Unpaid losses and loss adjustment expenses

     58,897        112,760  

Deferred policy acquisition costs

     20,851        16,507  

Property and equipment, net

     13,873        13,338  

Intangible assets, net

     4,498        4,800  

Other assets

     12,734        9,004  
  

 

 

    

 

 

 

Total assets

   $ 752,140      $ 832,863  
  

 

 

    

 

 

 

(continued)                                         

 

1


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets — continued

(Dollar amounts in thousands)

 

     June 30,
2019
     December 31,
2018
 
     (Unaudited)         

Liabilities and Stockholders’ Equity

     

Losses and loss adjustment expenses

   $ 154,242      $ 207,586  

Unearned premiums

     193,426        157,729  

Advance premiums

     13,652        6,192  

Assumed reinsurance balances payable

     —          14  

Accrued expenses

     11,099        6,483  

Deferred income taxes, net

     2,750        1,068  

Revolving credit facility

     9,500        —    

Long-term debt

     162,293        250,150  

Other liabilities

     18,684        22,200  
  

 

 

    

 

 

 

Total liabilities

     565,646        651,422  
  

 

 

    

 

 

 

Commitments and contingencies (Note 18)

     

Stockholders’ equity:

     

7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued or 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, 8,053,573 and 8,356,730 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)

     —          —    

Additional paid-in capital

     —          —    

Retained income

     184,739        182,894  

Accumulated other comprehensive income (loss), net of taxes

     1,755        (1,453
  

 

 

    

 

 

 

Total stockholders’ equity

     186,494        181,441  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 752,140      $ 832,863  
  

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

2


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2019     2018     2019     2018  

Revenue

        

Gross premiums earned

   $ 83,315     $ 85,919     $ 165,912     $ 171,691  

Premiums ceded

     (31,317     (32,954     (62,730     (65,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     51,998       52,965       103,182       106,487  

Net investment income

     4,226       3,399       7,504       6,617  

Net realized investment (losses) gains

     (133     2,662       (505     4,894  

Net unrealized investment gains (losses)

     1,326       (1,557     6,619       (4,157

Net other-than-temporary impairment losses

     —         (40     —         (80

Policy fee income

     800       855       1,595       1,720  

Other

     413       529       869       1,071  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     58,630       58,813       119,264       116,552  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Losses and loss adjustment expenses

     24,293       21,803       51,289       41,458  

Policy acquisition and other underwriting expenses

     10,077       9,959       19,750       19,319  

General and administrative personnel expenses

     7,998       7,840       15,362       14,123  

Interest expense

     2,884       4,505       7,221       8,975  

Other operating expenses

     3,063       3,186       6,044       6,353  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     48,315       47,293       99,666       90,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     10,315       11,520       19,598       26,324  

Income tax expense

     2,762       5,117       5,307       9,130  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,553     $ 6,403     $ 14,291     $ 17,194  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.93     $ 0.96     $ 1.75     $ 2.21  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.90     $ 0.92     $ 1.72     $ 2.03  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2019     2018     2019     2018  

Net income

   $ 7,553     $ 6,403     $ 14,291     $ 17,194  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Change in unrealized gain (loss) on investments:

        

Net unrealized gain (loss) arising during the period

     1,626       (65     4,330       (2,693

Other-than-temporary impairment loss charged to income

     —         40       —         80  

Call and repayment losses charged to investment income

     1       3       1       4  

Reclassification adjustment for net realized loss (gain)

     —         35       (33     (661
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gain (loss)

     1,627       13       4,298       (3,270

Deferred income taxes on above change

     (413     (3     (1,090     829  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,214       10       3,208       (2,441
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 8,767     $ 6,413     $ 17,499     $ 14,753  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended June 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

 

    

 

Common Stock

     Additional
Paid-In

Capital
    Retained
Income
    Accumulated
Other
Comprehensive
Income

Net of Tax
     Total
Stockholders’

Equity
 
     Shares     Amount  

Balance at March 31, 2019

     8,359,889     $ —        $ 103     $ 186,396     $ 541      $ 187,040  

Net income

     —         —          —         7,553       —          7,553  

Total other comprehensive income, net of income taxes

     —         —          —         —         1,214        1,214  

Exercise of common stock options

     10,000       —          63       —         —          63  

Issuance of restricted stock

     133,160       —          —         —         —          —    

Forfeiture of restricted stock

     (264,211     —          —         —         —          —    

Repurchase and retirement of common stock

     (24,478     —          (1,005     —         —          (1,005

Repurchase and retirement of common stock under share repurchase plan

     (160,787     —          (6,668     —         —          (6,668

Common stock dividends ($0.40 per share)

     —         —          —         (3,192     —          (3,192

Stock-based compensation

     —         —          1,489       —         —          1,489  

Additional paid-in capital shortfall allocated to retained income

     —         —          6,018       (6,018     —          —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2019

     8,053,573     $ —        $ —       $ 184,739     $ 1,755      $ 186,494  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

5


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended June 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

 

    

 

Common Stock

     Additional
Paid-In

Capital
    Retained
Income
    Accumulated
Other
Comprehensive
(Loss) Income,

Net of Tax
    Total
Stockholders’

Equity
 
     Shares     Amount  

Balance at March 31, 2018

     8,593,850     $ —        $ —       $ 193,971     $ (1,069   $ 192,902  

Net income

     —         —          —         6,403       —         6,403  

Total other comprehensive income, net of income taxes

     —         —          —         —         10       10  

Issuance of restricted stock

     143,360       —          —         —         —         —    

Forfeiture of restricted stock

     (27,115     —          —         —         —         —    

Repurchase and retirement of common stock

     (17,256     —          (730     —         —         (730

Repurchase and retirement of common stock under share repurchase plan

     (174,951     —          (7,174     —         —         (7,174

Common stock dividends ($0.375 per share)

     —         —          —         (1,423     —         (1,423

Stock-based compensation

     —         —          1,033       —         —         1,033  

Additional paid-in capital shortfall allocated to retained income

     —         —          6,871       (6,871     —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

     8,517,888     $ —        $ —       $ 192,080     $ (1,059   $ 191,021  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

6


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

 

    

 

Common Stock

     Additional
Paid-In

Capital
    Retained
Income
    Accumulated
Other
Comprehensive
(Loss) Income,

Net of Tax
    Total
Stockholders’

Equity
 
     Shares     Amount  

Balance at December 31, 2018

     8,356,730     $ —        $ —       $ 182,894     $ (1,453   $ 181,441  

Net income

     —         —          —         14,291       —         14,291  

Total other comprehensive income, net of income taxes

     —         —          —         —         3,208       3,208  

Exercise of common stock options

     10,000       —          63       —         —         63  

Issuance of restricted stock

     173,160       —          —         —         —         —    

Forfeiture of restricted stock

     (268,892     —          —         —         —         —    

Repurchase and retirement of common stock

     (24,849     —          (1,023     —         —         (1,023

Repurchase and retirement of common stock under share repurchase plan

     (192,576     —          (8,006     —         —         (8,006

Common stock dividends ($0.80 per share)

     —         —          —         (6,428     —         (6,428

Stock-based compensation

     —         —          2,948       —         —         2,948  

Additional paid-in capital shortfall allocated to retained income

     —         —          6,018       (6,018     —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2019

     8,053,573     $ —        $ —       $ 184,739     $ 1,755     $ 186,494  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

7


Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

 

    

 

Common Stock

     Additional
Paid-In

Capital
    Retained
Income
    Accumulated
Other
Comprehensive
Income (Loss),

Net of Tax
    Total
Stockholders’

Equity
 
     Shares     Amount  

Balance at December 31, 2017

     8,762,416     $ —        $ —       $ 189,409     $ 4,566     $ 193,975  

Net income

     —         —          —         17,194       —         17,194  

Total other comprehensive loss, net of income taxes

     —         —          —         —         (2,441     (2,441

Cumulative effect adjustments for adoption of new accounting standards:

             

Reclassification of after-tax net unrealized holding gains related to equity securities

     —         —          —         4,168       (4,168     —    

Reclassification of stranded tax effects related to available-for-sale fixed-maturity and equity securities

