HCI Group, Inc. - Quarter Report: 2022 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, 2022


☐		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.)

3802 Coconut Palm Drive
Tampa, FL 33619
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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


Large accelerated filer ☐	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 November 1, 2022 was 8,756,970.

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page

	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets:
	September 30, 2022 (unaudited) and December 31, 2021	1-2
	Consolidated Statements of Income:
	Three and nine months ended September 30, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Comprehensive Income:
	Three and nine months ended September 30, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Equity:
	Three and nine months ended September 30, 2022 and 2021 (unaudited)	5-8
	Consolidated Statements of Cash Flows:
	Nine months ended September 30, 2022 and 2021 (unaudited)	9-11
	Notes to Consolidated Financial Statements (unaudited)	12-48

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49-64

Item 3	Quantitative and Qualitative Disclosures About Market Risk	65-66

Item 4	Controls and Procedures	67


	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	68

Item 1A	Risk Factors	68

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	68-69

Item 3	Defaults Upon Senior Securities	69

Item 4	Mine Safety Disclosures	69

Item 5	Other Information	69

Item 6	Exhibits	70-77

Signatures		78

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,
	2022		2021
	(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $371,877 and $41,953, respectively and allowance for credit losses: $0 and $0, respectively)	$	360,639	$	42,583
Equity securities, at fair value (cost: $36,639 and $46,276, respectively)		33,946		51,740
Limited partnership investments		25,405		28,133
Investment in unconsolidated joint venture, at equity		18		363
Real estate investments		71,500		73,896
Total investments		491,508		196,715
Cash and cash equivalents		355,699		628,943
Restricted cash		2,900		2,400
Accrued interest and dividends receivable		2,032		353
Income taxes receivable		8,134		4,084
Premiums receivable, net (allowance: $4,573 and $1,750, respectively)		51,762		68,157
Prepaid reinsurance premiums		104,539		26,355
Reinsurance recoverable, net of allowance for credit losses:
Paid losses and loss adjustment expenses (allowance: $0 and $0, respectively)		14,592		11,985
Unpaid losses and loss adjustment expenses (allowance: $451 and $90, respectively)		938,404		64,665
Deferred policy acquisition costs		48,258		57,695
Property and equipment, net		17,749		14,232
Right-of-use assets - operating leases		1,597		2,204
Intangible assets, net		13,651		10,636
Funds withheld for assumed business		67,313		73,716
Other assets		26,605		14,717
Total assets	$	2,144,743	$	1,176,857

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets – (Continued)

(Dollar amounts in thousands)


	September 30,			December 31,
	2022			2021
	(Unaudited)
Liabilities and Equity
Losses and loss adjustment expenses	$	1,201,842		$	237,165
Unearned premiums		379,609			366,744
Advance premiums		28,672			13,771
Reinsurance payable on paid losses and loss adjustment expenses		3,046			4,017
Ceded reinsurance premiums payable		—			19,318
Accrued expenses		18,788			15,453
Deferred income taxes, net		1,705			11,739
Revolving credit facility		—			15,000
Long-term debt		211,667			45,504
Lease liabilities - operating leases		1,539			2,203
Other liabilities		33,453			31,485
Total liabilities		1,880,321			762,399
Commitments and contingencies (Note 20)
Redeemable noncontrolling interest (Note 17)		91,248			89,955
Equity:
Common stock (no par value, 40,000,000 shares authorized, 8,926,845 and 10,131,399 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively)		—			—
Additional paid-in capital		9,969			76,077
Retained income		175,056			246,790
Accumulated other comprehensive (loss) income, net of taxes		(10,795	)		498
Total stockholders’ equity		174,230			323,365
Noncontrolling interests		(1,056	)		1,138
Total equity		173,174			324,503
Total liabilities, redeemable noncontrolling interest and equity	$	2,144,743		$	1,176,857

See accompanying Notes to Consolidated Financial Statements (unaudited).

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,
	2022			2021			2022			2021
Revenue
Gross premiums earned	$	181,713		$	149,809		$	541,762		$	420,191
Premiums ceded		(74,741	)		(55,577	)		(184,108	)		(145,112	)
Net premiums earned		106,972			94,232			357,654			275,079
Net investment income		18,530			2,520			25,082			9,749
Net realized investment (losses) gains		(884	)		1,232			(1,204	)		4,952
Net unrealized investment losses		(347	)		(1,869	)		(8,157	)		(649	)
Policy fee income		1,071			1,000			3,180			2,962
Other		1,312			2,102			3,065			3,502
Total revenue		126,654			99,217			379,620			295,595
Expenses
Losses and loss adjustment expenses		139,794			62,664			299,328			164,332
Policy acquisition and other underwriting expenses		24,678			23,340			80,949			69,574
General and administrative personnel expenses		15,848			11,537			45,183			31,733
Interest expense		2,813			1,664			4,929			5,743
Debt conversion expense		—			1,273			—			1,273
Other operating expenses		7,123			5,243			20,392			14,245
Total expenses		190,256			105,721			450,781			286,900
(Loss) income before income taxes		(63,602	)		(6,504	)		(71,161	)		8,695
Income tax (benefit) expense		(12,099	)		(1,636	)		(13,907	)		2,888
Net (loss) income		(51,503	)		(4,868	)		(57,254	)		5,807
Net income attributable to redeemable noncontrolling interest (Note 17)		(2,285	)		(2,202	)		(6,801	)		(5,175	)
Net loss attributable to noncontrolling interests		2,829			833			4,018			1,196
Net (loss) income after noncontrolling interests	$	(50,959	)	$	(6,237	)	$	(60,037	)	$	1,828
Basic (loss) earnings per share	$	(5.66	)	$	(0.72	)	$	(6.26	)	$	0.23
Diluted (loss) earnings per share	$	(5.66	)	$	(0.72	)	$	(6.26	)	$	0.22

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net (loss) income	$	(51,503	)	$	(4,868	)	$	(57,254	)	$	5,807
Other comprehensive loss:
Change in unrealized loss on investments:
Net unrealized losses arising during the period		(5,969	)		(258	)		(12,294	)		(341	)
Call and repayment gains charged to investment income		—			—			—			(2	)
Reclassification adjustment for net realized losses (gains)		5			(88	)		426			(665	)
Net change in unrealized losses		(5,964	)		(346	)		(11,868	)		(1,008	)
Deferred income taxes on above change		(1,337	)		85			154			247
Total other comprehensive loss, net of income taxes		(7,301	)		(261	)		(11,714	)		(761	)
Comprehensive (loss) income		(58,804	)		(5,129	)		(68,968	)		5,046
Comprehensive loss attributable to noncontrolling interests		3,095			839			4,439			1,212
Comprehensive (loss) income after noncontrolling interests	$	(55,709	)	$	(4,290	)	$	(64,529	)	$	6,258

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Equity

For the Three Months Ended September 30, 2022

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Loss,			Total Stockholders’			Noncontrolling			Total
	Shares			Amount		Capital			Income			Net of Tax			Equity			Interests			Equity
Balance at June 30, 2022		9,047,972		$	—	$	12,887		$	229,621		$	(3,760	)	$	238,748		$	1,187		$	239,935
Net loss		—			—		—			(48,846	)		—			(48,846	)		(2,657	)		(51,503	)
Net income attributable to redeemable noncontrolling interest		—			—		—			(2,113	)		—			(2,113	)		(172	)		(2,285	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(7,035	)		(7,035	)		(266	)		(7,301	)
Forfeiture of restricted stock		(1,665	)		—		—			—			—			—			—			—
Repurchase and retirement of common stock under share repurchase plan		(119,462	)		—		(6,179	)		—			—			(6,179	)		—			(6,179	)
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			852			852
Common stock dividends ($0.40 per share)		—			—		—			(3,606	)		—			(3,606	)		—			(3,606	)
Stock-based compensation		—			—		3,261			—			—			3,261			—			3,261
Balance at September 30, 2022		8,926,845		$	—	$	9,969		$	175,056		$	(10,795	)	$	174,230		$	(1,056	)	$	173,174

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Equity – (Continued)

For the Three Months Ended September 30, 2021

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income,			Total Stockholders’			Noncontrolling			Total
	Shares			Amount		Capital			Income			Net of Tax			Equity			Interests			Equity
Balance at June 30, 2021		8,265,640		$	—	$	—		$	215,612		$	1,054		$	216,666		$	1,383		$	218,049
Net loss		—			—		—			(4,346	)		—			(4,346	)		(522	)		(4,868	)
Net income attributable to redeemable noncontrolling interest		—			—		—			(1,891	)		—			(1,891	)		(311	)		(2,202	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(255	)		(255	)		(6	)		(261	)
Issuance of restricted stock		2,340			—		—			—			—			—			—			—
Forfeiture of restricted stock		(38,855	)		—		—			—			—			—			—			—
Common stock issued on conversions of 4.25% senior notes		1,361,954			—		82,339			—			—			82,339			—			82,339
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			472			472
Common stock dividends ($0.40 per share)		—			—		—			(3,261	)		—			(3,261	)		—			(3,261	)
Stock-based compensation		—			—		2,260			—			—			2,260			—			2,260
Additional paid-in capital shortfall adjustment allocated to retained income		—			—		(44,694	)		44,694			—			—			—			—
Balance at September 30, 2021		9,591,079		$	—	$	39,905		$	250,808		$	799		$	291,512		$	1,016		$	292,528

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Equity – (Continued)

For the Nine Months Ended September 30, 2022

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income (Loss),			Total Stockholders’			Noncontrolling			Total
	Shares			Amount		Capital			Income			Net of Tax			Equity			Interests			Equity
Balance at December 31, 2021		10,131,399		$	—	$	76,077		$	246,790		$	498		$	323,365		$	1,138		$	324,503
Net loss		—			—		—			(53,753	)		—			(53,753	)		(3,501	)		(57,254	)
Net income attributable to redeemable noncontrolling interest		—			—		—			(6,284	)		—			(6,284	)		(517	)		(6,801	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(11,293	)		(11,293	)		(421	)		(11,714	)
Issuance of restricted stock		7,000			—		—			—			—			—			—			—
Forfeiture of restricted stock		(5,630	)		—		—			—			—			—			—			—
Repurchase and retirement of common stock		(1,056,997	)		—		(68,103	)		—			—			(68,103	)		—			(68,103	)
Repurchase and retirement of common stock under share repurchase plan		(148,927	)		—		(8,063	)		—			—			(8,063	)		—			(8,063	)
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			2,245			2,245
Common stock dividends ($1.20 per share)		—			—		—			(11,697	)		—			(11,697	)		—			(11,697	)
Stock-based compensation		—			—		10,058			—			—			10,058			—			10,058
Balance at September 30, 2022		8,926,845		$	—	$	9,969		$	175,056		$	(10,795	)	$	174,230		$	(1,056	)	$	173,174

