HCI Group, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

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 September 30, 2018

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)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 October 29, 2018 was 9,175,636.

 

 

 

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

				Page
		PART I – FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets: September 30, 2018 (unaudited) and December 31, 2017			1-2
		Consolidated Statements of Income: Three and nine months ended September 30, 2018 and 2017 (unaudited)			3
		Consolidated Statements of Comprehensive Income: Three and nine months ended September 30, 2018 and 2017 (unaudited)			4
		Consolidated Statements of Cash Flows: Nine months ended September 30, 2018 and 2017 (unaudited)			5-6
		Consolidated Statements of Stockholders’ Equity: Nine months ended September 30, 2018 and 2017 (unaudited)			7-8
		Notes to Consolidated Financial Statements (unaudited)			9-41
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			42-56
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
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
Signatures					69
Certifications

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

 

		September 30,				December 31,
		2018				2017
		(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $147,193 and $235,633, respectively)		$	145,719			$	237,484
Equity securities, at fair value (cost: $44,184 and $54,282, respectively)			45,311				59,956
Short-term investments, at fair value			87,778				—
Limited partnership investments, at equity			28,944				23,184
Investment in unconsolidated joint venture, at equity			860				1,304
Real estate investments (Note 4 – Consolidated Variable Interest Entity)			63,892				58,358
Total investments			372,504				380,286
Cash and cash equivalents			249,083				255,884
Restricted cash			700				809
Accrued interest and dividends receivable			1,527				1,983
Income taxes receivable			3,005				16,192
Premiums receivable			25,461				17,807
Prepaid reinsurance premiums			27,458				22,286
Reinsurance recoverable:
Paid losses and loss adjustment expenses			22,200				2,344
Unpaid losses and loss adjustment expenses			50,895				100,760
Deferred policy acquisition costs			20,669				16,712
Property and equipment, net			13,183				12,465
Intangible assets, net			4,951				4,995
Other assets (Note 4 – Consolidated Variable Interest Entity)			24,701				9,741
Total assets		$	816,337			$	842,264

 

(continued)

 

1

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets - continued

(Dollar amounts in thousands)

 

		September 30,				December 31,
		2018				2017
		(Unaudited)
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses		$	138,414			$	198,578
Unearned premiums			199,050				164,896
Advance premiums			10,350				4,948
Assumed reinsurance balances payable			142				15
Accrued expenses (Note 4 – Consolidated Variable Interest Entity)			11,759				6,035
Reinsurance recovered in advance on unpaid losses			—				13,885
Deferred income taxes, net			2,221				1,890
Long-term debt			248,544				237,835
Other liabilities (Note 4 – Consolidated Variable Interest Entity)			13,722				20,207
Total liabilities			624,202				648,289
Commitments and contingencies (Note 16)
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, 8,368,188 and 8,762,416 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)			—				—
Additional paid-in capital			—				—
Retained income			193,236				189,409
Accumulated other comprehensive (loss) income, net of taxes			(1,101	)			4,566
Total stockholders’ equity			192,135				193,975
Total liabilities and stockholders’ equity		$	816,337			$	842,264

See accompanying Notes to Consolidated Financial Statements

 

2

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Revenue
Gross premiums earned		$	86,163			$	88,669			$	257,854			$	270,376
Premiums ceded			(31,986	)			(44,705	)			(97,190	)			(101,529	)
Net premiums earned			54,177				43,964				160,664				168,847
Net investment income			5,054				2,878				11,671				8,522
Net realized investment gains (losses)			1,626				(226	)			6,520				2,276
Net unrealized investment (losses) gains			(390	)			74				(4,547	)			74
Net other-than-temporary impairment losses			—				(474	)			(80	)			(864	)
Policy fee income			843				905				2,563				2,721
Other			433				369				1,504				1,207
Total revenue			61,743				47,490				178,295				182,783
Expenses
Losses and loss adjustment expenses			25,769				89,231				67,227				142,425
Policy acquisition and other underwriting expenses			9,829				9,926				29,148				29,645
Impairment loss			—				38				—				38
General and administrative personnel expenses			6,781				6,672				20,904				21,021
Interest expense			4,552				4,408				13,527				12,328
Loss on repurchases of senior notes			—				—				—				743
Other operating expenses			2,889				3,233				9,242				9,154
Total expenses			49,820				113,508				140,048				215,354
Income (loss) before income taxes			11,923				(66,018	)			38,247				(32,571	)
Income tax expense (benefit)			2,926				(25,472	)			12,056				(13,587	)
Net income (loss)		$	8,997			$	(40,546	)		$	26,191			$	(18,984	)
Basic earnings (loss) per share		$	1.08			$	(4.44	)		$	3.29			$	(2.05	)
Diluted earnings (loss) per share		$	1.00			$	(4.44	)		$	3.03			$	(2.05	)
Dividends per share		$	0.375			$	0.35			$	1.10			$	1.05