     —         —          —         (984     984       —    

Issuance of restricted stock

     183,360       —          —         —         —         —    

Forfeiture of restricted stock

     (45,020     —          —         —         —         —    

Repurchase and retirement of common stock

     (23,346     —          (941     —         —         (941

Repurchase and retirement of common stock under share repurchase plan

     (359,522     —          (13,711     —         —         (13,711

Purchase of noncontrolling interest

     —         —          (539     —         —         (539

Common stock dividends ($0.725 per share)

     —         —          —         (4,421     —         (4,421

Stock-based compensation

     —         —          1,905       —         —         1,905  

Additional paid-in capital shortfall allocated to retained income

     —         —          13,286       (13,286     —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

     8,517,888     $ —        $ —       $ 192,080     $ (1,059   $ 191,021  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

     Six Months Ended
June 30,
 
     2019     2018  

Cash flows from operating activities:

    

Net income

   $ 14,291     $ 17,194  

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

    

Stock-based compensation

     2,948       1,905  

Net amortization of premiums on investments in fixed-maturity securities

     127       528  

Depreciation and amortization

     4,702       5,439  

Deferred income tax expense

     592       1,932  

Net realized investment losses (gains)

     505       (4,894

Net unrealized investment (gains) losses

     (6,619     4,157  

Other-than-temporary impairment losses

     —         80  

Loss (income) from unconsolidated joint venture

     54       (330

Net income from limited partnership interests

     (832     (852

Distributions received from limited partnership interests

     3,616       609  

Foreign currency remeasurement (gain) loss

     (5     115  

Other

     271       —    

Changes in operating assets and liabilities:

    

Accrued interest and dividends receivable

     110       511  

Income taxes

     (540     13,084  

Premiums receivable

     (9,731     (8,090

Prepaid reinsurance premiums

     (11,611     (7,294

Reinsurance recoverable

     45,831       7,203  

Deferred policy acquisition costs

     (4,344     (3,374

Other assets

     (1,393     1,520  

Losses and loss adjustment expenses

     (53,344     (26,191

Unearned premiums

     35,697       29,932  

Advance premiums

     7,460       8,202  

Assumed reinsurance balances payable

     (14     118  

Reinsurance recovered in advance on unpaid losses

     —         (13,885

Accrued expenses and other liabilities

     1,063       (28
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,834       27,591  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investments in limited partnership interests

     (1,751     (2,638

Distributions received from limited partnership interests

     470       114  

Purchase of property and equipment

     (1,313     (1,045

Purchase of real estate investments

     (9,892     (6,520

Purchase of intangible assets

     —         (409

Purchase of fixed-maturity securities

     (75,727     (50,976

Purchase of equity securities

     (15,778     (20,832

Purchase of short-term and other investments

     (684     (125,001

Proceeds from sales of fixed-maturity securities

     2,985       77,769  

Proceeds from calls, repayments and maturities of fixed-maturity securities

     47,788       27,207  

Proceeds from sales of equity securities

     32,841       40,436  

Proceeds from sales, redemptions and maturities of short-term and other investments

     66,897       15,117  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     45,836       (46,778
  

 

 

   

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)

 

     Six Months Ended
June 30,
 
     2019     2018  

Cash flows from financing activities:

    

Cash dividends paid

     (6,581     (5,011

Cash dividends received under share repurchase forward contract

     153       590  

Proceeds from revolving credit facility

     9,500       —    

Proceeds from exercise of common stock options

     63       —    

Repayment of long-term debt

     (90,647     (520

Repurchases of common stock

     (1,023     (941

Repurchases of common stock under share repurchase plan

     (8,006     (13,711

Purchase of non-controlling interest

     —         (539

Debt issuance costs

     (459     —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (97,000     (20,132
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     25       (112
  

 

 

   

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

     (22,305     (39,431

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

     240,158       256,693  
  

 

 

   

 

 

 

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

   $ 217,853     $ 217,262  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes

   $ 5,254     $ 43  
  

 

 

   

 

 

 

Cash paid for interest

   $ 5,453     $ 5,309  
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

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

   $ 3,208     $ (2,441
  

 

 

   

 

 

 

Receivable from sales of equity securities

   $ —       $ 530  
  

 

 

   

 

 

 

Receivable from maturities of fixed-maturity securities

   $ 2,000     $ 15,000  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements for HCI Group, Inc. and its majority-owned and controlled subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2019 and the results of operations and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2019. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018 included in the Company’s Form 10-K, which was filed with the SEC on March 8, 2019.

In preparing the interim unaudited consolidated financial statements, management was required to make certain judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

Material estimates that are particularly susceptible to significant change in the near term are related to the Company’s losses and loss adjustment expenses, which include amounts estimated for claims incurred but not yet reported. The Company uses various assumptions and actuarial data it believes to be reasonable under the circumstances to make these estimates. In addition, accounting policies specific to reinsurance with retrospective provisions, reinsurance recoverable, deferred income taxes, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements.

All significant intercompany balances and transactions have been eliminated.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). The guidance establishes new principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 is effective for the Company January 1, 2019 and supersedes accounting for leases prescribed in Topic 840, Leases. ASU 2016-02 leaves lessor accounting substantially unchanged. The key change affecting the Company is the requirement that operating leases be recorded on the balance sheet. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU No.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

2019-01, Codification Improvements to Topic 842. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company was initially required to use a modified retrospective method and apply this standard at the beginning of the earliest comparative period presented in the financial statements. Subsequently, the FASB permitted the application of this standard at the beginning of the adoption period as an alternative.

Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. As a result, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. The Company elected a package of practical expedients, which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. Upon adoption, the Company, as a lessee, recognized ROU assets of approximately $771 and lease liabilities of approximately $812 for all operating leases except for those that have a lease term of 12 months or less.

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 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 and corresponding lease liabilities are included with other assets and other liabilities, respectively.

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.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Reclassification

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

Note 2 — Recent Accounting Pronouncements

Accounting Standard to be Adopted in Fiscal Year 2020

In June 2016, the 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. For available-for-sale debt securities, credit losses will continue to be measured in a manner similar to the current standard. ASU 2016-13 requires a valuation allowance, rather than a write-down, to be recognized for the Company’s expected credit losses. The valuation allowance account is a deduction from the amortized cost basis of the financial assets to reflect the net amount expected to be collected. Any subsequent changes to the expected credit losses of the financial assets will be recorded in earnings. The Company is required to use the modified-retrospective method by recognizing a cumulative-effect adjustment to the beginning retained income of fiscal year 2020. As for debt securities in which an other-than-temporary impairment had been recognized before the effective date, the prospective transition method will be used. The Company does not anticipate a material impact on its financial position as a result of adopting this update.

Note 3 — Cash, Cash Equivalents, and Restricted Cash

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

 

     June 30,
2019
     December 31,
2018
 

Cash and cash equivalents

   $ 217,153      $ 239,458  

Restricted cash

     700        700  
  

 

 

    

 

 

 

Total

   $ 217,853      $ 240,158  
  

 

 

    

 

 

 

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

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 4 — Investments

a) Available-for-Sale Fixed-Maturity Securities

The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At June 30, 2019 and December 31, 2018, 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:

 

     Cost or
Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Estimated
Fair Value
 

As of June 30, 2019

          

U.S. Treasury and U.S. government agencies

   $ 26,577      $ 88      $ (13   $ 26,652  

Corporate bonds

     162,512        2,049        (288     164,273  

State, municipalities, and political subdivisions

     10,012        188        —         10,200  

Exchange-traded debt

     8,344        328        (5     8,667  

Redeemable preferred stock

     118        4        —         122  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 207,563      $ 2,657      $ (306   $ 209,914  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2018

          

U.S. Treasury and U.S. government agencies

   $ 61,979      $ 24      $ (206   $ 61,797  

Corporate bonds

     103,580        134        (1,809     101,905  

State, municipalities, and political subdivisions

     10,567        98        (3     10,662  

Exchange-traded debt

     8,426        82        (261     8,247  

Redeemable preferred stock

     118        —          (6     112  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 184,670      $ 338      $ (2,285   $ 182,723  
  

 

 

    

 

 

    

 

 

   

 

 

 

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of June 30, 2019 and December 31, 2018 are as follows:    

 

     Amortized
Cost
     Estimated
Fair Value
 

As of June 30, 2019

     

Due in one year or less

   $ 43,816      $ 44,011  

Due after one year through five years

     151,617        153,201  

Due after five years through ten years

     7,576        7,916  

Due after ten years

     4,554        4,786  
  

 

 

    

 

 

 
   $ 207,563      $ 209,914  
  

 

 

    

 

 

 

 

     Amortized
Cost
     Estimated
Fair Value
 

As of December 31, 2018

     

Due in one year or less

   $ 50,659      $ 50,574  

Due after one year through five years

     117,826        116,498  

Due after five years through ten years

     11,602        11,253  

Due after ten years

     4,583        4,398  
  

 

 

    

 

 

 
   $ 184,670      $ 182,723  
  

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and six months ended June 30, 2019 and 2018 were as follows:    

 

     Proceeds      Gross
Realized
Gains
     Gross
Realized
Losses
 

Three months ended June 30, 2019

   $ 74      $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2018

   $ 559      $ —        $ (35
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2019

   $ 2,985      $ 34      $ (1
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2018

   $ 77,769      $ 1,161      $ (500
  

 

 

    

 

 

    

 

 

 

Other-than-temporary Impairment

The Company regularly reviews its individual investment securities for other-than-temporary impairment. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including-

 

   

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

 

   

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

 

   

general market conditions and industry or sector specific factors 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.