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Equity – (Continued)

For the Nine Months Ended September 30, 2021

(Unaudited)

(Dollar amounts in thousands, except per share amount)


	Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive Income,			Total Stockholders’			Noncontrolling			Total
	Shares			Amount		Capital			Income			Net of Tax			Equity			Interests			Equity
Balance at December 31, 2020		7,785,617		$	—	$	—		$	199,592		$	1,544		$	201,136		$	—		$	201,136
Net income (loss)		—			—		—			6,692			—			6,692			(885	)		5,807
Net income attributable to redeemable noncontrolling interest		—			—		—			(4,864	)		—			(4,864	)		(311	)		(5,175	)
Cumulative effect of change in accounting principle		—			—		—			(3,018	)		—			(3,018	)		—			(3,018	)
Total other comprehensive loss, net of income taxes		—			—		—			—			(745	)		(745	)		(16	)		(761	)
Issuance of restricted stock		553,426			—		—			—			—			—			—			—
Forfeiture of restricted stock		(49,965	)		—		—			—			—			—			—			—
Cancellation of restricted stock		(142,760	)		—		—			—			—			—			—			—
Repurchase and retirement of common stock		(17,193	)		—		(1,308	)		—			—			(1,308	)		—			(1,308	)
Issuance of common stock		100,000			—		5,410			—			—			5,410			—			5,410
Common stock issued on conversions of 4.25% senior notes		1,361,954			—		82,339			—			—			82,339			—			82,339
Dilution from subsidiary stock-based compensation		—			—		—			—			—			—			2,228			2,228
Issuance of warrants, net of issuance costs (Note 17)		—			—		8,640			—			—			8,640			—			8,640
Common stock dividends ($1.20 per share)		—			—		—			(9,713	)		—			(9,713	)		—			(9,713	)
Stock-based compensation		—			—		6,943			—			—			6,943			—			6,943
Additional paid-in capital shortfall adjustment allocated to retained income		—			—		(62,119	)		62,119			—			—			—			—
Balance at September 30, 2021		9,591,079		$	—	$	39,905		$	250,808		$	799		$	291,512		$	1,016		$	292,528

See accompanying Notes to Consolidated Financial Statements (unaudited).

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2022			2021
Cash flows from operating activities:
Net (loss) income after noncontrolling interests	$	(60,037	)	$	1,828
Net income attributable to noncontrolling interests		2,783			3,979
Net (loss) income		(57,254	)		5,807
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation expense		12,709			9,229
Net (accretion of discount) amortization of premiums on investments in fixed-maturity securities		(922	)		180
Depreciation and amortization		5,659			4,276
Deferred income tax benefit		(9,880	)		(6,989	)
Net realized investment losses (gains)		1,204			(4,952	)
Net unrealized investment losses		8,157			649
Credit loss expense - reinsurance recoverable		361			(41	)
Net income from unconsolidated joint venture		(495	)		(423	)
Distributions received from unconsolidated joint venture		489			114
Net income from limited partnership interests		(3,064	)		(3,491	)
Distributions received from limited partnership interests		2,417			2,345
Debt conversion expense		—			1,273
Gain on involuntary conversion		(13,402	)		—
Gain on sale of real estate investments		(376	)		—
Foreign currency remeasurement loss		91			48
Other non-cash items		(38	)		37
Changes in operating assets and liabilities:
Accrued interest and dividends receivable		(1,679	)		125
Income taxes		(4,050	)		8,128
Premiums receivable, net		16,395			25,304
Prepaid reinsurance premiums		(78,184	)		(11,592	)
Reinsurance recoverable		(876,707	)		36,061
Deferred policy acquisition costs		9,437			(3,271	)
Funds withheld for assumed business		6,403			(79,965	)
Other assets		(11,317	)		5,727
Losses and loss adjustment expenses		964,677			(8,992	)
Unearned premiums		12,865			64,900
Advance premiums		14,901			7,692
Assumed reinsurance balances payable		—			1
Reinsurance payable on paid losses and loss adjustment expenses		(971	)		4,727
Ceded reinsurance premiums payable		(19,318	)		(7,447	)
Accrued expenses and other liabilities		3,631			(789	)
Net cash (used in) provided by operating activities		(18,261	)		48,671

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2022			2021
Cash flows from investing activities:
Investments in limited partnership interests		(1,357	)		(837	)
Distributions received from limited partnership interests		4,732			3,635
Distributions received from unconsolidated joint venture		351			623
Purchase of property and equipment		(5,431	)		(2,583	)
Purchase of real estate investments		(445	)		(657	)
Purchase of intangible assets		(3,800	)		—
Purchase of fixed-maturity securities		(393,145	)		(10,504	)
Purchase of equity securities		(20,921	)		(72,707	)
Purchase of short-term and other investments		(32	)		(1,161	)
Compensation received for property relinquished through eminent domain		14,500			—
Proceeds from sales of real estate investments		667			—
Proceeds from sales of fixed-maturity securities		11,694			18,838
Proceeds from calls, repayments and maturities of fixed-maturity securities		52,023			16,734
Proceeds from sales of equity securities		29,316			81,292
Proceeds from sales, redemptions and maturities of short-term and other investments		496			2,414
Net cash (used in) provided by investing activities		(311,352	)		35,087
Cash flows from financing activities:
Cash dividends paid		(11,774	)		(9,943	)
Cash dividends received under share repurchase forward contract		77			230
Net repayment under revolving credit facility		(15,000	)		(23,750	)
Proceeds from issuance of redeemable noncontrolling interest and warrants		—			100,000
Issuance costs - redeemable noncontrolling interest		—			(6,262	)
Cash dividends paid to redeemable noncontrolling interest		(5,508	)		(2,542	)
Proceeds from issuance of long-term debt		172,500			—
Repayment of long-term debt		(754	)		(724	)
Repurchases of common stock		(68,103	)		(1,308	)
Repurchases of common stock under share repurchase plan		(8,063	)		—
Purchase of noncontrolling interests		(406	)		(58	)
Debt conversion expense paid		—			(1,414	)
Debt issuance costs		(6,014	)		(152	)
Net cash provided by financing activities		56,955			54,077
Effect of exchange rate changes on cash		(86	)		(42	)
Net (decrease) increase in cash, cash equivalents, and restricted cash		(272,744	)		137,793
Cash, cash equivalents, and restricted cash at beginning of period		631,343			433,741
Cash, cash equivalents, and restricted cash at end of period	$	358,599		$	571,534

(continued)

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Continued)

(Unaudited)

(Amounts in thousands)


	Nine Months Ended
	September 30,
	2022			2021
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	100		$	1,748
Cash paid for interest	$	1,665		$	6,686
Non-cash investing and financing activities:
Unrealized loss on investments in available-for-sale securities, net of tax	$	(11,714	)	$	(761	)
Receivable from maturities of fixed-maturity securities	$	—		$	18
Common stock issued on conversions of 4.25% senior notes	$	—		$	82,339
Warrants issued in Centerbridge transaction	$	—		$	9,217
Asset acquired under finance lease	$	—		$	7
Acquisition of intangibles:
Common stock issued	$	—		$	5,410
Contingent consideration payable	$	1,069		$	2,419

See accompanying Notes to Consolidated Financial Statements (unaudited).

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 -- Nature of Operations

HCI Group, Inc., together with its subsidiaries (“HCI” or the “Company”), is primarily engaged in the property and casualty insurance business through two Florida domiciled insurance companies, Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). Both HCPCI and TypTap are authorized to underwrite various homeowners’ property and casualty insurance products and allied lines business in the state of Florida and in other states. The operations of both insurance subsidiaries are supported by HCI Group, Inc. and certain HCI subsidiaries. The Company emphasizes the use of internally developed technologies to collect and analyze claims and other supplemental data to generate savings and efficiency for the operations of the insurance subsidiaries. In addition, Greenleaf Capital, LLC, the Company’s real estate subsidiary, is primarily engaged in the business of owning and leasing real estate and operating marina facilities.

Impact of Hurricane Ian

On September 28, 2022, Hurricane Ian made landfall in southwestern Florida as a dangerous, high-end Category 4 storm. After crossing the Florida peninsula, it made a second landfall on September 30, 2022 in coastal South Carolina. On a pre-tax consolidated basis, estimated gross losses related to Hurricane Ian totaled $970,000. After anticipated reinsurance recoveries, the Company incurred a net estimated loss of approximately $65,000. Gross loss estimates, including loss adjustment expenses, for HCPCI and TypTap were $550,518 and $419,482, respectively.

As a result of Hurricane Ian, the balance of previously accrued benefits under one multi-year reinsurance contract with retrospective provisions was decreased by $12,600 during the third quarter of 2022. In addition, the Company recognized an allowance for credit losses of approximately $399 related to Hurricane Ian’s unpaid ceded reinsurance recoverable.

On September 28, 2022, the Florida Office of Insurance Regulation issued an emergency order in response to Hurricane Ian preventing insurers regulated under the Florida Insurance Code from cancelling or non-renewing a policy as well as issuing a notice of cancellation or nonrenewal of a policy between September 28, 2022 and November 28, 2022, except at the written request of the policyholder. This rule does not apply to new policies effective on or after September 28, 2022.

Assumed Business

Northeast Region

In 2021, the Company began providing quota share reinsurance on all in-force, new and renewal policies issued by United Property & Casualty Insurance Company, an insurance subsidiary of United Insurance Holdings Corporation (“United”), in the states of Connecticut, New Jersey, Massachusetts, and Rhode Island (collectively “Northeast Region”). Through its insurance subsidiaries, the Company began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.

Southeast Region

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Under this agreement, HCPCI paid United a catastrophe allowance of 9% of premium and a provisional ceding commission of 25% of premium.

The Company also entered into a renewal rights agreement with United in connection with the Southeast Region assumed business. Under the renewal rights agreement, the Company has the right to renew and/or replace United’s insurance policies at the end of their respective policy periods. The ability to replace policies is subject to regulatory approvals in the three states. The policy replacement date was set for June 1, 2022 or such other date as mutually agreed by both parties. In connection with the transaction, United agreed to not compete with the Company for the issuance of personal lines homeowners business in these three states until July 1, 2025. As part of the transaction, United will receive a renewal rights ceding commission of 6%, with a portion of the ceding commission paid up-front, and the aggregate ceding commission amount will not exceed $6,000. See Note 7 -- “Intangible Assets, Net” for additional information.