See accompanying Notes to Consolidated Financial Statements.

 

3

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Net income (loss)		$	8,997			$	(40,546	)		$	26,191			$	(18,984	)
Other comprehensive (loss) income:
Change in unrealized gain (loss) on investments:
Net unrealized gain (loss) arising during the period			35				2,155				(2,658	)			4,822
Other-than-temporary impairment loss charged to income			—				474				80				864
Call and repayment losses charged to investment income			(19	)			—				(15	)			9
Reclassification adjustment for net realized loss (gain)			(71	)			226				(732	)			(2,276	)
Net change in unrealized (loss) gain			(55	)			2,855				(3,325	)			3,419
Deferred income taxes on above change			13				(1,101	)			842				(1,319	)
Total other comprehensive (loss) income, net of income taxes			(42	)			1,754				(2,483	)			2,100
Comprehensive income (loss)		$	8,955			$	(38,792	)		$	23,708			$	(16,884	)

See accompanying Notes to Consolidated Financial Statements.

 

4

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

		Nine Months Ended
		September 30,
		2018				2017
Cash flows from operating activities:
Net income (loss)		$	26,191			$	(18,984	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation			3,274				3,362
Net amortization of debt securities			344				884
Depreciation and amortization			8,195				6,945
Deferred income tax expense (benefit)			1,173				(3,822	)
Net realized investment gains			(6,520	)			(2,276	)
Net unrealized investment losses (gains)			4,547				(74	)
Other-than-temporary impairment losses			80				864
Income from unconsolidated joint venture			(320	)			(126	)
Distribution received from unconsolidated joint venture			68				147
Net income from limited partnership interests			(2,816	)			(1,724	)
Distributions received from limited partnership interests			1,495				854
Loss on repurchases of senior notes			—				743
Foreign currency remeasurement loss (gain)			200				(31	)
Other			—				172
Changes in operating assets and liabilities:
Accrued interest and dividends receivable			456				(587	)
Income taxes			13,187				(21,270	)
Premiums receivable			(7,654	)			(9,903	)
Prepaid reinsurance premiums			(5,172	)			(3,798	)
Reinsurance recoverable			30,009				(213,746	)
Deferred policy acquisition costs			(3,957	)			(4,511	)
Other assets			1,829				2,550
Losses and loss adjustment expenses			(60,164	)			274,180
Unearned premiums			34,154				30,371
Advance premiums			5,402				5,597
Assumed reinsurance balances payable			127				(3,051	)
Reinsurance recovered in advance on unpaid losses			(13,885	)			9,882
Accrued expenses and other liabilities			(794	)			(1,146	)
Net cash provided by operating activities			29,449				51,502
Cash flows from investing activities:
Investments in limited partnership interests			(4,823	)			(2,623	)
Distributions received from limited partnership interests			384				11,758
Distribution from unconsolidated joint venture			696				417
Purchase of property and equipment			(1,654	)			(1,872	)
Purchase of real estate investments			(6,685	)			(2,095	)
Purchase of intangible assets			(409	)			—
Purchase of fixed-maturity securities			(58,098	)			(105,258	)
Purchase of equity securities			(41,844	)			(36,019	)
Purchase of short-term investments			(155,252	)			—
Proceeds from sales of fixed-maturity securities			78,540				9,638
Proceeds from calls, repayments and maturities of fixed-maturity securities			52,843				8,786
Proceeds from sales of equity securities			55,879				26,309
Proceeds from sales, redemptions and maturities of short-term investments			67,867				—
Proceeds from sales of derivative instruments			124				—
Net cash used in investing activities			(12,432	)			(90,959	)