There was no impairment loss recognized for the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, the Company recognized $40 and $80, respectively, of impairment loss on one fixed-maturity security. At June 30, 2019, none of the fixed-maturity securities were considered other-than-temporarily impaired versus one fixed-maturity security at June 30, 2018.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Securities with gross unrealized loss positions at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

 

     Less Than Twelve Months      Twelve Months or Longer      Total  
As of June 30, 2019    Gross
Unrealized
Loss
    Estimated
Fair Value
     Gross
Unrealized
Loss
    Estimated
Fair Value
     Gross
Unrealized
Loss
    Estimated
Fair
Value
 

U.S. Treasury and U.S. government agencies

   $ —       $ —        $ (13   $ 2,675      $ (13   $ 2,675  

Corporate bonds

     —         —          (288     31,727        (288     31,727  

Exchange-traded debt

     (5     1,060              —          (5     1,060  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (5   $ 1,060      $ (301   $ 34,402      $ (306   $ 35,462  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At June 30, 2019, there were 22 securities in an unrealized loss position. Of these securities, 19 securities had been in an unrealized loss position for 12 months or longer.

 

     Less Than Twelve Months      Twelve Months or Longer      Total  
As of December 31, 2018    Gross
Unrealized
Loss
    Estimated
Fair Value
     Gross
Unrealized
Loss
    Estimated
Fair Value
     Gross
Unrealized
Loss
    Estimated
Fair Value
 

U.S. Treasury and U.S. government agencies

   $ (59   $ 21,031      $ (147   $ 35,393      $ (206   $ 56,424  

Corporate bonds

     (542     19,932        (1,267     36,682        (1,809     56,614  

State, municipalities, and political subdivisions

     (3     715        —         —          (3     715  

Exchange-traded debt

     (261     5,275        —         —          (261     5,275  

Redeemable preferred stock

     (6     112        —         —          (6     112  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (871   $ 47,065      $ (1,414   $ 72,075      $ (2,285   $ 119,140  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At December 31, 2018, there were 82 securities in an unrealized loss position. Of these securities, 35 securities had been in an unrealized loss position for 12 months or longer.

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At June 30, 2019 and December 31, 2018, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

 

     Cost      Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Estimated
Fair
Value
 

June 30, 2019

   $ 27,770      $ 2,421      $ (330   $ 29,861  

December 31, 2018

   $ 45,671      $ 1,059      $ (5,587   $ 41,143  

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Net gains recognized

   $ 1,193      $ 1,134      $ 6,030     $ 70  

Exclude: Net realized (losses) gains recognized for securities sold

     (133      2,691        (589     4,227  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net unrealized gains (losses) recognized

   $ 1,326      $ (1,557    $ 6,619     $ (4,157
  

 

 

    

 

 

    

 

 

   

 

 

 

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and six months ended June 30, 2019 and 2018 were as follows:

 

     Proceeds      Gross
Realized
Gains
     Gross
Realized
Losses
 

Three months ended June 30, 2019

   $ 4,967      $ 113      $ (246
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2018

   $ 16,003      $ 2,794      $ (103
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2019

   $ 32,841      $ 2,187      $ (2,776
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2018

   $ 40,436      $ 4,971      $ (744
  

 

 

    

 

 

    

 

 

 

c) Short-Term Investments

Short-term investments consist of the following at June 30, 2019 and December 31, 2018.

 

     June 30,
2019
     December 31,
2018
 

Certificates of deposit

   $ 508      $ 56,519  

Zero-coupon commercial paper

     —          9,960  
  

 

 

    

 

 

 

Total

   $ 508      $ 66,479  
  

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

d) Limited Partnership Investments

The Company has interests in limited partnerships that are not registered or readily tradeable on a securities exchange. These partnerships are private equity funds managed by general partners who make decisions with regard to financial policies and operations. As such, the Company is not the primary beneficiary and does not consolidate these partnerships. The following table provides information related to the Company’s investments in limited partnerships:

 

     June 30, 2019      December 31, 2018  
Investment Strategy    Carrying
Value
     Unfunded
Balance
     (%)(a)      Carrying
Value
     Unfunded
Balance
     (%)(a)  

Primarily in senior secured loans and, to a limited extent, in other debt and equity securities of private U.S. lower-middle-market companies. (b)(c)(e)

   $ 10,088      $ 2,085        15.37      $ 10,169      $ 2,577        15.37  

Value creation through active distressed debt investing primarily in bank loans, public and private corporate bonds, asset-backed securities, and equity securities received in connection with debt restructuring. (b)(d)(e)

     7,240        —          1.76        9,219        —          1.76  

High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g)

     9,039        1,567        0.18        9,023        2,329        0.18  

Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)

     1,462        3,270        0.47        1,156        3,706        0.47  

Value-oriented investments in mature real estate private equity funds and portfolio globally. (b)(j)

     2,961        7,630        2.24        2,726        7,692        3.28  
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 30,790      $ 14,552         $ 32,293      $ 16,304     
  

 

 

    

 

 

       

 

 

    

 

 

    

 

(a)

Represents the Company’s percentage investment in the fund at each balance sheet date.

(b)

Except under certain circumstances, withdrawals from the funds or any assignments are not permitted. Distributions, except income from late admission of a new limited partner, will be received when underlying investments of the funds are liquidated.

(c)

Expected to have a ten-year term and the capital commitment is expected to expire on September 3, 2019.

(d)

Expected to have a three-year term from June 30, 2018. Although the capital commitment period already ended, the general partner could still request an additional funding of approximately $843 under certain circumstances.

(e)

At the fund manager’s discretion, the term of the fund may be extended for up to two additional one-year periods.

(f)

Expected to have a ten-year term and the capital commitment is expected to expire on June 30, 2020.

(g)

With the consent of a supermajority of partners, the term of the fund may be extended for up to three additional one-year periods.

(h)

Expected to have a six-year term from the commencement date, which can be extended for up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.

(i)

Unless extended or terminated for reasons specified in the agreement, the capital commitment is expected to expire on December 1, 2019.

(j)

Expected to have an eight-year term after the final fund closing date, which has yet to be determined.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

The following 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. In applying the equity method of accounting, the Company uses the most recently available financial information provided by the general partner of each of these partnerships. The financial statements of these limited partnerships are audited annually.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Operating results:

          

Total income

   $ 338,414      $ 51,074      $ 247,901     $ 209,030  

Total expenses

     (32,140      (27,951      (81,173     (85,695
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 306,274      $ 23,123      $ 166,728     $ 123,335  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     June 30,
2019
     December 31,
2018
 

Balance Sheet:

     

Total assets

   $ 7,381,073      $ 6,689,792  

Total liabilities

   $ 580,840      $ 394,029  

For the three and six months ended June 30, 2019, the Company recognized net investment income of $1,043 and $832, respectively, for these investments. During the three and six months ended June 30, 2019, the Company received total cash distributions of $3,073 and $4,086, respectively. Cash distributions representing return on investment were $2,603 and $3,616 for the three and six months ended June 30, 2019, respectively.