The Company began renewing United’s policies in South Carolina on June 1, 2022. The policy replacement date for North Carolina policies has yet to be determined and the Company, through TypTap, entered into a new quota share reinsurance agreement in June 2022 to provide 100% reinsurance on all of United’s in-force, new and renewal policies in the Southeast Region from June 1, 2022 through May 31, 2023. In exchange, TypTap pays United a ceding commission of 16% of premium. See Note 21 -- “Subsequent Events” for additional information.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 2 -- 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, 2022 and the results of operations and cash flows for the interim 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, 2022. 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, 2021 included in the Company’s Form 10-K, which was filed with the SEC on March 10, 2022.

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, limited partnership investments, intangible assets acquired from United, 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.

Allowance for Credit Losses

Allowance for credit losses represents an estimation of potential losses that the Company may experience due to credit risk. The allowance for credit losses account is a contra account of a financial asset to reflect the net amount expected to be collected. For certain financial assets related to insurance business such as reinsurance recoverable and reinsurance receivable for premium refund, the Company uses a rating-based method, which is a modified version of the probability of default method. It requires two key inputs: a) the liquidation rate and b) the amount of loss exposure. The liquidation rate, which is published annually, is the ratio of impaired insurance companies that were eventually liquidated to the group of insurance companies considered by A.M. Best in its study. The amount of loss exposure represents the future billing balance, net of any collateral, spread over the projected periods that are based on the Company’s historical claim payment pattern. The rating-based method measures credit losses by multiplying the future billings grouped by insurance rating over the projected periods by their corresponding liquidation rates by insurance rating.

For paid reinsurance recoverable which is due within 90 days after billing, the Company will rely heavily on each reinsurer’s current rating, recent financial condition, and historical collection problems, if any, in

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

determining the expected credit loss. For risk attributable to disagreements between an insurer and reinsurer regarding a difference in interpretation of provisions in a reinsurance agreement (“dispute risk”), the Company will continue to use an incurred loss method to estimate losses. At September 30, 2022, there was no dispute risk associated with the reinsurance recoverable balance.

Long-Term Debt

Long-term debt includes debt instruments and finance lease obligations. A debt instrument is generally classified as a liability and carried at amortized cost, net of any issuance costs. Debt issuance costs are capitalized and amortized to interest expense over the expected life of the debt instrument using the effective interest method. At issuance, a debt instrument with embedded features such as conversion and redemption options is evaluated to determine whether bifurcation and derivative accounting is applicable. Any embedded feature other than the conversion option is evaluated at issuance to determine if it is probable that such embedded feature will be exercised. If the Company concludes that the exercisability of that embedded feature is not probable, the embedded feature is considered to be non-substantive and would not impact the initial measurement and expected life of the debt instrument.

Revenue from Claims Processing Services

Revenue related to claims processing services is included in other revenue in the consolidated statements of income. For the three and nine months ended September 30, 2022, revenues from claims processing services were $903 and $2,282, respectively. For the three and nine months ended September 30, 2021, revenues from claims processing services were $1,709 and $1,916, respectively. At September 30, 2022 and December 31, 2021, other assets included $1,418 and $314, respectively, of amounts receivable attributable to this service.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation. Ceded reinsurance premiums payable were reclassified out of other liabilities for the nine months ended September 30, 2021 within the consolidated statement of cash flows to conform with the current year presentation.

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 consolidated statements of cash flows.


	September 30,		December 31,
	2022		2021
Cash and cash equivalents	$	355,699	$	628,943
Restricted cash		2,900		2,400
Total	$	358,599	$	631,343

Restricted cash represents funds in the Company’s sole ownership held by certain states in which the Company’s insurance subsidiaries conduct business to meet regulatory requirements and not available for immediate business use. Funds withheld in an account for which the Company is a co-owner but not the named beneficiary are not considered restricted cash and are included in funds withheld for assumed business on the consolidated balance sheets.

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 September 30, 2022 and December 31, 2021, the cost or amortized cost, allowance for credit loss, 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		Allowance for Credit		Gross Unrealized		Gross Unrealized			Estimated Fair
	Cost		Loss		Gain		Loss			Value
As of September 30, 2022
U.S. Treasury and U.S. government agencies	$	339,666	$	—	$	1	$	(9,814	)	$	329,853
Corporate bonds		29,642		—		—		(1,410	)		28,232
States, municipalities, and political subdivisions		1,762		—		—		(11	)		1,751
Exchange-traded debt		700		—		3		(2	)		701
Redeemable preferred stock		107		—		—		(5	)		102
Total	$	371,877	$	—	$	4	$	(11,242	)	$	360,639
As of December 31, 2021
U.S. Treasury and U.S. government agencies	$	17,046	$	—	$	64	$	(86	)	$	17,024
Corporate bonds		21,913		—		632		(53	)		22,492
States, municipalities, and political subdivisions		1,759		—		49		—			1,808
Exchange-traded debt		767		—		44		—			811
Redeemable preferred stock		468		—		—		(20	)		448
Total	$	41,953	$	—	$	789	$	(159	)	$	42,583

Expected maturities may 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, 2022 and December 31, 2021 are as follows:


	September 30, 2022				December 31, 2021
	Cost or		Estimated		Cost or		Estimated
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale
Due in one year or less	$	124,676	$	124,402	$	10,734	$	10,826
Due after one year through five years		242,499		232,166		19,222		19,820
Due after five years through ten years		4,208		3,577		11,503		11,403
Due after ten years		494		494		494		534
	$	371,877	$	360,639	$	41,953	$	42,583

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 fixed-maturity securities, for the three and nine months ended September 30, 2022 and 2021 were as follows:


			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2022	$	200	$	—	$	(5	)
Three months ended September 30, 2021	$	4,158	$	94	$	(6	)
Nine months ended September 30, 2022	$	11,694	$	13	$	(439	)
Nine months ended September 30, 2021	$	18,838	$	671	$	(6	)

Gross Unrealized Losses for Available-for-Sale Fixed-Maturity Securities

Securities with gross unrealized loss positions at September 30, 2022 and December 31, 2021, 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, 2022	Loss			Value		Loss			Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(9,677	)	$	324,643	$	(137	)	$	2,233	$	(9,814	)	$	326,876
Corporate bonds		(1,164	)		26,947		(246	)		1,285		(1,410	)		28,232
States, municipalities, and political subdivisions		(11	)		1,751		—			—		(11	)		1,751
Exchange-traded debt		(2	)		517		—			—		(2	)		517
Redeemable preferred stock		(5	)		102		—			—		(5	)		102
Total available-for-sale securities	$	(10,859	)	$	353,960	$	(383	)	$	3,518	$	(11,242	)	$	357,478


	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, 2021	Loss			Value		Loss			Value		Loss			Value
U.S. Treasury and U.S. government agencies	$	(73	)	$	9,809	$	(13	)	$	616	$	(86	)	$	10,425
Corporate bonds		(53	)		4,452		—			—		(53	)		4,452
Redeemable preferred stock		(20	)		442		—			—		(20	)		442
Total available-for-sale securities	$	(146	)	$	14,703	$	(13	)	$	616	$	(159	)	$	15,319

At September 30, 2022 and December 31, 2021, there were 88 and 23 securities, respectively, in an unrealized loss position.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Allowance for Credit Losses of Available-for-Sale Fixed-Maturity Securities

The Company regularly reviews its individual investment securities for credit impairment. The Company considers various factors in determining whether a credit loss exists for each individual security, including-

•

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

•

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

•

general market conditions and industry or sector specific factors and other qualitative factors;

•

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

•

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

The table below summarizes the activity in the allowance for credit losses of available-for-sale securities for the three and nine months ended September 30, 2022 and 2021:



	2022		2021
Balance at January 1	$	—	$	588
Reductions for securities sold		—		(9	)
Balance at March 31	$	—	$	579
Reductions for securities exchanged		—		(579	)
Balance at June 30	$	—	$	—
Balance at September 30	$	—	$	—

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At September 30, 2022 and December 31, 2021, 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, 2022	$	36,639	$	1,873	$	(4,566	)	$	33,946
December 31, 2021	$	46,276	$	6,335	$	(871	)	$	51,740

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net (losses) gains recognized	$	(1,279	)	$	(916	)	$	(9,144	)	$	2,620
Exclude: Net realized (losses) gains recognized for securities sold		(932	)		953			(987	)		3,269
Net unrealized losses recognized	$	(347	)	$	(1,869	)	$	(8,157	)	$	(649	)

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, 2022 and 2021 were as follows:


			Gross Realized		Gross Realized
	Proceeds		Gains		Losses
Three months ended September 30, 2022	$	4,889	$	135	$	(1,067	)
Three months ended September 30, 2021	$	24,781	$	1,141	$	(188	)
Nine months ended September 30, 2022	$	29,316	$	1,988	$	(2,975	)
Nine months ended September 30, 2021	$	81,292	$	4,266	$	(997	)

c) Limited Partnership Investments

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


	September 30, 2022						December 31, 2021
	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)	$	4,120	$	—		15.37	$	6,076	$	2,085		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)		3,312		—		1.67		3,423		—		1.69
High returns and long-term capital appreciation through investments in the power, utility and energy industries, and in the infrastructure sector. (b)(f)(g)		4,421		—		0.18		6,270		1,401		0.18
Value-oriented investments in less liquid and mispriced senior and junior debts of private equity-backed companies. (b)(h)(i)		3,757		—		0.57		4,437		—		0.57
Value-oriented investments in mature real estate private equity funds and portfolios globally. (b)(j)		7,103		3,633		1.32		5,977		4,537		1.36
Risk-adjusted returns on credit and equity investments, primarily in private equity-owned companies. (b)(k)		2,692		2,629		1.07		1,950		3,050		0.47
Total	$	25,405	$	6,262			$	28,133	$	11,073

(a)

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

(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)

The term is expected to be the later of ten years or two years following the maturity of the fund’s outstanding leverage. Although the capital commitment period has expired, follow-on investments and pending commitments may require additional fundings.

(d)

The term has been extended for a second additional one-year period to June 30, 2023. Although the capital commitment period has ended, the general partner could still request an additional funding 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. The capital commitment period has expired but the general partner may request additional funding for follow-on investment.

(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 an eight-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)

The capital commitment period has ended but an additional funding may be requested.

(j)

The term is expected to end November 27, 2027. The term may be extended for up to four additional one-year periods at the general partner’s discretion, and up to two additional one-year periods with the consent of the advisory committee.