 

5

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)

 

		Nine Months Ended
		September 30,
		2018				2017
Cash flows from financing activities:
Cash dividends paid			(8,371	)			(10,512	)
Cash dividends received under share repurchase forward contract			896				788
Proceeds from exercise of common stock options			—				75
Proceeds from issuance of long-term debt			6,000				143,859
Repurchases of senior notes			—				(40,250	)
Repayment of long-term debt			(804	)			(718	)
Repurchases of common stock			(941	)			(30,636	)
Repurchases of common stock under share repurchase plan			(19,867	)			(6,189	)
Purchase of non-controlling interest			(539	)			—
Debt issuance costs			(105	)			(4,975	)
Net cash (used in) provided by financing activities			(23,731	)			51,442
Effect of exchange rate changes on cash			(196	)			31
Net (decrease) increase in cash, cash equivalents, and restricted cash			(6,910	)			12,016
Cash, cash equivalents, and restricted cash at beginning of period			256,693				281,131
Cash, cash equivalents, and restricted cash at end of period		$	249,783			$	293,147
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	3,625			$	11,506
Cash paid for interest		$	10,403			$	8,647
Non-cash investing and financing activities:
Unrealized (loss) gain on investments in available-for-sale securities, net of tax		$	(2,483	)		$	2,100
Conversion of revolving credit facility to long-term debt		$	—			$	9,441
Receivable from sales of equity securities		$	1,978			$	3,034
Payable on purchases of equity securities		$	—			$	3,014
Receivable from sales and maturities of fixed-maturity securities		$	15,070			$	—
Addition to property and equipment under capital lease		$	61			$	—

See accompanying Notes to Consolidated Financial Statements.

 

6

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2018

(Unaudited)

(Dollar amounts in thousands)

 

		Common Stock								Additional Paid-In				Retained				Accumulated Other Comprehensive Income (Loss),				Total Stockholders’
		Shares				Amount				Capital				Income				Net of Tax				Equity
Balance at December 31, 2017			8,762,416			$	—			$	—			$	189,409			$	4,566			$	193,975
Net income			—				—				—				26,191				—				26,191
Total other comprehensive loss, net of income taxes			—				—				—				—				(2,483	)			(2,483	)
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			189,860				—				—				—				—				—
Forfeiture of restricted stock			(52,452	)			—				—				—				—				—
Repurchase and retirement of common stock			(23,346	)			—				(941	)			—				—				(941	)
Repurchase and retirement of common stock under share repurchase plan			(508,290	)			—				(19,867	)			—				—				(19,867	)
Purchase of noncontrolling interest			—				—				(539	)			—				—				(539	)
Common stock dividends			—				—				—				(7,475	)			—				(7,475	)
Stock-based compensation			—				—				3,274				—				—				3,274
Additional paid-in capital shortfall allocated to retained income			—				—				18,073				(18,073	)			—				—
Balance at September 30, 2018			8,368,188			$	—			$	—			$	193,236			$	(1,101	)		$	192,135

 

See accompanying Notes to Consolidated Financial Statements.

 

7

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity - continued

For the Nine Months Ended September 30, 2017

(Unaudited)

(Dollar amounts in thousands)

 