For the three and six months ended June 30, 2018, the Company recognized net investment income of $247 and $852, respectively. During the three months ended June 30, 2018, the Company received total cash distributions of $595, representing $114 of returned capital and $481 of return on investment. During the six months ended June 30, 2018, the Company received total cash distributions of $723, representing $114 of returned capital and $609 of return on investment. At June 30, 2019 and December 31, 2018, the Company’s cumulative contributed capital to the partnerships at each respective balance sheet date totaled $30,106 and $28,354, respectively, and the Company’s maximum exposure to loss aggregated $30,790 and $32,293, respectively.

e) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At June 30, 2019 and December 31, 2018, the Company’s maximum exposure to loss relating to the variable interest entity was $791 and $845, respectively, representing the carrying value of the investment. There was no cash distribution during the six months ended June 30, 2019 and 2018. At June 30, 2019 and December 31, 2018, there was no undistributed income from this equity method investment. The following tables provide FMJV’s summarized unaudited financial results and the unaudited financial positions:

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Operating results:

          

Total revenues and gain

   $ —        $ 438      $ 2     $ 438  

Total expenses

     (24      (14      (62     (71
  

 

 

    

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (24    $ 424      $ (60   $ 367  
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s share of net (loss) income*

   $ (21    $ 381      $ (54   $ 330  

 

*

Included in net investment income in the Company’s consolidated statements of income.

 

     June 30,
2019
     December 31,
2018
 

Balance Sheet:

     

Property and equipment, net

   $ 763      $ 787  

Cash

     124        149  

Other

     —          5  
  

 

 

    

 

 

 

Total assets

   $ 887      $ 941  
  

 

 

    

 

 

 

Other liabilities

   $ 9      $ 3  

Members’ capital

     878        938  
  

 

 

    

 

 

 

Total liabilities and members’ capital

   $ 887      $ 941  
  

 

 

    

 

 

 

Investment in unconsolidated joint venture, at equity**

   $ 791      $ 845  

 

**

Includes the 90% share of FMKT Mel JV’s operating results.

f) Real Estate Investments

Real estate investments consist of the following as of June 30, 2019 and December 31, 2018.

 

     June 30,
2019
     December 31,
2018
 

Land

   $ 32,384      $ 23,884  

Land improvements

     10,249        8,717  

Buildings

     19,207        19,201  

Tenant and leasehold improvements

     1,379        1,261  

Other

     4,602        5,266  
  

 

 

    

 

 

 

Total, at cost

     67,821        58,329  

Less: accumulated depreciation and amortization

     (4,593      (3,839
  

 

 

    

 

 

 

Real estate investments

   $ 63,228      $ 54,490  
  

 

 

    

 

 

 

On February 27, 2019, the Company acquired approximately nine acres of undeveloped land located near its current headquarters in Tampa, Florida for a purchase price of $8,500, which was primarily financed by the Company’s revolving credit facility. The transaction was accounted for as an asset acquisition. As such, all acquisition-related costs were capitalized.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Depreciation and amortization expense related to real estate investments was $422 and $402 for the three months ended June 30, 2019 and 2018, respectively, and $754 and $796 for the six months ended June 30, 2019 and 2018, respectively.

g) Net Investment Income

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Available-for-sale fixed-maturity securities

   $ 1,622      $ 1,119      $ 3,157     $ 2,258  

Equity securities

     293        534        674       1,155  

Investment expense

     (106      (140      (235     (310

Limited partnership investments

     1,043        247        832       852  

Real estate investments

     (105      14        201       217  

Loss (income) from unconsolidated joint venture

     (21      381        (54     330  

Cash and cash equivalents

     1,495        818        2,571       1,642  

Short-term investments

     5        426        358       473  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net investment income

   $ 4,226      $ 3,399      $ 7,504     $ 6,617  
  

 

 

    

 

 

    

 

 

   

 

 

 

Note 5 — Comprehensive Income (Loss)

Comprehensive income (loss) includes net income and other comprehensive income or loss, which for the Company includes changes in unrealized gains or losses of investments carried at fair value and changes in the unrealized other-than-temporary impairment losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows:

 

     Three Months Ended
June 30, 2019
     Three Months Ended
June 30, 2018
 
            Income Tax                   Income Tax        
     Before
Tax
     Expense
(Benefit)
     Net of
Tax
     Before
Tax
    Expense
(Benefit)
    Net of
Tax
 

Unrealized gain (loss) arising during the period

   $ 1,626      $ 413      $ 1,213      $ (65   $ (16   $ (49

Other-than-temporary impairment loss

     —          —          —          40       10       30  

Call and repayment losses charged to investment income

     1        —          1        3       1       2  

Reclassification adjustment for realized losses

     —          —          —          35       8       27  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive gain (loss)

   $ 1,627      $ 413      $ 1,214      $ 13     $ 3     $ 10  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

     Six Months Ended
June 30, 2019
    Six Months Ended
June 30, 2018
 
           Income Tax                 Income Tax        
     Before
Tax
    Expense
(Benefit)
    Net of
Tax
    Before
Tax
    Expense
(Benefit)
    Net of
Tax
 

Unrealized gain (loss) arising during the period

   $ 4,330     $ 1,098     $ 3,232     $ (2,693   $ (682   $ (2,011

Other-than-temporary impairment loss

     —         —         —         80       20       60  

Call and repayment losses charged to investment income

     1       —         1       4       1       3  

Reclassification adjustment for realized losses

     (33     (8     (25     (661     (168     (493
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive gain (loss)

   $ 4,298     $ 1,090     $ 3,208     $ (3,270   $ (829   $ (2,441
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 6 — Fair Value Measurements

The Company records and discloses certain financial assets at their estimated fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

 

Level 1       Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2       Other inputs that are observable for the asset, either directly or indirectly such as quoted prices for identical assets that are not observable throughout the full term of the asset.
Level 3       Inputs that are unobservable.

Valuation Methodology

Cash and cash equivalents

Cash and cash equivalents primarily consist of money-market funds and certificates of deposit maturing within 90 days. Their carrying value approximates fair value due to the short maturity and high liquidity of these funds.

Short-term investments

Short-term investments consist of certificates of deposit 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 of the Company’s fixed-maturity and equity securities are determined in accordance with U.S. GAAP, using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical securities or other inputs that are observable either directly or indirectly, such as quoted prices for similar securities. In those instances where observable inputs are not

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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.

Limited Partnership Investments

As described in Note 4 — “Investments” under Limited Partnership Investments, the Company has interests in limited partnerships which are private equity funds. Pursuant to U.S. GAAP, these funds are required to use fair value accounting; therefore, the estimated fair value approximates the carrying value of these funds.

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:

 

     Maturity
Date
   Valuation Methodology

3.875% Convertible senior notes

   2019    Quoted price

4.25% Convertible senior notes

   2037    Quoted price

3.95% Promissory note

   2020    Discounted cash flow method/Level 3 inputs

4% Promissory note

   2031    Discounted cash flow method/Level 3 inputs

3.75% Callable promissory note

   2036    Discounted cash flow method/Level 3 inputs

4.55% Promissory note

   2036    Discounted cash flow method/Level 3 inputs

 

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Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Assets Measured at Estimated Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets measured at estimated fair value on a recurring basis. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of June 30, 2019 and December 31, 2018:

 

     Fair Value Measurements Using         
     (Level 1)      (Level 2)      (Level 3)      Total  

As of June 30, 2019

           

Financial Assets:

           

Cash and cash equivalents

   $ 217,153      $ —        $ —        $ 217,153  

Restricted cash

   $ 700      $ —        $ —        $ 700  

Short-term investments

   $ 508        —          —          508  

Fixed-maturity securities:

           

U.S. Treasury and U.S. government agencies

   $ 25,151      $ 1,501      $ —        $ 26,652  

Corporate bonds

     164,273        —          —          164,273  

State, municipalities, and political subdivisions

     —          10,200        —          10,200  

Exchange-traded debt

     8,667        —          —          8,667  

Redeemable preferred stock

     122        —          —          122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     198,213        11,701        —          209,914  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 29,861      $ —        $ —        $ 29,861  

 

     Fair Value Measurements Using         
     (Level 1)      (Level 2)      (Level 3)      Total  

As of December 31, 2018

           

Financial Assets:

           

Cash and cash equivalents

   $ 239,458      $ —        $ —        $ 239,458  

Restricted cash

   $ 700      $ —        $ —        $ 700  

Short-term investments

   $ 66,479      $ —        $ —        $ 66,479  

Fixed-maturity securities:

           

U.S. Treasury and U.S. government agencies

   $ 60,297      $ 1,500      $ —        $ 61,797  

Corporate bonds

     101,905        —          —          101,905  

State, municipalities, and political subdivisions

     —          10,662        —          10,662  

Exchange-traded debt

     8,247        —          —          8,247  

Redeemable preferred stock

     112        —          —          112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 170,561      $ 12,162      $ —        $ 182,723  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 41,143      $ —        $ —        $ 41,143  

 

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Table of Contents

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Assets and Liabilities Carried at Other Than Estimated Fair Value

The following tables present fair value information for assets and liabilities that are carried on the balance sheet at amounts other than fair value as of June 30, 2019 and December 31, 2018:

 

     Carrying
Value
     Fair Value Measurements Using      Estimated
Fair Value
 
     (Level 1)      (Level 2)      (Level 3)  

As of June 30, 2019

              

Financial Assets:

              

Limited partnership investments

   $ 30,790      $ —        $ —        $ 30,790      $ 30,790  

Financial Liabilities:

              

Revolving credit facility

   $ 9,500      $ 9,500      $ —        $ —        $ 9,500  

Long-term debt:

              

4.25% Convertible senior notes

   $ 132,060      $ —        $ 141,953      $ —        $ 141,953  

3.95% Promissory note

     8,977        —          —          9,013        9,013  

4% Promissory note

     7,487        —          —          7,582        7,582  

3.75% Callable promissory note

     8,000        —          —          7,788        7,788  

4.55% Promissory note

     5,719        —          —          5,825        5,825  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 162,243      $ —        $ 141,953      $ 30,208      $ 172,161  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Carrying
Value
     Fair Value Measurements Using      Estimated
Fair Value
 
     (Level 1)      (Level 2)      (Level 3)  

As of December 31, 2018

              

Financial Assets:

              

Limited partnership investments

   $ 32,293      $ —        $ —        $ 32,293      $ 32,293  

Financial Liabilities:

              

Long-term debt:

              

3.875% Convertible senior notes

   $ 89,181      $ —        $ 89,824      $ —        $ 89,824  

4.25% Convertible senior notes

     130,120        —          145,617        —          145,617  

3.95% Promissory note

     9,077        —          —          9,128        9,128  

4% Promissory note

     7,732        —          —          7,788        7,788  

3.75% Callable promissory note

     8,159        —          —          8,001        8,001  

4.55% Promissory note

     5,826        —          —          6,025        6,025  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 250,095      $ —        $ 235,441      $ 30,942      $ 266,383  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 7 — Other Assets

The following table summarizes the Company’s other assets.

 

     June 30,
2019
     December 31,
2018
 

Benefits receivable related to retrospective reinsurance contract

   $ 4,440      $ 3,136  

Prepaid expenses

     2,361        2,069  

Deposits

     1,431        1,413  

Lease acquisition costs, net

     570        620  

Right-of-use assets – operating leases

     629        —    

Other

     3,303        1,766  
  

 

 

    

 

 

 

Total other assets

   $ 12,734      $ 9,004  
  

 

 

    

 

 

 

Note 8 – Revolving Credit Facility

In February 2019, the Company borrowed $8,000 to fund the purchase of the undeveloped land as described in Note 4 — “Investments” under Real Estate Investments. The Company incurred and capitalized $459 of issuance costs in other assets. During the second quarter of 2019, the Company borrowed an additional amount of $1,500 for general corporate purposes. For the three months ended June 30, 2019, interest expense was $127 including $40 of amortization of issuance costs. For the six months ended June 30, 2019, interest expense totaled $196, which included $79 of amortized issuance costs. At June 30, 2019, the Company was in compliance with all required covenants, and there were $9,500 of borrowings outstanding.

Note 9 — Long-Term Debt

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

 

     June 30,
2019
     December 31,
2018
 

3.875% Convertible senior notes, due March 15, 2019

   $ —        $ 89,990  

4.25% Convertible senior notes, due March 1, 2037

     143,750        143,750  

3.95% Promissory note, due through February 17, 2020

     9,004        9,125  

4% Promissory note, due through February 1, 2031

     7,603        7,857  

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

     8,124        8,290  

4.55% Promissory note, due through August 1, 2036

     5,817        5,928  

Finance lease liability, due through August 15, 2023

     50        55  
  

 

 

    

 

 

 

Total principal amount

     174,348        264,995  

Less: unamortized discount and issuance costs

     (12,055      (14,845
  

 

 

    

 

 

 

Total long-term debt

   $ 162,293      $ 250,150  
  

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

The following table summarizes future maturities of long-term debt as of June 30, 2019, which takes into consideration the assumption that the 4.25% Convertible Senior Notes are repurchased at the earliest call date.

 

Due in 12 months following June 30, 2019

   $ 10,107  

2020

     1,149  

2021

     144,946  

2022

     1,245  

2023

     1,287  

Thereafter

     15,614  
  

 

 

 

Total

   $ 174,348  
  

 

 

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Interest Expense:

          

Contractual interest

   $ 1,837      $ 2,653      $ 4,394     $ 5,307  

Non-cash expense (a)

     999        1,852        2,789       3,668  

Capitalized interest (b)

     (79      —          (158     —    
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,757      $ 4,505      $ 7,025     $ 8,975  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)

Includes amortization of debt discount and issuance costs.

(b)

Interest was capitalized for a construction project.

Convertible Senior Notes

On March 15, 2019, the Company repaid the remaining principal balance of its 3.875% Convertible Notes totaling $89,990 plus accrued interest of $1,744. Prior to the repayment, the conversion rate of the 3.875% Convertible Notes was 16.4074 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.95 per share.

4.25% Convertible Notes. Since May 2018, the Company’s cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Notes. Accordingly, as of June 30, 2019, the conversion rate of the Company’s 4.25% Convertible Notes was 16.3280 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $61.24 per share.

As of June 30, 2019, the remaining amortization period of the debt discount for 4.25% Convertible Notes was expected to be 2.75 years.

Note 10 — Reinsurance

The Company cedes a portion of its insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and one quota share reinsurance agreement. 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

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.

The impact of the reinsurance contracts on premiums written and earned is as follows:    

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Premiums Written:

          

Direct

   $ 133,441      $ 132,391      $ 201,053     $ 202,616  

Assumed

     —          (19      (2     (97
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross written

     133,441        132,372        201,051       202,519  

Ceded

     (31,317      (32,954      (62,730     (65,204
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums written

   $ 102,124      $ 99,418      $ 138,321     $ 137,315  
  

 

 

    

 

 

    

 

 

   

 

 

 

Premiums Earned:

          

Direct

   $ 83,315      $ 85,207      $ 165,914     $ 170,036  

Assumed

     —          712        (2     1,655  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross earned

     83,315        85,919        165,912       171,691  

Ceded

     (31,317      (32,954      (62,730     (65,204
  

 

 

    

 

 

    

 

 

   

 

 

 

Net premiums earned

   $ 51,998      $ 52,965      $ 103,182     $ 106,487  
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no ceded losses recognized during the three and six months ended June 30, 2019. During the three and six months ended June 30, 2018, ceded losses of $58,671 and $58,466, respectively, were recognized as a reduction in losses and losses adjustment expenses. At June 30, 2019 and December 31, 2018, there were 31 and 38 reinsurers, respectively, participating in the Company’s reinsurance program. Total amounts recoverable and receivable from reinsurers at June 30, 2019 and December 31, 2018 were $78,080 and $123,911, respectively. Approximately 36.0% of the reinsurance recoverable balance at June 30, 2019 was concentrated in five reinsurers. Based on the insurance ratings, the payment history and the financial strength of the reinsurers, management believes there was no significant credit risk associated with its reinsurers’ obligations to perform on any prepaid reinsurance contract and to fund any reinsurance recoverable balance as of June 30, 2019.

One of the reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three and six months ended June 30, 2019, the Company recognized reductions in premiums ceded of $1,226 and $1,738, respectively, related to these adjustments. In contrast, these adjustments were reflected in the consolidated statements of income as net increases in ceded premiums of $378 and $715 for the three and six months ended June 30, 2018, respectively, of which $400 and $448 related to the Company’s contract with Oxbridge Reinsurance Limited, a related party, which was terminated effective June 1, 2018.