(k)

Expected to have an eight-year term after the final admission date. The term may be extended for an additional one-year period at the general partner’s discretion, and up to two additional one-year periods with the consent of either the advisory committee or a majority of limited partners.

The following is the summary of aggregated unaudited financial information of limited partnerships included in the investment strategy table above, which in certain cases is presented on a three-month lag due to the unavailability of information at the Company’s respective balance sheet dates. The financial statements of these limited partnerships are audited annually.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Operating results:
Total income	$	208,468		$	(13,796	)	$	724,413		$	359,885
Total expenses		(45,537	)		(24,828	)		(117,877	)		(105,548	)
Net income (loss)	$	162,931		$	(38,624	)	$	606,536		$	254,337


	September 30,		December 31,
	2022		2021
Balance sheet:
Total assets	$	5,488,857	$	5,855,616
Total liabilities	$	409,604	$	564,732

For the three and nine months ended September 30, 2022, the Company recognized net investment income of $1,265 and $3,064, respectively. During the three and nine months ended September 30, 2022, the Company received total cash distributions of $2,768 and $7,149, respectively, including returns on investment of $371 and $2,417, respectively.

For the three and nine months ended September 30, 2021, the Company recognized net investment income of $1,132 and $3,491, respectively. During the three and nine months ended September 30, 2021, the Company

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

received total cash distributions of $1,535 and $5,980, respectively, including returns on investment of $553 and $2,345, respectively.

At September 30, 2022 and December 31, 2021, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $24,996 and $28,371, respectively, and the Company’s maximum exposure to loss aggregated $25,405 and $28,133, respectively.

d) Investment in Unconsolidated Joint Venture

Melbourne FMA, LLC, a wholly owned subsidiary, currently has an equity investment in FMKT Mel JV, a Florida limited liability company treated as a joint venture under U.S. GAAP. At September 30, 2022 and December 31, 2021, the Company’s maximum exposure to loss relating to the variable interest entity was $18 and $363, respectively, representing the carrying value of the investment. In June 2022, the joint venture sold its last outparcel and recognized a gain of $572. During the three and nine months ended September 30, 2022, the Company received a cash distribution of $840, including return on investment of $489. During the three and nine months ended September 30, 2021, the Company received a cash distribution of $737, including return on investment of $114. At September 30, 2022 and December 31, 2021, 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:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022		2021			2022			2021
Operating results:
Total revenues	$	—	$	540		$	572		$	540
Total expenses		—		(14	)		(22	)		(70	)
Net income	$	—	$	526		$	550		$	470
The Company’s share of net income*	$	—	$	473		$	495		$	423

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


	September 30,		December 31,
	2022		2021
Balance sheet:
Property and equipment, net	$	—	$	357
Cash		2		29
Other		18		18
Total assets	$	20	$	404

Members’ capital	$	20	$	404
Total members’ capital	$	20	$	404
Investment in unconsolidated joint venture, at equity**	$	18	$	363

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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

e) Real Estate Investments

Real estate investments consist of the following as of September 30, 2022 and December 31, 2021:


	September 30,			December 31,
	2022			2021
Land	$	38,327		$	39,720
Land improvements		12,138			11,917
Buildings and building improvements		29,410			29,405
Tenant and leasehold improvements		1,554			1,511
Other		1,462			1,265
Total, at cost		82,891			83,818
Less: accumulated depreciation and amortization		(11,391	)		(9,922	)
Real estate investments	$	71,500		$	73,896

In May 2022, the Company sold one outparcel in Sorrento, Florida for net proceeds of $667. On July 1, 2022, the Company closed on its agreement to sell 1.5 acres of land in Tampa, Florida for net proceeds of $14,500 to the Florida Department of Transportation (“FDOT”) in connection with an eminent domain proceeding for a planned road improvement project. See additional information under f) Net Investment Income (Loss) below. Depreciation and amortization expense related to real estate investments was $480 and $475 for the three months ended September 30, 2022 and 2021, respectively, and $1,469 and $1,445 for the nine months ended September 30, 2022 and 2021, respectively.

f) Net Investment Income (Loss)

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Available-for-sale fixed-maturity securities	$	2,125		$	266		$	3,710		$	1,091
Equity securities		288			322			875			1,013
Investment expense		(117	)		(134	)		(367	)		(388	)
Limited partnership investments		1,265			1,132			3,064			3,491
Real estate investments		13,897			305			15,782			3,646
Net income from unconsolidated joint venture		—			473			495			423
Cash and cash equivalents		1,072			156			1,523			473
Net investment income	$	18,530		$	2,520		$	25,082		$	9,749

For the three months ended September 30, 2022, income from real estate investments included a net realized gain of $13,402 resulting from the sale of 1.5 acres of land in Tampa, Florida in July 2022 for net proceeds of $14,500 to the FDOT in connection with an eminent domain proceeding for a planned road improvement project. For the nine months ended September 30, 2022, in addition to the aforementioned sale of land, income from real estate investments included a net gain of $376 resulting from the sale of the outparcel described in e) Real Estate Investments and $451 of income from selling the liquor license previously owned by the Company’s restaurant business which was discontinued in 2020. For the nine months ended September 30, 2021, income from real estate investments included a net gain of $2,790 resulting from a legal settlement with The Kroger Co. in a lawsuit filed by a real estate subsidiary of the Company to enforce a guaranty of a commercial lease.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

g) Other Investments

From time to time, the Company may invest in financial assets other than stocks, mutual funds and bonds. For the three months ended September 30, 2022 and 2021, net realized gains related to other investments were $53 and $191, respectively, and $209 and $1,018 for the nine months ended September 30, 2022 and 2021, respectively.

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 to any credit losses related to these investments. Reclassification adjustments for realized (gains) losses are reflected in net realized investment gains (losses) on the consolidated statements of income. The components of other comprehensive income or loss and the related tax effects allocated to each component were as follows:


	Three Months Ended								Three Months Ended
	September 30, 2022								September 30, 2021
	Before			Income		Net of			Before			Income			Net of
	Tax			Tax Effect		Tax			Tax			Tax Effect			Tax
Net unrealized losses	$	(5,969	)	$	1,336	$	(7,305	)	$	(258	)	$	(63	)	$	(195	)
Reclassification adjustment for realized losses (gains)		5			1		4			(88	)		(22	)		(66	)
Total other comprehensive loss	$	(5,964	)	$	1,337	$	(7,301	)	$	(346	)	$	(85	)	$	(261	)


	Nine Months Ended									Nine Months Ended
	September 30, 2022									September 30, 2021
	Before			Income			Net of			Before			Income			Net of
	Tax			Tax Effect			Tax			Tax			Tax Effect			Tax
Net unrealized losses	$	(12,294	)	$	(262	)	$	(12,032	)	$	(341	)	$	(83	)	$	(258	)
Call and repayment gains charged to investment income		—			—			—			(2	)		(1	)		(1	)
Reclassification adjustment for realized losses (gains)		426			108			318			(665	)		(163	)		(502	)
Total other comprehensive loss	$	(11,868	)	$	(154	)	$	(11,714	)	$	(1,008	)	$	(247	)	$	(761	)

Note 6 -- Fair Value Measurements

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


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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Valuation Methodology

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash represents cash held by state authorities and the carrying value approximates fair value.

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 available, fair values are measured using unobservable inputs. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the security and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange.

The estimated fair values for securities that do not trade on a daily basis are determined by management, utilizing prices obtained from an independent pricing service and information provided by brokers, which are level 2 inputs. Management reviews the assumptions and methods utilized by the pricing service and then compares the relevant data and pricing to broker-provided data. The Company gains assurance of the overall reasonableness and consistent application of the assumptions and methodologies, and compliance with accounting standards for fair value determination through ongoing monitoring of the reported fair values.

Revolving Credit Facility

From time to time, the Company has an amount outstanding under a revolving credit facility. The interest rate is variable and is periodically adjusted based on the London Interbank Offered Rate plus a spread. As a result, carrying value, when outstanding, approximates fair value.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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
4.75% Convertible Senior Notes	2042	Quoted price
4.25% Convertible Senior Notes	2037	Quoted price
3.90% Promissory Note	2032	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

Assets Measured at Estimated Fair Value on a Recurring Basis

The following tables present information about the Company’s financial assets measured at estimated fair value on a recurring basis. The tables indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of September 30, 2022 and December 31, 2021:


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2022
Financial Assets:
Cash and cash equivalents	$	355,699	$	—	$	—	$	355,699
Restricted cash	$	2,900	$	—	$	—	$	2,900
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	321,520	$	8,333	$	—	$	329,853
Corporate bonds		28,232		—		—		28,232
State, municipalities, and political subdivisions		—		1,751		—		1,751
Exchange-traded debt		701		—		—		701
Redeemable preferred stock		102		—		—		102
Total available-for-sale securities	$	350,555	$	10,084	$	—	$	360,639
Equity securities	$	33,946	$	—	$	—	$	33,946


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
As of December 31, 2021
Financial Assets:
Cash and cash equivalents	$	628,943	$	—	$	—	$	628,943
Restricted cash	$	2,400	$	—	$	—	$	2,400
Fixed-maturity securities:
U.S. Treasury and U.S. government agencies	$	15,536	$	1,488	$	—	$	17,024
Corporate bonds		22,492		—		—		22,492
State, municipalities, and political subdivisions		—		1,808		—		1,808
Exchange-traded debt		811		—		—		811
Redeemable preferred stock		448		—		—		448
Total available-for-sale securities	$	39,287	$	3,296	$	—	$	42,583
Equity securities	$	51,740	$	—	$	—	$	51,740

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Liabilities Carried at Other Than Fair Value

The following tables present fair value information for liabilities that are carried on the consolidated balance sheets at amounts other than fair value as of September 30, 2022 and December 31, 2021:


	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
As of September 30, 2022
Financial Liabilities:
Long-term debt:
4.75% Convertible Senior Notes	$	166,859	$	—	$	134,388	$	—	$	134,388
4.25% Convertible Senior Notes		23,916		—		20,527		—		20,527
3.90% Promissory Note		9,031		—		—		8,058		8,058
3.75% Callable Promissory Note		6,881		—		—		6,137		6,137
4.55% Promissory Note		4,963		—		—		4,610		4,610
Total long-term debt	$	211,650	$	—	$	154,915	$	18,805	$	173,720


	Carrying		Fair Value Measurements Using						Estimated
	Value		(Level 1)		(Level 2)		(Level 3)		Fair Value
As of December 31, 2021
Financial Liabilities:
Revolving credit facility	$	15,000	$	—	$	15,000	$	—	$	15,000
Long-term debt:
4.25% Convertible Senior Notes	$	23,885	$	—	$	33,248	$	—	$	33,248
3.90% Promissory Note		9,287		—		—		10,488		10,488
3.75% Callable Promissory Note		7,153		—		—		7,852		7,852
4.55% Promissory Note		5,148		—		—		6,051		6,051
Total long-term debt	$	45,473	$	—	$	33,248	$	24,391	$	57,639

Note 7 -- Intangible Assets, Net

The Company’s intangible assets, net consist of the following:


	September 30,			December 31,
	2022			2021
Anchor tenant relationships (a)	$	1,761		$	1,761
In-place leases		4,215			4,215
Policy renewal rights - United		12,384			7,634
Non-compete agreements - United (b)		314			195
Total, at cost		18,674			13,805
Less: accumulated amortization		(5,023	)		(3,169	)
Intangible assets, net	$	13,651		$	10,636

(a)

An anchor tenant is a tenant that attracted more customers than other tenants.