		Common Stock								Additional Paid-In				Retained				Accumulated Other Comprehensive Income (Loss),				Total Stockholders’
		Shares				Amount				Capital				Income				Net of Tax				Equity
Balance at December 31, 2016			9,662,761			$	—			$	8,139			$	232,964			$	2,643			$	243,746
Net income			—				—				—				(18,984	)			—				(18,984	)
Total other comprehensive income, net of income taxes			—				—				—				—				2,100				2,100
Exercise of common stock options			30,000				—				75				—				—				75
Issuance of restricted stock			154,936				—				—				—				—				—
Forfeiture of restricted stock			(23,218	)			—				—				—				—				—
Repurchase and retirement of common stock			(434,505	)			—				(21,236	)			—				—				(21,236	)
Repurchase and retirement of common stock under share repurchase plan			(163,265	)			—				(6,189	)			—				—				(6,189	)
Repurchase of common stock under prepaid forward contract			(191,100	)			—				(9,400	)			—				—				(9,400	)
Equity component on 4.25% convertible senior notes (net of offering costs of $543)			—				—				15,151				—				—				15,151
Deferred taxes on debt discount			—				—				(5,845	)			—				—				(5,845	)
Common stock dividends			—				—				—				(9,724	)			—				(9,724	)
Stock-based compensation			—				—				3,362				—				—				3,362
Additional paid-in capital shortfall allocated to retained income			—				—				15,943				(15,943	)			—				—
Balance at September 30, 2017			9,035,609			$	—			$	—			$	188,313			$	4,743			$	193,056

See accompanying Notes to Consolidated Financial Statements.

 

8

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 September 30, 2018 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, 2018. 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, 2017 included in the Company’s Form 10-K, which was filed with the SEC on March 7, 2018.

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

The Company adopted the following accounting standards effective January 1, 2018.

Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company elected to use a modified retrospective method for transition to the new revenue recognition standard. The impact is limited to certain revenue generating activities that are not material to the Company’s results of operations.

 

9

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Accounting Standards Update No. 2016-01 (“ASU 2016-01”), Financial Instruments—Overall (Subtopic 825-10). ASU 2016-01 amends the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 requires all equity investments other than those accounted for under the equity method of accounting or those that result in consolidation of the investee to be measured at fair value with changes in the fair value recognized through income. ASU 2016-01 also supersedes the guidance that requires classification of equity securities with readily determinable fair values into either “trading” or “available-for-sale.” Upon adoption of this standard, the after-tax net unrealized holding gains of $4,168 in accumulated other comprehensive income at December 31, 2017, which pertain to available-for-sale equity securities and represent a cumulative-effect amount, were reclassified to beginning retained income. Any subsequent changes in the fair value of equity securities have now been recognized in the Company’s consolidated statement of income rather than in accumulated other comprehensive income. In addition, previously reported available-for-sale and trading equity securities of $58,911 and $1,045, respectively, at December 31, 2017 are combined and presented as equity securities on the comparative balance sheet. Certain prior-period disclosures related to equity securities are reorganized to conform with current period presentation.

Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 amends guidance on the classification and presentation of restricted cash in the statement of cash flows. Upon adoption of this standard, restricted cash is now included with cash and cash equivalents when the Company reconciles the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. In addition, the consolidated statement of cash flows for the prior period presented is retrospectively restated to comply with the new standard. This change in classification and presentation of restricted cash increases the previously reported cash flows from operating activities for the nine months ended September 30, 2017 from $51,393 to $51,502.

Accounting Standards Update No. 2017-09 (“ASU 2017-09”), Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an application of modification accounting. The adoption of this standard will impact the Company’s accounting for any future modification of its existing share-based awards.

Accounting Standards Update No. 2018-02 (“ASU 2018-02”), Income Statement – Reporting Comprehensive Income (Topic 220). ASU 2018-02 primarily allows a reclassification from accumulated other comprehensive income to retained income for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company elected to early adopt this standard in the first quarter of 2018. As a result, the Company decreased beginning retained income and increased accumulated other comprehensive income by $984 of the net deferred tax effects pertaining to available-for-sale fixed-maturity and equity securities as of December 31, 2017.

Equity Securities

Equity securities represent ownership interests held by the Company in entities for investment purposes. Prior to January 1, 2018, these equity securities were classified as either available-for-sale or trading and were carried at fair value on the Company’s consolidated balance sheet. Unrealized holding gains and losses from the changes in the fair values of available-for-sale equity securities were reported in accumulated other comprehensive income. Effective January 1, 2018, unrealized holding gains and losses are reported in the consolidated statement of income as net unrealized investment gains and losses. As a result, other-than-temporary impairments will no longer be considered for equity securities. Realized investment gains and losses from sales are recorded on the trade date and are determined using the first-in first-out method (see Equity Securities in Note 4 — “Investments”).