In addition, adjustments related to retrospective provisions are reflected in other assets. At June 30, 2019 and December 31, 2018, other assets included $4,440 and $3,136, respectively. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 11 — Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses is determined on an individual case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and losses incurred, but not reported.

The Company primarily writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes. The occurrence of a major catastrophe could have a significant effect on the Company’s quarterly results and cause a temporary disruption of the normal operations of the Company. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019     2018  

Net balance, beginning of period*

   $ 98,453      $ 91,403      $ 94,826     $ 97,818  

Incurred, net of reinsurance, related to:

          

Current period

     21,416        20,917        45,737       40,407  

Prior period

     2,877        886        5,552       1,051  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total incurred, net of reinsurance

     24,293        21,803        51,289       41,458  
  

 

 

    

 

 

    

 

 

   

 

 

 

Paid, net of reinsurance, related to:

          

Current period

     (13,778      (9,710      (17,708     (14,157

Prior period

     (13,623      (14,107      (33,062     (35,730
  

 

 

    

 

 

    

 

 

   

 

 

 

Total paid, net of reinsurance

     (27,401      (23,817      (50,770     (49,887
  

 

 

    

 

 

    

 

 

   

 

 

 

Net balance, end of period

     95,345        89,389        95,345       89,389  

Add: reinsurance recoverable

     58,897        82,998        58,897       82,998  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross balance, end of period

   $ 154,242      $ 172,387      $ 154,242     $ 172,387  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Net balance represents beginning-of-period liability for unpaid losses and loss adjustment expenses less beginning-of-period reinsurance recoverable for unpaid losses and loss adjustment expenses.

The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as these estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such estimates are adjusted. During the three and six months ended June 30, 2019, the Company recognized losses related to prior periods of $2,877 and $5,552, respectively, which were primarily attributable to unfavorable development resulting from litigation. Included in adverse development for the three and six months ended June 30, 2019 were losses related to Hurricane Matthew of $242 and $1,052, respectively. Losses for the 2019 loss year included estimated losses of $5,250 related to one severe storm event during the first quarter.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 12 — Segment Information

The Company identifies its operating divisions based on organizational structure and revenue source. Currently, the Company has three reportable segments: insurance operations, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance division are grouped together into one reportable segment under insurance operations. The real estate operations segment includes companies engaged in operating commercial properties the Company owns for investment purposes or for use in its own operations. The corporate and other segment represents the activities of the holding companies, the information technology division, and other companies that do not meet the quantitative and qualitative thresholds for a reportable segment. The determination of segments may change over time due to changes in operational emphasis, revenues, and results of operations. The Company’s chief executive officer, who serves as the Company’s chief operating decision maker, evaluates each division’s financial and operating performance based on revenue and operating income.

For the three months ended June 30, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 95.2% and 95.6%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2019 and 2018, revenues from the Company’s insurance operations before intracompany elimination represented 94.9% and 95.2%, respectively, of total revenues of all operating segments. At June 30, 2019 and December 31, 2018, insurance operations’ total assets represented 84.6% and 85.9%, respectively, of the combined assets of all operating segments. The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Three Months Ended June 30, 2019    Insurance
Operations
    Real
Estate(a)
    Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

          

Net premiums earned

   $ 51,998     $ —       $ —       $ —       $ 51,998  

Net investment income

     3,388       —         1,096       (258     4,226  

Net realized investment losses

     (132     —         (1     —         (133

Net unrealized investment gains

     1,108       —         218       —         1,326  

Policy fee income

     800       —         —         —         800  

Other

     162       2,380       1,698       (3,827     413  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     57,324       2,380       3,011       (4,085     58,630  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Losses and loss adjustment expenses

     24,293       —         —         —         24,293  

Amortization of deferred policy acquisition costs

     8,770       —         —         —         8,770  

Interest expense

     —         382       2,632       (130     2,884  

Depreciation and amortization

     26       668       262       (572     384  

Other

     7,774       1,466       6,127       (3,383     11,984  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     40,863       2,516       9,021       (4,085     48,315  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 16,461     $ (136   $ (6,010   $ —       $ 10,315  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 57,324     $ 1,974     $ 2,562      

 

(a)

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

(b)

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

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Three Months Ended June 30, 2018    Insurance
Operations
    Real
Estate(a)
     Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

           

Net premiums earned

   $ 52,965     $ —        $ —       $ —       $ 52,965  

Net investment income

     2,386       —          737       276       3,399  

Net realized investment gains

     1,550       —          1,112       —         2,662  

Net unrealized investment losses

     (1,096     —          (461     —         (1,557

Net other-than-temporary impairment losses

     —         —          (40     —         (40

Policy fee income

     855       —          —         —         855  

Other

     173       2,345        1,456       (3,445     529  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     56,833       2,345        2,804       (3,169     58,813  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

           

Losses and loss adjustment expenses

     21,803       —          —         —         21,803  

Amortization of deferred policy acquisition costs

     8,696       —          —         —         8,696  

Interest expense

     —         391        4,233       (119     4,505  

Depreciation and amortization

     32       606        250       (553     335  

Other

     7,643       915        5,893       (2,497     11,954  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     38,174       1,912        10,376       (3,169     47,293  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 18,659     $ 433      $ (7,572   $ —       $ 11,520  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 56,833     $ 1,963      $ 2,519      

 

(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 to conform with an insurance company’s presentation.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Six Months Ended June 30, 2019    Insurance
Operations
     Real
Estate(a)
     Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

            

Net premiums earned

   $ 103,182      $ —        $ —       $ —       $ 103,182  

Net investment income

     6,016        —          1,603       (115     7,504  

Net realized investment gains (losses)

     66        —          (571     —         (505

Net unrealized investment gains

     5,418        —          1,201       —         6,619  

Policy fee income

     1,595        —          —         —         1,595  

Other

     338        4,692        3,249       (7,410     869  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     116,615        4,692        5,482       (7,525     119,264  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

            

Losses and loss adjustment expenses

     51,289        —          —         —         51,289  

Amortization of deferred policy acquisition costs

     17,426        —          —         —         17,426  

Interest expense

     1        765        6,715       (260     7,221  

Depreciation and amortization

     53        1,251        530       (1,056     778  

Other

     14,864        2,574        11,723       (6,209     22,952  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     83,633        4,590        18,968       (7,525     99,666  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 32,982      $ 102      $ (13,486   $ —       $ 19,598  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 116,615      $ 3,877      $ 4,622      

 

(a)

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

(b)

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

(c)

Represents amounts before reclassification to conform with an insurance company’s presentation.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

For Six Months Ended June 30, 2018    Insurance
Operations
    Real
Estate(a)
     Corporate/
Other(b)
    Reclassification/
Elimination
    Consolidated  

Revenue:

           

Net premiums earned

   $ 106,487     $ —        $ —       $ —       $ 106,487  

Net investment income

     4,743       1        1,564       309       6,617  

Net realized investment gains

     3,755       —          1,139       —         4,894  

Net unrealized investment losses

     (3,507     —          (650     —         (4,157

Net other-than-temporary impairment losses

     —         —          (80     —         (80

Policy fee income

     1,720       —          —         —         1,720  

Other

     372       4,647        2,734       (6,682     1,071  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     113,570       4,648        4,707       (6,373     116,552  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

           

Losses and loss adjustment expenses

     41,458       —          —         —         41,458  

Amortization of deferred policy acquisition costs

     17,510       —          —         —         17,510  

Interest expense

     —         783        8,430       (238     8,975  

Depreciation and amortization

     66       1,196        509       (1,098     673  

Other

     13,948       2,036        10,665       (5,037     21,612  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     72,982       4,015        19,604       (6,373     90,228  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 40,588     $ 633      $ (14,897   $ —       $ 26,324  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue from non-affiliates(c)

   $ 113,570     $ 3,883      $ 4,139      

 

(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 to conform with an insurance company’s presentation.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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

 

     June 30,
2019
     December 31,
2018
 

Segment:

     

Insurance Operations

   $ 607,135      $ 615,983  

Real Estate Operations

     92,938        83,828  

Corporate and Other

     67,969        146,651  

Consolidation and Elimination

     (15,902      (13,599
  

 

 

    

 

 

 

Total assets

   $ 752,140      $ 832,863  
  

 

 

    

 

 

 

Note 13 — Leases

At June 30, 2019, the Company had operating leases’ ROU assets and corresponding liabilities of $629 and $672, respectively. In addition, the Company had one finance lease with a ROU asset of $61 and a corresponding lease liability of $50 at June 30, 2019. The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:

 

Class of Assets

   Initial Term      Renewal Option      Other Terms and
Conditions
 

Operating lease:

        

Office equipment

     1 to 63 months        Yes        (a), (b)  

Storage units

     2 years        Yes        (b)  

Office space

     3 to 10 years        Yes        (b), (c)  

Finance lease:

        

Office equipment

     5 years        Not applicable        (d)  

 

(a)

At the end of the lease term, the Company can purchase the equipment at fair market value.