(b)

$119 was fully amortized in June 2022 and $195 was fully amortized in June 2021.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The remaining weighted-average amortization periods for the intangible assets at September 30, 2022 are summarized in the table below:


Anchor tenant relationships		11.7 years
In-place leases		9.8 years
Policy renewal rights - United		3.6 years

In connection with the Southeast Region assumed business as described in Note 1 -- “Nature of Operations” the Company recorded intangible assets of $4,869 representing the renewal rights and non-compete agreement in exchange for consideration consisting of a 6% commission on any replacement premium which includes $3,800 of commission prepaid up-front. The consideration was estimated at $4,869 with a $1,069 contingent liability. At September 30, 2022 and December 31, 2021, contingent liabilities related to renewal rights intangible assets were $3,488 and $2,419, respectively, with the contingent liabilities included in other liabilities on the consolidated balance sheets.

The renewal rights and non-compete intangible assets acquired do not meet the definition of a business as substantially all of the fair value of the intangible assets acquired are concentrated in a group of similar assets. Therefore, the Company accounted for the purchase of the renewal rights and non-compete intangible assets as an asset acquisition.

Note 8 -- Other Assets

The following table summarizes the Company’s other assets:


	September 30,		December 31,
	2022		2021
Benefits receivable related to retrospective reinsurance contracts	$	14,781	$	3,064
Reimbursement receivable under TPA service		801		3,525
Prepaid expenses		3,384		2,853
Deposits		3,592		406
Lease acquisition costs, net		665		505
Other		3,382		4,364
Total other assets	$	26,605	$	14,717

Note 9 -- Revolving Credit Facility

In May 2022, the Company repaid the entire credit facility balance of $15,000 and at September 30, 2022 had no borrowings under the credit facility. For the three months ended September 30, 2022 and 2021, interest expense was $25 and $24, respectively, including $25 and $25 of amortization of issuance costs, respectively. For the nine months ended September 30, 2022 and 2021, interest expense was $176 and $153, respectively, including $74 and $74 of amortization of issuance costs, respectively. At September 30, 2022, the Company was in compliance with all required covenants and had available borrowing capacity of $65,000. See Note 21 -- “Subsequent Events” for information with regards to amendments to the terms of the credit agreement.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 10 -- Long-Term Debt

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


	September 30,			December 31,
	2022			2021
4.75% Convertible Senior Notes, due June 1, 2042	$	172,500		$	—
4.25% Convertible Senior Notes, due March 1, 2037		23,916			23,916
3.90% Promissory Note, due through April 1, 2032		9,163			9,431
3.75% Callable Promissory Note, due through September 1, 2036		6,966			7,246
4.55% Promissory Note, due through August 1, 2036		5,033			5,225
Finance lease liabilities, due through October 15, 2024		17			31
Total principal amount		217,595			45,849
Less: unamortized issuance costs		(5,928	)		(345	)
Total long-term debt	$	211,667		$	45,504

The following table summarizes future maturities of long-term debt as of September 30, 2022, which takes into consideration the assumption that the 4.75% Convertible Senior Notes and 4.25% Convertible Senior Notes are repurchased at their respective next earliest call dates:


Due in 12 months following September 30,
2022	$	1,036
2023		1,065
2024		1,106
2025		1,151
2026		197,615
Thereafter		15,622
Total	$	217,595

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest Expense:
Contractual interest	$	2,516	$	1,421	$	4,322	$	4,832
Non-cash expense (a)		272		219		431		758
Total	$	2,788	$	1,640	$	4,753	$	5,590

(a)

Includes amortization of debt issuance costs.

4.75% Convertible Senior Notes

In May 2022, the Company issued 4.75% Convertible Senior Notes in a private offering for an aggregate principal amount of $172,500. The net proceeds of the 4.75% Convertible Senior Notes were $166,486 after $6,014 in related issuance and transaction costs. These notes mature June 1, 2042 and the cash interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022.

The 4.75% Convertible Senior Notes rank equally in right of payment to the Company’s existing and future unsecured and unsubordinated obligations. The 4.75% Convertible Senior Notes do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

the issuance or repurchase of securities by the Company or any of its subsidiaries. The 4.75% Convertible Senior Notes provide no protection to the note holders in the event of a fundamental change or other corporate transaction involving the Company except those described in the indenture. The 4.75% Convertible Senior Notes do not require a sinking fund to be established for the purpose of redemption. In conjunction with the issuance of the 4.75% Convertible Senior Notes, the Company entered into a share repurchase agreement providing for the repurchase of shares of the Company’s common stock. See Note 18 -- “Equity” under Share Repurchase Agreement for additional information.

Embedded Conversion Feature

The conversion feature of the 4.75% Convertible Senior Notes is subject to conversion rate adjustments upon the occurrence of specified events (including payment of dividends above a specified amount) but will not be adjusted for any accrued and unpaid interest.

The conversion rate of the 4.75% Convertible Senior Notes is currently 12.4166 shares of common stock for each $1 in principal amount, which is the equivalent of approximately $80.54 per share.

The holders of the 4.75% Convertible Senior Notes may convert all or a portion of their convertible senior notes during specified periods prior to the maturity date as follows: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2022, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any ten consecutive trading-day period in which the trading price per $1 principal amount of the 4.75% Convertible Senior Notes is less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if specified corporate events, including a change in control, occur; (4) if any or all of the 4.75% Convertible Senior Notes are called for redemption, at any time prior to the close of business on the business day prior to the redemption date; or (5) during either the period beginning on, and including, March 1, 2027 and ending at the close of business on the business day immediately preceding June 7, 2027, or the period beginning on, and including, March 1, 2042 and ending at the close of business on the business day immediately preceding the maturity date.

The note holders who elect to convert their convertible senior notes in connection with a fundamental change as described in the indenture will be entitled to a “make-whole” adjustment in the form of an increase in the conversion rate. Upon conversion, the Company has the option to satisfy its conversion obligation by paying or delivering cash, shares of its common stock or a combination of cash and shares of its common stock. As of September 30, 2022, none of the conditions allowing the holders of the 4.75% Convertible Senior Notes to convert had been met.

The Company determined that the 4.75% Convertible Senior Notes’ embedded conversion feature is not a derivative financial instrument and does not require bifurcation.

Embedded Redemption Feature – Fundamental Change

The note holders have the right to require the Company to repurchase for cash all or any portion of the 4.75% Convertible Senior Notes at par prior to the maturity date should any of the fundamental change events described in the indenture occur. The Company concluded that this embedded redemption feature is not a derivative financial instrument, does not require bifurcation, and that it is not probable at issuance that any of the

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

specified fundamental change events will occur. Therefore, this embedded redemption feature is not substantive and will not affect the expected life of the liability.

Embedded Redemption Feature – Put Option of the Note Holder

At the option of the holders of the 4.75% Convertible Senior Notes, the Company is required to repurchase for cash all or any portion of the 4.75% Convertible Senior Notes at par on June 1, 2027, June 1, 2032 or June 1, 2037. The Company concluded that this embedded feature is not a derivative financial instrument and does not require bifurcation. Due to this provision, the Company determined that it is appropriate to amortize the debt issuance costs from the date the debt is issued to the earliest date at which the holders of the 4.75% Convertible Senior Notes can demand payment. Thus, the Company amortizes the issuance costs associated with the 4.75% Convertible Senior Notes over the period from May 23, 2022 to June 1, 2027.

The effective interest rate for the 4.75% Convertible Senior Notes, taking into account both cash and non-cash components, approximates 5.6%. Had a 20-year term been used for the amortization of the issuance costs of the 4.75% Convertible Senior Notes, the annual effective interest rate charged to earnings would have decreased to approximately 5.0%. As of September 30, 2022, the remaining amortization period of the debt issuance costs was expected to be 4.7 years for the 4.75% Convertible Senior Notes.

4.25% Convertible Senior Notes

On March 1, 2022, none of the holders of the 4.25% Convertible Senior Notes exercised the put option, which would have required the Company to repurchase for cash all or any portion of the notes at par. The Company’s recent cash dividends on common stock have exceeded $0.35 per share, resulting in adjustments to the conversion rate of the 4.25% Convertible Senior Notes. Accordingly, as of September 30, 2022, the conversion rate of the Company’s 4.25% Convertible Senior Notes was 16.5108 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.57 per share.

The debt issuance costs for the 4.25% Convertible Senior Notes had been fully amortized as of February 2022.

Note 11 -- Reinsurance

Reinsurance obtained from other insurance companies

The Company cedes a portion of its homeowners’ insurance exposure to other entities under catastrophe excess of loss reinsurance contracts and a portion of its flood insurance exposure under one quota share reinsurance agreement. Ceded premiums under most catastrophe excess of loss reinsurance contracts are subject to revision resulting from subsequent adjustments in total insured value. Under the terms of the quota share reinsurance agreement, the Company is entitled to a 30% ceding commission on ceded premiums written and a profit commission equal to 10% of net profit.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

The Company remains liable for claims payments in the event that any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a number of reinsurers to secure its annual reinsurance coverage, which generally becomes effective June 1st of each year. The Company purchases reinsurance each year taking into consideration probable maximum losses and reinsurance market conditions.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Premiums Written:
Direct	$	182,039		$	143,426		$	541,812		$	396,781
Assumed		9,142			30,840			12,815			88,311
Gross written		191,181			174,266			554,627			485,092
Ceded		(74,741	)		(55,577	)		(184,108	)		(145,112	)
Net premiums written	$	116,440		$	118,689		$	370,519		$	339,980
Premiums Earned:
Direct	$	166,116		$	120,763		$	479,849		$	346,788
Assumed		15,597			29,046			61,913			73,403
Gross earned		181,713			149,809			541,762			420,191
Ceded		(74,741	)		(55,577	)		(184,108	)		(145,112	)
Net premiums earned	$	106,972		$	94,232		$	357,654		$	275,079

During the three and nine months ended September 30, 2022, the Company recognized ceded losses of $907,541 and $910,928, respectively, as reductions in losses and loss adjustment expenses. During the three and nine months ended September 30, 2021, the Company recognized ceded losses of $1,830 and $2,424, respectively, as reductions in losses and loss adjustment expenses. At September 30, 2022 and December 31, 2021, there were 45 and 55 reinsurers, respectively, participating in the Company’s reinsurance program. Total net amounts recoverable and receivable from reinsurers at September 30, 2022 and December 31, 2021 were $952,996 and $76,650, respectively. Approximately 74.7% of the reinsurance recoverable balance at September 30, 2022 was receivable from three reinsurers, one of which was the Florida Hurricane Catastrophe Fund, a tax-exempt state trust fund. Based on all available information considered in the rating-based method, the Company recognized increases in credit loss expense of $389 and $361 for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2021, the Company derecognized credit loss expenses of $13 and $41, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $451 and $90 at September 30, 2022 and December 31, 2021, respectively.