 

10

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Short-Term Investments

Short-term investments include certificates of deposit issued by financial institutions and commercial paper with original maturities of more than three months but less than one year at date of acquisition. These short-term investments are carried at cost or amortized cost, which approximates fair value.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the current year presentation. Certain payroll-related costs such as share-based compensation expense, payroll taxes and employee benefits, which were previously reported in other operating expenses totaling $2,067 and $5,970 for the three and nine months ended September 30, 2017, respectively, were reclassified to general and administrative personnel expenses to conform with the 2018 presentation.

Note 2 — Recent Accounting Pronouncements

Accounting Standards Update No. 2018-13. In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework, which removes, modifies and adds certain disclosure requirements about recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for the Company beginning with the first quarter of 2020. Early adoption is permitted. This guidance will impact the Company’s future fair value disclosures in the notes to financial statements.

Accounting Standard to be Adopted in Fiscal Year 2019

In February 2016, the 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 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. 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. The FASB later issued Accounting Standards Update No. 2018-11, Transition and Lessor Improvements, which provides a new alternative transition method. Under the alternative transition method, the Company is permitted to apply this standard at the beginning of the adoption period. The Company has identified lease contracts that will be affected by this standard and chosen to apply the practical expedients related to the identification and classification of leases that commenced before the effective date, initial direct cost for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease. The Company has elected to use the alternative transition method. The Company does not anticipate a material impact on its financial position.

 

11

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

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.

 

		September 30,				December 31,
		2018				2017
Cash and cash equivalents		$	249,083			$	255,884
Restricted cash			700				809
Total		$	249,783			$	256,693

Restricted cash primarily represents funds held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements. In August 2018, $109 of a deposit related to a mortgage loan with one regional bank was released to the Company.

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 September 30, 2018 and December 31, 2017, 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				Gross Unrealized				Gross Unrealized				Estimated Fair
		Cost				Gain				Loss				Value
As of September 30, 2018
U.S. Treasury and U.S. government agencies		$	56,632			$	1			$	(388	)		$	56,245
Corporate bonds			67,222				258				(1,645	)			65,835
State, municipalities, and political subdivisions			12,773				105				(6	)			12,872
Exchange-traded debt			10,499				253				(53	)			10,699
Redeemable preferred stock			67				1				—				68
Total		$	147,193			$	618			$	(2,092	)		$	145,719
As of December 31, 2017
U.S. Treasury and U.S. government agencies		$	42,313			$	1			$	(287	)		$	42,027
Corporate bonds			106,897				1,110				(904	)			107,103
State, municipalities, and political subdivisions			78,954				1,816				(75	)			80,695
Exchange-traded debt			7,469				197				(7	)			7,659
Total		$	235,633			$	3,124			$	(1,273	)		$	237,484

 

12

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties. The scheduled contractual maturities of fixed-maturity securities as of September 30, 2018 and December 31, 2017 are as follows:

 

		Cost or Amortized				Estimated
		Cost				Fair Value
As of September 30, 2018
Due in one year or less		$	51,805			$	51,690
Due after one year through five years			75,395				73,977
Due after five years through ten years			15,405				15,381
Due after ten years			4,588				4,671
		$	147,193			$	145,719

 

		Cost or Amortized				Estimated
		Cost				Fair Value
As of December 31, 2017
Due in one year or less		$	35,386			$	35,364
Due after one year through five years			116,378				115,766
Due after five years through ten years			57,415				58,984
Due after ten years			26,454				27,370
		$	235,633			$	237,484

Sales of Available-for-Sale Fixed-Maturity Securities

Proceeds received, and the gross realized gains and losses from sales of available-for-sale fixed-maturity securities, for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

						Gross Realized				Gross Realized
		Proceeds				Gains				Losses
Three months ended September 30, 2018		$	771			$	71			$	—
Three months ended September 30, 2017		$	2,765			$	97			$	(23	)
Nine months ended September 30, 2018		$	78,540			$	1,232			$	(500	)
Nine months ended September 30, 2017		$	9,638			$	126			$	(45	)

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;

 

13

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

•	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 months ended September 30, 2018 and 2017. For the nine months ended September 30, 2018, the Company recognized $80 of impairment loss on one fixed-maturity security. For the nine months ended September 30, 2017, the Company recognized impairment losses of $100 attributable to the sale of two intent-to-sell fixed-maturity securities. At September 30, 2018, one fixed-maturity security was considered other-than-temporarily impaired versus two fixed-maturity securities at September 30, 2017.