(b)

There are no variable lease payments.

(c)

Rent escalation provisions exist.

(d)

There is a bargain purchase option.

As of June 30, 2019, maturities of lease liabilities were as follows:

 

     Leases  
     Operating      Finance  

Due in 12 months following June 30,

     

2019

   $ 336      $ 13  

2020

     289        13  

2021

     93        13  

2022

     —          12  

2023

     —          3  
  

 

 

    

 

 

 

Total lease payments

     718        54  

Less: interest and foreign taxes

     46        4  
  

 

 

    

 

 

 

Total lease obligations

   $ 672      $ 50  
  

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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

 

     Three Months Ended     Six Months Ended  
     June 30, 2019     June 30, 2019  

Lease costs:

    

Finance lease costs:

    

Amortization — ROU assets*

   $ 3     $ 6  

Interest expense

     —         1  

Operating lease costs*

     73       154  

Short-term lease costs*

     59       104  
  

 

 

   

 

 

 

Total lease costs

   $ 135     $ 265  
  

 

 

   

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

    

Operating cash flows — finance leases

   $ —       $ 1  

Operating cash flows — operating leases

   $ 81     $ 159  

Financing cash flows — finance leases

   $ 3     $ 5  
     June 30, 2019        

Weighted-average remaining lease term:

    

Finance leases (in years)

     3.1    

Operating leases (in years)

     2.2    

Weighted-average discount rate:

    

Finance leases

     3.8  

Operating leases

     4.0  

 

*

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

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

 

Class of Assets

   Initial Term      Renewal
Option
     Other Terms and
Conditions
 

Operating lease:

        

Office space

     1 to 3 years        Yes        (e)  

Retail space

     3 to 20 years        Yes        (e)  

Boat docks/wet slips

     1 to 12 months        Yes        (e)  

 

(e)

There are no purchase options.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 14 — Income Taxes

During the three months ended June 30, 2019 and 2018, the Company recorded approximately $2,762 and $5,117 respectively, of income taxes, which resulted in effective tax rates of 26.8% and 44.4%, respectively. The decrease in the effective tax rate was primarily attributable to the derecognition of deferred tax assets of $1,620 for restricted stock awards with market-based vesting conditions that would not vest and the disallowance of the deductibility of the $1,727 expense representing dividends cumulatively paid on such restricted stock awards, both of which occurred in the second quarter of 2018 (see Restricted Stock Awards in Note 17 — “Stock-Based Compensation”). During the six months ended June 30, 2019 and 2018, the Company recorded approximately $5,307 and $9,130, respectively, of income taxes, which resulted in effective tax rates of 27.1% and 34.7%, respectively. The decrease in the effective tax rate in 2019 as compared with the corresponding period in the prior year was primarily attributable to the negative effect of the aforementioned derecognition of deferred tax assets and the nondeductible expense related to reclassified dividends. The Company’s estimated annual effective tax rate differs from the statutory federal tax rate due to state and foreign income taxes as well as certain nondeductible and tax-exempt items.

Note 15 — Earnings Per Share

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

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

 

     Three Months Ended
June 30, 2019
     Three Months Ended
June 30, 2018
 
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
     Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Net income

   $ 7,553           $ 6,403        

Less: (Income) loss attributable to participating securities*

     (405           1,202        
  

 

 

         

 

 

       

Basic Earnings Per Share:

                

Income allocated to common stockholders

     7,148       7,666      $ 0.93        7,605        7,923      $ 0.96  
       

 

 

          

 

 

 

Effect of Dilutive Securities:

                

Stock options

     —         15           —          17     

Convertible senior notes

     1,871       2,346           3,160        3,803     
  

 

 

   

 

 

       

 

 

    

 

 

    

Diluted Earnings Per Share:

                

Income available to common stockholders and assumed conversions

   $ 9,019       10,027      $ 0.90      $ 10,765        11,743      $ 0.92  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

     Six Months Ended
June 30, 2019
     Six Months Ended
June 30, 2018
 
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
     Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
 

Net income

   $ 14,291           $ 17,194        

Less: (Income) loss attributable to participating securities*

     (821           501        
  

 

 

         

 

 

       

Basic Earnings Per Share:

                

Income allocated to common stockholders

     13,470       7,701      $ 1.75        17,695        8,002      $ 2.21  
       

 

 

          

 

 

 

Effect of Dilutive Securities:

                

Stock options

     —         16           —          17     

Convertible senior notes

     4,868       2,947           6,294        3,801     
  

 

 

   

 

 

       

 

 

    

 

 

    

Diluted Earnings Per Share:

                

Income available to common stockholders and assumed conversions

   $ 18,338       10,664      $ 1.72      $ 23,989        11,820      $ 2.03  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Loss attributable to participating securities for the three and six months ended June 30, 2018 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 17 — “Stock-Based Compensation” for additional information.

Note 16 — Stockholders’ Equity

Common Stock

In December 2018, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2019, the Company repurchased and retired a total of 160,787 shares at a weighted average price per share of $41.44 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2019 was $6,668 or $41.47 per share. During the six months ended June 30, 2019, the Company repurchased and retired a total of 192,576 shares at a weighted average price per share of $41.54 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2019 was $8,006, or $41.57 per share.

In December 2017, the Company’s Board of Directors authorized a plan to repurchase up to $20,000 of the Company’s common shares before commissions and fees. During the three months ended June 30, 2018, the Company repurchased and retired a total of 174,951 shares at a weighted average price per share of $40.97 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended June 30, 2018 was $7,174, or $41.00 per share. During the six months ended June 30, 2018, the Company repurchased and retired a total of 359,522 shares at a weighted average price per share of $38.11. The total cost of shares repurchased, inclusive of fees and commissions, during the six months ended June 30, 2018 was $13,711, or $38.14 per share.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

On April 8, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on June 21, 2019 to stockholders of record on May 17, 2019.

Note 17 — Stock-Based Compensation

Incentive Plans

The Company currently has outstanding stock-based awards granted under the 2007 Stock Option and Incentive Plan and the 2012 Omnibus Incentive Plan. Only the 2012 Plan is active and available for future grants. At June 30, 2019, there were 1,738,164 shares available for grant.

Stock Options

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

A summary of the stock option activity for the three and six months ended June 30, 2019 and 2018 is as follows (option amounts not in thousands):

 

     Number of
Options
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2019

     240,000      $ 37.19      8.8 years    $ 3,278  

Granted

     110,000      $ 53.00        
  

 

 

          

Outstanding at March 31, 2019

     350,000      $ 42.16      8.5 years    $ 1,329  
  

 

 

          

Exercised

     10,000      $ 6.30        
  

 

 

          

Outstanding at June 30, 2019

     340,000      $ 43.21      8.4 years    $ 445  
  

 

 

          

Exercisable at June 30, 2019

     92,500      $ 36.36      7.3 years    $ 380  
  

 

 

          

Outstanding at January 1, 2018

     130,000      $ 34.82      8.2 years    $ 472  

Granted

     110,000      $ 40.00        
  

 

 

          

Outstanding at March 31, 2018

     240,000      $ 37.19      8.8 years    $ 637  
  

 

 

          

Outstanding at June 30, 2018

     240,000      $ 37.19      8.6 years    $ 749  
  

 

 

          

Exercisable at June 30, 2018

     47,500      $ 25.81      6.3 years    $ 749  
  

 

 

          

There were 10,000 options exercised during the three and six months ended June 30, 2019. Tax benefits realized for the exercise of common stock options totaled $88 for the three and six months ended June 30, 2019. For the three months ended June 30, 2019 and 2018, the Company recognized $200 and $136, respectively, of compensation expense which was included in general and administrative personnel expenses. For the six months ended June 30, 2019 and 2018, the Company recognized $425 and $246, respectively, of compensation expense. Deferred tax benefits related to stock options were $20 for each of the three months ended June 30, 2019 and 2018, and $39 for each of the six months ended June 30, 2019 and 2018. At June 30, 2019 and December 31, 2018, there was $2,280 and $1,359, 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 2.9 years.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

The following table provides assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the stock options granted during the six months ended June 30, 2019 and 2018:

 

     2019     2018  

Expected dividend yield

     3.34     4.00

Expected volatility

     40.17     42.22

Risk-free interest rate

     2.53     2.57

Expected life (in years)

     5       5  

Restricted Stock Awards

From time to time, the Company has granted and may grant restricted stock awards to its executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, performance and market-based conditions. The fair value of the awards with market-based conditions is determined using a Monte Carlo simulation method, which calculates many potential outcomes for an award and then establishes fair value based on the most likely outcome. The determination of fair value with respect to the awards containing only performance or service-based conditions is based on the market value of the Company’s common stock on the grant date.