One of the existing reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. Prior to June 1, 2022, there were two reinsurance contracts with retrospective provisions. As a result of Hurricane Ian, the balance of previously accrued benefits under the multi-year reinsurance contract with retrospective provisions was decreased by $12,600 during the third quarter of 2022. For the three and nine months ended September 30, 2022, the Company recognized reductions in premiums ceded of $3,843 and $11,717, respectively, related to these adjustments in the consolidated statements of income. For the

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

three and nine months ended September 30, 2021, the Company recognized reductions in premiums ceded of $1,364 and $9,619, respectively. See Note 20 -- “Commitments and Contingencies” for additional information.

Amounts receivable pursuant to retrospective provisions are reflected in other assets. At September 30, 2022 and December 31, 2021, other assets included $14,781 and $3,064, respectively. Management believes the credit risk associated with the collectability of accrued benefits is minimal as the amount receivable is concentrated with reinsurers with good credit ratings and the Company monitors the creditworthiness of these reinsurers based on available information about each reinsurer’s financial condition. See Note 21 -- “Subsequent Events” for information on collection.

Reinsurance provided to other insurance companies

For the three months ended September 30, 2022, assumed premiums written related to the Northeast Region’s insurance policies were $0, whereas for the nine months ended September 30, 2022, $27,488 of assumed premiums written related to the Northeast Region’s insurance policies were derecognized, which primarily resulted from the return of the unearned portion of assumed written premiums subsequent to the Company’s renewal and/or replacement of insurance policies in Massachusetts and New Jersey. For the three and nine months ended September 30, 2021, assumed premiums written were $30,840 and $88,311, respectively. At September 30, 2022, the Company had a net balance of $1,301 due to United related to the Northeast Region, consisting of ceding commission payable of $865 and payable on paid losses and loss adjustment expenses of $436. At December 31, 2021, the Company had a net balance of $4,486 due to United related to the Northeast Region, consisting of ceding commission payable of $535 and payable on paid losses and loss adjustment expenses of $4,017, offset by premiums receivable of $66.

Effective December 31, 2021, the Company entered into a separate agreement to provide 85% quota share reinsurance on United’s personal lines insurance policies in the states of Georgia, South Carolina and North Carolina through May 31, 2022. Effective June 1, 2022, the Company entered into a new agreement to provide 100% quota share reinsurance on United’s personal lines insurance policies in the Southeast Region. For the three and nine months ended September 30, 2022, assumed premiums written related to the Southeast Region’s insurance policies were $9,142 and $40,303, respectively. At September 30, 2022, the Company had a net balance of $8,038 receivable from United, consisting of premiums receivable of $12,676, offset by payable on paid losses and loss adjustment expenses of $2,610 and ceding commission payable of $2,028. At December 31, 2021, there was an amount receivable from United of $23,325, net of a ceding commission of $8,835 and a catastrophe cost allowance of $3,181.

At September 30, 2022 and December 31, 2021, the balance of funds withheld for assumed business related to the Company’s quota share reinsurance agreements with United was $67,313 and $73,716, respectively.

Note 12 -- Losses and Loss Adjustment Expenses

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

The Company primarily writes insurance in states 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

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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 losses and LAE is summarized as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net balance, beginning of period*	$	196,414		$	154,901		$	172,410		$	141,065
Incurred, net of reinsurance, related to:
Current period		126,486			53,834			275,010			147,064
Prior period		13,308			8,830			24,318			17,268
Total incurred, net of reinsurance		139,794			62,664			299,328			164,332
Paid, net of reinsurance, related to:
Current period		(45,732	)		(31,663	)		(102,155	)		(59,265	)
Prior period		(27,489	)		(22,237	)		(106,596	)		(82,467	)
Total paid, net of reinsurance		(73,221	)		(53,900	)		(208,751	)		(141,732	)
Net balance, end of period		262,987			163,665			262,987			163,665
Add: reinsurance recoverable before allowance for credit losses		938,855			39,512			938,855			39,512
Gross balance, end of period	$	1,201,842		$	203,177		$	1,201,842		$	203,177

* Net balance represents beginning-of-period liability for unpaid losses and LAE less beginning-of-period reinsurance recoverable for unpaid losses and LAE.

The establishment of loss and LAE reserves is an inherently uncertain process and changes in loss and LAE reserve estimates are expected as these estimates are subject to the outcome of future events. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such estimates are adjusted. During the three and nine months ended September 30, 2022, the Company recognized losses related to prior periods of $13,308 and $24,318, respectively, primarily to increase the reserve resulting from increased litigation. The Company incurred a net estimated loss of approximately $65,000 resulting from Hurricane Ian during the third quarter of 2022. Loss and LAE expenses for the three and nine months ended September 30, 2022 included net estimated losses of approximately $18,715 and $42,114, respectively, related to policies assumed from United.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 13 -- Segment Information

The Company identifies its operating divisions or segments based on managerial emphasis, organizational structure and revenue source. In the first quarter of 2021, the Company reorganized its operations to focus on specific business segments, resulting in the creation of TTIG with a separate workforce, board of directors and financial reporting structure. Companies under TTIG include TypTap, TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company, Inc., the parent company of an India company, Exzeo Software Private Limited. TTIG and its subsidiaries are considered a new reporting segment known as TypTap Group. The Company has four reportable segments: HCPCI insurance operations, TypTap Group, real estate operations, and corporate and other. Due to their economic characteristics, the Company’s property and casualty insurance division and reinsurance operations, excluding the insurance operations under TypTap Group, are grouped together into one reportable segment under HCPCI insurance operations. The TypTap Group segment includes its property and casualty insurance operations, information technology operations and its management company’s activities. 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 and any 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 September 30, 2022 and 2021, revenues from the HCPCI insurance operations segment before intracompany elimination represented 60.5% and 73.9%, respectively, and revenues from the TypTap Group segment represented 29.9% and 24.0%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2022 and 2021, revenues from the HCPCI insurance operations segment before intracompany elimination represented 66.6% and 76.4%, respectively, and revenues from the TypTap Group segment represented 28.7% and 20.7%, respectively, of total revenues of all operating segments. At September 30, 2022 and December 31, 2021, HCPCI insurance operations’ total assets represented 55.9% and 58.7%, respectively, and TypTap Group’s total assets represented 36.7% and 29.3%, respectively, of the combined assets of all operating segments.

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 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.


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Three Months Ended September 30, 2022	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned (c)	$	104,671		$	82,728		$	—	$	—		$	(5,686	)	$	181,713
Premiums ceded		(46,157	)		(33,236	)		—		—			4,652			(74,741	)
Net premiums earned		58,514			49,492			—		—			(1,034	)		106,972
Net income from investment portfolio		1,143			1,144			—		1,338			13,674			17,299
Policy fee income		613			458			—		—			—			1,071
Gain on involuntary conversion		—			—			13,402		—			(13,402	)		—
Other		1,246			512			2,785		717			(3,948	)		1,312
Total revenue		61,516			51,606			16,187		2,055			(4,710	)		126,654
Expenses:
Losses and loss adjustment expenses		73,228			62,153			—		—			4,413			139,794
Amortization of deferred policy acquisition costs		11,333			12,176			—		—			—			23,509
Other policy acquisition expenses		748			450			—		—			(29	)		1,169
Stock-based compensation expense		1,049			869			—		2,212			—			4,130
Interest expense		—			222			221		2,591			(221	)		2,813
Depreciation and amortization		166			865			651		186			(596	)		1,272
Personnel and other operating expenses		14,240			8,497			1,583		1,526			(8,277	)		17,569
Total expenses		100,764			85,232			2,455		6,515			(4,710	)		190,256
(Loss) income before income taxes	$	(39,248	)	$	(33,626	)	$	13,732	$	(4,460	)	$	—		$	(63,602	)
Total revenue from non-affiliates (d)	$	55,801		$	55,803		$	15,848	$	1,440
Gross premiums written	$	119,400		$	71,781

(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 marina business.

(c)

Gross premiums earned under HCPCI Insurance Operations consist of $98,985 from HCPCI and $5,686 from a reinsurance company.

(d)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Three Months Ended September 30, 2021	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned	$	98,256		$	51,553		$	—	$	—		$	—		$	149,809
Premiums ceded		(36,955	)		(20,135	)		—		—			1,513			(55,577	)
Net premiums earned		61,301			31,418			—		—			1,513			94,232
Net income from investment portfolio		831			102			—		172			778			1,883
Policy fee income		693			307			—		—			—			1,000
Other		2,087			480			2,336		489			(3,290	)		2,102
Total revenue		64,912			32,307			2,336		661			(999	)		99,217
Expenses:
Losses and loss adjustment expenses		36,928			24,224			—		—			1,512			62,664
Amortization of deferred policy acquisition costs		12,402			9,250			—		—			—			21,652
Other policy acquisition expenses		633			1,110			—		—			(55	)		1,688
Stock-based compensation expense		662			471			—		1,599			—			2,732
Interest expense		—			1			231		1,432			—			1,664
Depreciation and amortization		18			342			576		171			(603	)		504
Debt conversion expense		—			—			—		1,273			—			1,273
Personnel and other operating expenses		5,234			7,214			814		2,135			(1,853	)		13,544
Total expenses		55,877			42,612			1,621		6,610			(999	)		105,721
Income (loss) before income taxes	$	9,035		$	(10,305	)	$	715	$	(5,949	)	$	—		$	(6,504	)
Total revenue from non-affiliates (c)	$	65,629		$	32,701		$	1,997	$	402
Gross premiums written	$	118,280		$	55,987

(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 marina business.