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in income from available for sale fixed-maturity securities.

 

		2018				2017
Balance at January 1		$	—			$	475
Additional credit impairments on previously impaired securities			—				—
Balance at September 30		$	—			$	475

Securities with gross unrealized loss positions at September 30, 2018 and December 31, 2017, 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
		Gross				Estimated				Gross				Estimated				Gross				Estimated
		Unrealized				Fair				Unrealized				Fair				Unrealized				Fair
As of September 30, 2018		Loss				Value				Loss				Value				Loss				Value
U.S. Treasury and U.S. government agencies		$	(144	)		$	19,321			$	(244	)		$	35,921			$	(388	)		$	55,242
Corporate bonds			(228	)			11,465				(1,417	)			38,104				(1,645	)			49,569
State, municipalities, and political subdivisions			(6	)			2,027				—				—				(6	)			2,027
Exchange-traded debt			(53	)			2,563				—				47				(53	)			2,610
Total		$	(431	)		$	35,376			$	(1,661	)		$	74,072			$	(2,092	)		$	109,448

At September 30, 2018, there were 79 securities in an unrealized loss position. Of these securities, 27 securities had been in an unrealized loss position for 12 months or longer.

 

14

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

		Less Than Twelve Months								Twelve Months or Longer								Total
		Gross				Estimated				Gross				Estimated				Gross				Estimated
		Unrealized				Fair				Unrealized				Fair				Unrealized				Fair
As of December 31, 2017		Loss				Value				Loss				Value				Loss				Value
U.S. Treasury and U.S. government agencies		$	(246	)		$	40,587			$	(41	)		$	1,938			$	(287	)		$	42,525
Corporate bonds			(174	)			40,627				(730	)			30,563				(904	)			71,190
State, municipalities, and political subdivisions			(30	)			9,775				(45	)			2,297				(75	)			12,072
Exchange-traded debt			(6	)			2,481				(1	)			36				(7	)			2,517
Total available-for-sale securities		$	(456	)		$	93,470			$	(817	)		$	34,834			$	(1,273	)		$	128,304

At December 31, 2017, there were 77 securities in an unrealized loss position. Of these securities, 15 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 September 30, 2018 and December 31, 2017, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

 

						Gross Unrealized				Gross Unrealized				Estimated Fair
		Cost				Gain				Loss				Value
September 30, 2018		$	44,184			$	2,543			$	(1,416	)		$	45,311
December 31, 2017		$	54,282			$	6,383			$	(709	)		$	59,956

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				Nine Months
		Ended				Ended
		September 30,				September 30,
		2018				2018
Net gains recognized		$	1,097			$	1,167
Less: Net realized gains recognized for securities sold			1,487				5,714
Net unrealized losses recognized*		$	(390	)		$	(4,547	)

 

*	Unrealized holding gains and losses for the corresponding periods in 2017 were reported in accumulated other comprehensive income. See Adoption of New Accounting Standards in Note 1 — “Summary of Significant Accounting Policies” for additional information.

 

15

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 Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

						Gross Realized				Gross Realized
		Proceeds				Gains				Losses
Three months ended September 30, 2018		$	15,443			$	1,926			$	(439	)
Three months ended September 30, 2017		$	5,407			$	235			$	(535	)
Nine months ended September 30, 2018		$	55,879			$	6,897			$	(1,183	)
Nine months ended September 30, 2017		$	26,309			$	3,070			$	(875	)

c) Short-Term Investments

Short-term investments consist of the following at September 30, 2018. The Company did not have short-term investments at December 31, 2017.