Information with respect to the activity of unvested restricted stock awards during the three and six months ended June 30, 2019 and 2018 is as follows:

 

     Number of
Restricted
Stock
Awards
     Weighted
Average
Grant Date
Fair Value
 

Nonvested at January 1, 2019

     632,296      $ 33.33  

Granted

     40,000      $ 47.94  

Vested

     (21,250    $ 37.69  

Forfeited

     (4,681    $ 42.79  
  

 

 

    

Nonvested at March 31, 2019

     646,365      $ 34.03  
  

 

 

    

Granted

     133,160      $ 41.30  

Vested

     (84,914    $ 41.58  

Forfeited

     (264,211    $ 23.81  
  

 

 

    

Nonvested at June 30, 2019

     430,400      $ 41.06  
  

 

 

    

Nonvested at January 1, 2018

     597,690      $ 32.82  

Granted

     40,000      $ 34.92  

Vested

     (28,643    $ 45.17  

Forfeited

     (17,905    $ 38.55  
  

 

 

    

Nonvested at March 31, 2018

     591,142      $ 31.53  
  

 

 

    

Granted

     143,360      $ 43.83  

Vested

     (59,974    $ 40.09  

Forfeited

     (27,115    $ 32.76  
  

 

 

    

Nonvested at June 30, 2018

     647,413      $ 33.41  
  

 

 

    

The Company recognized compensation expense related to restricted stock, which is included

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

in general and administrative personnel expenses, of $1,269 and $897 for the three months ended June 30, 2019 and 2018, respectively, and $2,523 and $1,659 for the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019 and December 31, 2018, there was approximately $15,712 and $11,199, respectively, of total unrecognized compensation expense related to nonvested restricted stock arrangements. The Company expects to recognize the remaining compensation expense over a weighted-average period of 2.9 years. The following table summarizes information about deferred tax benefits recognized and tax benefits realized related to restricted stock awards and paid dividends, and the fair value of vested restricted stock for the three and six months ended June 30, 2019 and 2018.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Deferred tax benefits recognized

   $ 244      $ 180      $ 490      $ 336  

Tax benefits realized for restricted stock and paid dividends

   $ 924      $ 652      $ 985      $ 848  

Fair value of vested restricted stock

   $ 3,530      $ 2,404      $ 4,331      $ 3,698  

In May 2019, 260,000 shares of the Company’s restricted stock awards granted to employee and nonemployee directors were forfeited for not meeting their market-based vesting conditions. For the same reason, the Company expects another 24,000 shares of restricted stock awards with similar vesting conditions to be forfeited in November 2019. Any dividend payment associated with these awards was expensed when declared. As a result, for the three months ended June 30, 2019, the Company recognized dividends of $113 related to these awards in general and administrative personnel expenses for $85 and in other operating expenses for $28. For the six months ended June 30, 2019, the Company recognized dividends of $227 in general and administrative personnel expenses for $170 and in other operating expenses for $57. In May 2018, the Company reclassified from retained income dividends of $1,727 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 $381.

Note 18 — Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contract

As of June 30, 2019, the Company has a contractual obligation related to one multi-year reinsurance contract. This contract may be cancelled only with the other party’s consent. The table below presents the future minimum aggregate premium amounts payable to the reinsurer.

 

Due in 12 months following June 30, 2019*

   $ 3,759  

 

*

Premiums payable after September 30, 2019 are estimated.

Capital Commitment

As described in Note 4 — “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for four limited partnership interests. At June 30, 2019, there was an aggregate unfunded balance of $14,552.

 

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Note 19 — Subsequent Events

On July 2, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on September 20, 2019 to stockholders of record on August 16, 2019.

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019. Unless the context requires otherwise, as used in this Form 10-Q, the terms “HCI,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in whole dollars unless specified otherwise.

Forward-Looking Statements

In addition to historical information, this quarterly report contains forward-looking statements as defined under federal securities laws. Such statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. 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 effects 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; and other risks and uncertainties detailed herein and from time to time in our SEC reports.

OVERVIEW – General

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. Based on our organizational structure, revenue sources, and evaluation of financial and operating performances by management, we manage the following operations:

 

  a)

Insurance Operations

 

   

Property and casualty insurance

 

   

Reinsurance

 

  b)

Real Estate Operations

 

  c)

Other Operations

 

   

Information technology

 

   

Other auxiliary operations

 

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For the three months ended June 30, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 95.2% and 95.6%, respectively, of total revenues of all operating segments. For the six months ended June 30, 2019 and 2018, revenues from insurance operations before intracompany elimination represented 94.9% and 95.2%, respectively, of total revenues of all operating segments. At June 30, 2019 and December 31, 2018, insurance operations’ total assets represented 84.6% and 85.9%, respectively, of the combined assets of all operating segments. See Note 12 — “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Insurance Operations

Property and Casualty Insurance

Our insurance business is operated through two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”), our principal operating subsidiary, and TypTap Insurance Company (“TypTap”). We provide various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. We are authorized to write residential property and casualty insurance in the states of Arkansas, California, Florida, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Texas. Currently, Florida is our primary market.

Since the beginning of 2019, TypTap business has expanded rapidly. We expect this expansion to continue and contribute to our future growth.

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.

Real Estate Operations

Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes. Properties used in operations consist of our Tampa headquarters building and a secondary insurance operations site in Ocala, Florida. Our investment properties include one full-service restaurant, retail shopping centers, one office building, two marinas, and undeveloped land near our headquarters in Tampa, Florida which we acquired in February 2019. See Note 4 — “Investments” under Real Estate Investments to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

 

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Other Operations

Information Technology

Our information technology operations include a team of experienced software developers with extensive knowledge in developing web-based products and applications for mobile devices. The operations, which are in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products or services that support in-house operations as well as our third party relationships with our agency partners and claim vendors. These products include TypTapTM, SAMSTM, Harmony, CasaClueTM, Exzeo®, and Atlas ViewerTM.

Recent Events

On July 2, 2019, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on September 20, 2019 to stockholders of record on August 16, 2019.

 

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RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six months ended June 30, 2019 and 2018 (dollar amounts in thousands, except per share amounts):    

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2019     2018     2019     2018  

Operating Revenue

        

Gross premiums earned

   $ 83,315     $ 85,919     $ 165,912     $ 171,691  

Premiums ceded

     (31,317     (32,954     (62,730     (65,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     51,998       52,965       103,182       106,487  

Net investment income

     4,226       3,399       7,504       6,617  

Net realized investment (losses) gains

     (133     2,662       (505     4,894  

Net unrealized investment gains (losses)

     1,326       (1,557     6,619       (4,157

Net other-than-temporary impairment losses

     —         (40     —         (80

Policy fee income

     800       855       1,595       1,720  

Other income

     413       529       869       1,071  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     58,630       58,813       119,264       116,552  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses

        

Losses and loss adjustment expenses

     24,293       21,803       51,289       41,458  

Policy acquisition and other underwriting expenses

     10,077       9,959       19,750       19,319  

General and administrative personnel expenses

     7,998       7,840       15,362       14,123  

Interest expense

     2,884       4,505       7,221       8,975  

Other operating expenses

     3,063       3,186       6,044       6,353  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     48,315       47,293       99,666       90,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     10,315       11,520       19,598       26,324  

Income tax expense

     2,762       5,117       5,307       9,130