(c)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2022	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned (c)	$	339,612		$	210,793		$	—	$	—		$	(8,643	)	$	541,762
Premiums ceded		(120,089	)		(70,798	)		—		—			6,779			(184,108	)
Net premiums earned		219,523			139,995			—		—			(1,864	)		357,654
Net (loss) income from investment portfolio		(1,760	)		1,411			—		426			15,644			15,721
Policy fee income		1,895			1,285			—		—			—			3,180
Gain on involuntary conversion		—			—			13,402		—			(13,402	)		—
Other		2,907			1,513			7,953		3,025			(12,333	)		3,065
Total revenue		222,565			144,204			21,355		3,451			(11,955	)		379,620
Expenses:
Losses and loss adjustment expenses		165,915			129,833			—		—			3,580			299,328
Amortization of deferred policy acquisition costs		46,339			31,403			—		—			—			77,742
Other policy acquisition expenses		2,090			1,230			—		—			(113	)		3,207
Stock-based compensation expense		3,380			2,651			—		6,678			—			12,709
Interest expense		—			633			672		4,256			(632	)		4,929
Depreciation and amortization		433			2,200			1,862		660			(1,819	)		3,336
Personnel and other operating expenses		29,296			24,516			3,516		5,173			(12,971	)		49,530
Total expenses		247,453			192,466			6,050		16,767			(11,955	)		450,781
(Loss) income before income taxes	$	(24,888	)	$	(48,262	)	$	15,305	$	(13,316	)	$	—		$	(71,161	)
Total revenue from non-affiliates (d)	$	213,810		$	149,635		$	20,339	$	1,530
Gross premiums written	$	323,680		$	230,947

(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 marina business.

(c)

Gross premiums earned under HCPCI Insurance Operations consist of $330,969 from HCPCI and $8,643 from a reinsurance company.

(d)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	HCPCI
	Insurance			TypTap			Real		Corporate/			Reclassification/
For Nine Months Ended September 30, 2021	Operations			Group			Estate (a)		Other (b)			Elimination			Consolidated
Revenue:
Gross premiums earned	$	300,827		$	119,364		$	—	$	—		$	—		$	420,191
Premiums ceded		(104,236	)		(42,229	)		—		—			1,353			(145,112	)
Net premiums earned		196,591			77,135			—		—			1,353			275,079
Net income from investment portfolio		5,261			933			—		4,059			3,799			14,052
Policy fee income		2,106			856			—		—			—			2,962
Other		3,420			1,130			9,849		1,316			(12,213	)		3,502
Total revenue		207,378			80,054			9,849		5,375			(7,061	)		295,595
Expenses:
Losses and loss adjustment expenses		110,008			52,976			—		—			1,348			164,332
Amortization of deferred policy acquisition costs		43,906			20,541			—		—			—			64,447
Other policy acquisition expenses		2,170			3,071			—		—			(114	)		5,127
Stock-based compensation expense		2,360			2,438			—		4,431			—			9,229
Interest expense		—			91			972		4,950			(270	)		5,743
Depreciation and amortization		56			942			1,737		711			(1,841	)		1,605
Debt conversion expense		—			—			—		1,273			—			1,273
Personnel and other operating expenses		14,957			18,569			3,332		4,470			(6,184	)		35,144
Total expenses		173,457			98,628			6,041		15,835			(7,061	)		286,900
Income (loss) before income taxes	$	33,921		$	(18,574	)	$	3,808	$	(10,460	)	$	—		$	8,695
Total revenue from non-affiliates (c)	$	206,743		$	80,893		$	8,833	$	4,641
Gross premiums written	$	323,490		$	161,602

(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 marina business.

(c)

Represents amounts before reclassification of certain revenue and expenses to conform with an insurance company’s presentation.

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


	September 30,			December 31,
	2022			2021
Segments:
HCPCI Insurance Operations	$	1,141,660		$	676,509
TypTap Group		813,543			369,600
Real Estate Operations		125,992			127,651
Corporate and Other		159,569			65,349
Consolidation and Elimination		(96,021	)		(62,252	)
Total assets	$	2,144,743		$	1,176,857

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 -- Leases

The table below summarizes the Company’s right-of-use (“ROU”) assets and corresponding liabilities for operating and finance leases:


	September 30,		December 31,
	2022		2021
Operating leases:
ROU assets	$	1,597	$	2,204
Liabilities	$	1,539	$	2,203
Finance leases:
ROU assets	$	80	$	86
Liabilities	$	17	$	31

The Company’s lease of office space in India for its information technology operations expired in January 2022 and a new lease agreement was entered into effective February 2022 with an initial term of nine years.

The following table summarizes the Company’s operating and finance leases in which the Company is a lessee:


		Renewal	Other Terms and
Class of Assets	Initial Term	Option	Conditions
Operating lease:
Office equipment	1 to 51 months	Yes	(a), (b)
Office space	3 to 9 years	Yes	(b), (c)
Finance lease:
Office equipment	3 to 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 September 30, 2022, maturities of lease liabilities were as follows:


	Leases
	Operating		Finance
Due in 12 months following September 30,
2022	$	917	$	15
2023		92		2
2024		96		—
2025		101		—
2026		106		—
Thereafter		393		—
Total lease payments		1,705		17
Less: interest		166		—
Total lease obligations	$	1,539	$	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 table provides quantitative information with regards to the Company’s operating and finance leases:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022			2021		2022		2021
Lease costs:
Finance lease costs:
Amortization – ROU assets*	$	4		$	4	$	14	$	13
Interest expense		—			—		—		1
Operating lease costs*		281			386		937		1,231
Short-term lease costs*		105			100		306		250
Total lease costs	$	390		$	490	$	1,257	$	1,495
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – finance leases						$	—	$	1
Operating cash flows – operating leases						$	924	$	1,237
Financing cash flows – finance leases						$	14	$	14

	September 30,
	2022
Weighted-average remaining lease term:
Finance leases (in years)		1.3
Operating leases (in years)		4.3
Weighted-average discount rate:
Finance leases (%)		3.4	%
Operating leases (%)		4.0	%

* Included in other operating expenses on the consolidated statements of income.

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


		Renewal	Other Terms and
Class of Assets	Initial Term	Option	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.

Note 15 -- Income Taxes

During the three months ended September 30, 2022 and 2021, the Company recorded approximately $12,099 and $1,636, respectively, of income tax benefits, which resulted in effective tax rates of 19.0% and 25.2%, respectively. The decrease in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to a valuation allowance established during the third quarter of 2022 and an increase in non-deductible compensation expense related to restricted stock granted to certain executives, offset by the increased Florida corporate tax rate effective January 1, 2022. A valuation allowance must be established for deferred tax assets when it is more likely than not that the deferred tax assets will not be realized based on available evidence both positive and negative, including recent operating results, available tax planning strategies,

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

and projected future taxable income. Management concluded that the negative evidence outweighed the positive evidence and therefore recorded a valuation allowance on the Company’s deferred tax assets as of September 30, 2022.

During the nine months ended September 30, 2022, the Company recorded approximately $13,907 of income tax benefit, which resulted in an effective tax rate of 19.5%. During the nine months ended September 30, 2021, the Company recorded approximately $2,888 of income tax expense, which resulted in an effective tax rate of 33.2%. The decrease in the effective tax rate in 2022 as compared with the corresponding period in the prior year was primarily attributable to the recognition of tax benefits attributable to restricted stock that vested in February and May of 2022 and the valuation allowance as described above. 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 16 -- Earnings Per Share

U.S. GAAP requires the Company to use the two-class method in computing basic earnings (loss) per share since holders of the Company’s restricted stock have the right to share in dividends, if declared, equally with common stockholders. These participating securities affect the computation of both basic and diluted earnings (loss) per share during periods of net income or loss. For a majority-owned subsidiary, its basic and diluted earnings (loss) per share are first computed separately. Then, the Company’s proportionate share in that majority-owned subsidiary’s earnings is added to the computation of both basic and diluted earnings (loss) per share at a consolidated level.

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


	Three Months Ended								Three Months Ended
	September 30, 2022								September 30, 2021
	Loss			Shares (a)		Per Share			Loss			Shares (a)		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Net loss	$	(51,503	)						$	(4,868	)
Less: Net income attributable to redeemable noncontrolling interest		(2,285	)							(2,202	)
Less: TypTap Group’s net loss attributable to non-HCI common stockholders and TypTap Group’s participating securities		2,829								774
Net loss attributable to HCI		(50,959	)							(6,296	)
Less: Loss attributable to participating securities		3,289								537
Basic Loss Per Share:
Loss allocated to common stockholders		(47,670	)		8,427	$	(5.66	)		(5,759	)		8,023	$	(0.72	)
Effect of Dilutive Securities: *
Stock options		—			—					—			—
Convertible senior notes		—			—					—			—
Warrants		—			—					—			—
Diluted Loss Per Share:
Loss available to common stockholders and assumed conversions	$	(47,670	)		8,427	$	(5.66	)	$	(5,759	)		8,023	$	(0.72	)


(a)	Shares in thousands.
*	For the three months ended September 30, 2022 and 2021, respectively, convertible senior notes, stock options, and warrants were excluded due to anti-dilutive effect.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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


	Nine Months Ended								Nine Months Ended
	September 30, 2022								September 30, 2021
	Loss			Shares (a)		Per Share			Income			Shares (a)		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Net (loss) income	$	(57,254	)						$	5,807
Less: Net income attributable to redeemable noncontrolling interest		(6,801	)							(5,175	)
Less: TypTap Group’s net loss attributable to non-HCI common stockholders and TypTap Group’s participating securities		4,018								1,191
Net (loss) income attributable to HCI		(60,037	)							1,823
Less: Loss (income) attributable to participating securities		3,855								(37	)
Basic (Loss) Earnings Per Share:
(Loss) income allocated to common stockholders		(56,182	)		8,972	$	(6.26	)		1,786			7,676	$	0.23
Effect of Dilutive Securities: *
Stock options		—			—					—			182
Convertible senior notes		—			—					—			—
Warrants		—			—					—			234
Diluted (Loss) Earnings Per Share:
(Loss) income available to common stockholders and assumed conversions	$	(56,182	)		8,972	$	(6.26	)	$	1,786			8,092	$	0.22


(a)	Shares in thousands.
*	For the nine months ended September 30, 2022, convertible senior notes, stock options, and warrants were excluded due to anti-dilutive effect. For the nine months ended September 30, 2021, convertible senior notes were excluded due to anti-dilutive effect.