 

Certificates of deposit		$	35,437
Zero-coupon commercial paper			52,341
Total		$	87,778

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. In February 2018, the Company entered into a subscription agreement to invest $5,000 with a limited partnership specializing in real estate private equity funds and portfolios. Subsequently, in September 2018, the Company increased its aggregate investment commitment with this limited partnership to $10,000. The following table provides information related to the Company’s investments in limited partnerships:

 

16

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

		September 30, 2018												December 31, 2017
		Carrying				Unfunded								Carrying				Unfunded
Investment Strategy		Value				Balance				(%)(a)				Value				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)		$	9,690			$	2,853				15.37			$	7,276			$	5,505				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)			9,295				—				1.76				7,951				1,745				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)			8,169				2,329				0.18				7,509				2,512				0.18
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)			1,458				3,481				0.47				448				4,566				0.47
Value-oriented investments in mature real estate private equity funds and portfolios globally. (b)(j)			332				10,000				3.28				—				—				—
Total		$	28,944			$	18,663							$	23,184			$	14,328

 

(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.

(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, 2018.

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

 

17

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								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Operating results:
Total income		$	959,721			$	71,854			$	1,168,751			$	301,604
Total expenses			(30,192	)			(24,663	)			(115,887	)			(78,482	)
Net income (loss)		$	929,529			$	47,191			$	1,052,864			$	223,122

 

		September 30,				December 31,
		2018				2017
Balance Sheet:
Total assets		$	6,679,069			$	4,381,321
Total liabilities		$	585,780			$	382,310

For the three and nine months ended September 30, 2018, the Company recognized net investment income of $1,964 and $2,816, respectively, for these investments. During the three and nine months ended September 30, 2018, the Company received total cash distributions of $1,156 and $1,879, respectively. Cash distributions representing return on investment were $886 and $1,495 for the three and nine months ended September 30, 2018, respectively.

For the three and nine months ended September 30, 2017, the Company recognized net investment income of $392 and $1,724, respectively. During the three months ended September 30, 2017, the Company received in cash a return on investment of $428. During the nine months ended September 30, 2017, the Company received total cash distributions of $12,612, representing $11,758 of returned capital and $854 of return on investment. At September 30, 2018 and December 31, 2017, the Company’s cumulative contributed capital to the partnerships at each respective balance sheet date totaled $25,995 and $21,172, respectively, and the Company’s maximum exposure to loss aggregated $28,944 and $23,184, respectively.

 

18

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

 

e) Investment in Unconsolidated Joint Venture

The Company has an equity investment in FMKT Mel JV (“FMJV”), which is a limited liability company treated as a joint venture under U.S. GAAP. In June 2018, FMJV sold one of its outparcels for $849 and recognized a gain of $438. At September 30, 2018 and December 31, 2017, the Company’s maximum exposure to loss relating to the variable interest entity was $860 and $1,304, respectively, representing the carrying value of the investment. There were no cash distributions during the three months ended September 30, 2018 and 2017. During the nine months ended September 30, 2018, the Company received a cash distribution of $764, representing a combined distribution of $68 in earnings and $696 in capital. During the nine months ended September 30, 2017, the Company received a cash distribution of $564, representing a combined distribution of $147 in earnings and $417 in capital. There was no undistributed income at September 30, 2018 and December 31, 2017. The following tables provide FMJV’s summarized unaudited financial results and unaudited financial positions:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Operating results:
Total revenues and gain		$	—			$	—			$	438			$	331
Total expenses			(12	)			(18	)			(83	)			(83	)
Net (loss) income		$	(12	)		$	(18	)		$	355			$	248
The Company’s share of net (loss) income*		$	(10	)		$	(16	)		$	320			$	126

 

*	Included in net investment income in the Company’s consolidated statements of income. Gain from the sale of an outparcel in 2017 was allocated in accordance with the method specified in the operating agreement.

 

		September 30,				December 31,
		2018				2017
Balance Sheet:
Construction in progress—real estate		$	—			$	27
Real estate investments, net			793				1,199
Cash			167				236
Other			5				5
Total assets		$	965			$	1,467
Other liabilities		$	10			$	18
Members’ capital			955				1,449
Total liabilities and members’ capital		$	965			$	1,467
Investment in unconsolidated joint venture, at equity**		$	860			$	1,304

 

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

 

19