Note 17 -- Redeemable Noncontrolling Interest

The following table summarizes the activity of redeemable noncontrolling interest during the nine months ended September 30, 2022 and 2021:


	2022			2021
Balance at January 1	$	89,955		$	—
Initial proceeds from Centerbridge		—			100,000
Increase (decrease):
Proceeds allocated to warrants*		—			(9,217	)
Issuance costs		—			(6,262	)
Issuance costs allocated to warrants*		—			577
Accrued cash dividends		1,342			458
Accretion - increasing dividend rates		906			336
Dividends paid		(2,508	)		—
Balance at March 31	$	89,695		$	85,892
Increase (decrease):
Accrued cash dividends		1,500			1,250
Accretion - increasing dividend rates		768			929
Balance at June 30	$	91,963		$	88,071
Increase (decrease):
Accrued cash dividends		1,499			1,250
Accretion - increasing dividend rates		786			952
Dividends paid		(3,000	)		(2,542	)
Balance at September 30	$	91,248		$	87,731

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

*Net decrease related to warrants of $8,640.

For the three months ended September 30, 2022 and 2021, net income attributable to redeemable noncontrolling interest was $2,285 and $2,202, respectively, consisting of accrued cash dividends of $1,499 and $1,250, respectively, and accretion related to increasing dividend rates of $786 and $952, respectively. For the nine months ended September 30, 2022 and 2021, net income attributable to redeemable noncontrolling interest was $6,801 and $5,175, respectively, consisting of accrued cash dividends of $4,341 and $2,958, respectively, and accretion related to increasing dividend rates of $2,460 and $2,217, respectively.

Note 18 -- Equity

Stockholders’ Equity

Common Stock

In March 2022, 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 2022. During the three months ended September 30, 2022, the Company repurchased and retired a total of 119,462 shares at a weighted average price per share of $51.69 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the three months ended September 30, 2022 was $6,179 or $51.72 per share. During the nine months ended September 30, 2022, the Company repurchased and retired a total of 148,927 shares at a weighted average price per share of $54.11 under this authorized repurchase plan. The total cost of shares repurchased, inclusive of fees and commissions, during the nine months ended September 30, 2022 was $8,063 or $54.14 per share.

On July 14, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on September 16, 2022 to stockholders of record on August 19, 2022.

Warrants

At September 30, 2022, there were warrants outstanding and exercisable to purchase 750,000 shares of HCI common stock at an exercise price of $54.40. The warrants expire on February 26, 2025.

Share Repurchase Agreement

In conjunction with the issuance of the 4.75% Convertible Senior Notes as described in Note 10 -- “Long-Term Debt” under 4.75% Convertible Senior Notes, the Company used $66,853 of the net proceeds to repurchase

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

and retire an aggregate of 1,037,600 shares of its common stock at a price of $64.43 per share from institutional investors.

Prepaid Share Repurchase Forward Contract

In March 2022, the Company’s share repurchase forward contract with Societe Generale, entered into in conjunction with the 2017 issuance of the 4.25% Convertible Senior Notes, was physically settled with the delivery from Societe Generale of 191,100 shares of HCI’s common stock to the Company.

Noncontrolling Interests

At September 30, 2022, there were 81,139,221 shares of TTIG’s common stock outstanding, of which 6,139,221 shares were not owned by HCI.

During the three and nine months ended September 30, 2022, TTIG repurchased and retired a total of 2,893 and 69,876 shares, respectively, of its common stock surrendered by its employees to satisfy payroll tax liabilities associated with the vesting of restricted shares. The total cost of purchasing noncontrolling interests during the three and nine months ended September 30, 2022 was $17 and $406, respectively.

Note 19 -- Stock-Based Compensation

2012 Omnibus Incentive Plan

The Company currently has outstanding stock-based awards granted under the Plan which is currently active and available for future grants. At September 30, 2022, there were 1,110,605 shares available for grant.

Stock Options

Stock options granted and outstanding under the incentive plan vest over a period of four years and are exercisable over the contractual term of ten years.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

A summary of the stock option activity for the three and nine months ended September 30, 2022 and 2021 is as follows (option amounts not in thousands):


					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Options		Price		Term	Value
Outstanding at January 1, 2022		440,000	$	45.25	6.6 years	$	18,119
Outstanding at March 31, 2022		440,000	$	45.25	6.3 years	$	10,494
Outstanding at June 30, 2022		440,000	$	45.25	6.1 years	$	9,354
Outstanding at September 30, 2022		440,000	$	45.25	5.8 years	$	117
Exercisable at September 30, 2022		357,500	$	44.23	5.5 years	$	117

Outstanding at January 1, 2021		440,000	$	45.25	7.6 years	$	3,113
Outstanding at March 31, 2021		440,000	$	45.25	7.3 years	$	13,464
Outstanding at June 30, 2021		440,000	$	45.25	7.1 years	$	23,883
Outstanding at September 30, 2021		440,000	$	45.25	6.8 years	$	29,238
Exercisable at September 30, 2021		275,000	$	43.40	6.3 years	$	18,782

There were no options exercised during the three and nine months ended September 30, 2022 and 2021. For the three months ended September 30, 2022 and 2021, the Company recognized $162 and $221, respectively, of compensation expense which was included in general and administrative personnel expenses. For the nine months ended September 30, 2022 and 2021, the Company recognized $507 and $663, respectively, of compensation expense. Deferred tax benefits related to stock options were $0 and $3 for the three months ended September 30, 2022 and 2021, respectively, and $0 and $4 for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022 and December 31, 2021, there was $498 and $1,005, 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 1.1 years.

Restricted Stock Awards

From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees and nonemployee directors in connection with their service to the Company. The terms of the Company’s outstanding restricted stock grants may include service, performance and market-based conditions. The determination of fair value with respect to the awards containing only service-based conditions is based on the market value of the Company’s common stock on the grant date. For awards with market-based conditions, the fair value 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.

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Information with respect to the activity of unvested restricted stock awards during the three and nine months ended September 30, 2022 and 2021 is as follows:


	Number of			Weighted
	Restricted			Average
	Stock			Grant Date
	Awards			Fair Value
Nonvested at January 1, 2022		679,997		$	39.72
Granted		4,000		$	70.58
Vested		(50,667	)	$	50.68
Forfeited		(3,265	)	$	45.85
Nonvested at March 31, 2022		630,065		$	39.00
Granted		3,000		$	67.30
Vested		(51,125	)	$	45.04
Forfeited		(700	)	$	45.61
Nonvested at June 30, 2022		581,240		$	38.61
Forfeited		(1,665	)	$	45.56
Nonvested at September 30, 2022		579,575		$	38.59

Nonvested at January 1, 2021		423,787		$	43.79
Granted		548,086		$	36.95
Vested		(41,250	)	$	42.18
Cancelled		(141,600	)	$	43.76
Forfeited		(2,050	)	$	45.67
Nonvested at March 31, 2021		786,973		$	39.11
Granted		3,000		$	76.00
Vested		(68,541	)	$	43.80
Cancelled		(1,160	)	$	45.96
Forfeited		(9,060	)	$	46.44
Nonvested at June 30, 2021		711,212		$	38.71
Granted		2,340		$	96.60
Forfeited		(38,855	)	$	38.05
Nonvested at September 30, 2021		674,697		$	38.95

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $3,099 and $2,039 for the three months ended September 30, 2022 and 2021, respectively, and $9,551 and $6,280 for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022 and December 31, 2021, there was approximately $9,670 and $18,995, 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 2.2 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 nine months ended September 30, 2022 and 2021.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Deferred tax benefits recognized	$	230	$	420	$	1,521	$	879
Tax benefits realized for restricted stock and paid dividends	$	56	$	70	$	1,360	$	1,482
Fair value of vested restricted stock	$	—	$	—	$	4,871	$	4,742

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

In February 2021, the Company cancelled 141,600 shares of restricted stock for employees who transitioned to TypTap Group. In exchange, these employees received replacement restricted stock issued under TTIG’s equity incentive plan.

Subsidiary Equity Plan

For the three months ended September 30, 2022 and 2021, TypTap Group recognized compensation expense related to its stock-based awards of $869 and $472, respectively. For the nine months ended September 30, 2022 and 2021, TypTap Group recognized compensation expense related to its stock-based awards of $2,651 and $2,286, respectively. At September 30, 2022 and December 31, 2021, there was $8,780 and $11,230, respectively, of unrecognized compensation expense related to nonvested restricted stock and stock options.

Note 20 -- Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contracts

As of September 30, 2022, the Company has a contractual obligation related to one multi-year reinsurance contract. The contract was entered into effective June 1, 2022 and the Company’s previous two multi-year reinsurance contracts were commuted effective May 31, 2022. The contract may be cancelled only with the other party’s consent or when its respective experience account is positive at the end of each contract year. The table below represents the future minimum aggregate premium amounts payable to the reinsurer.


Due in 12 months following September 30,
2022	$	91,350
2023		91,350
Total	$	182,700

Capital Commitments

As described in Note 4 -- “Investments” under Limited Partnership Investments, the Company is contractually committed to capital contributions for limited partnership interests. At September 30, 2022, there was an aggregate unfunded balance of $6,262.

FIGA Assessments

In October 2021, the Florida Office of Insurance Regulation approved a 2022 assessment for the Florida Insurance Guaranty Association (“FIGA”) which is necessary to secure funds for the payment of covered claims of insolvent insurance companies. The 2022 FIGA assessment is levied at 0.70% on collected premiums of all covered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, will be assessed on new and renewal policies with effective dates beginning January 1, 2022 through December 31, 2022.

In March 2022, the Florida Office of Insurance Regulation approved an assessment for FIGA which is necessary to secure funds for the payment of covered claims relating to the liquidation of one insurance company. The FIGA assessment is levied at 1.3% on collected premiums of all covered lines of business except auto

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

insurance. The surcharge, which is collectible from a policyholder, will be assessed on new and renewal policies with effective dates beginning July 1, 2022 through June 30, 2023.

In August 2022, the Florida Office of Insurance Regulation approved a 2023 assessment for FIGA which is necessary to secure funds for the payment of covered claims relating to the liquidation of two insurance companies. The 2023 FIGA assessment is levied at 0.70% on collected premiums of all covered lines of business except auto insurance. The surcharge, which is collectible from a policyholder, will be assessed on new and renewal policies with effective dates beginning January 1, 2023 through December 31, 2023.

The Company’s insurance subsidiaries, as member insurers, are required to collect and remit the pass-through assessments to FIGA on a quarterly basis. As of September 30, 2022, the FIGA assessments payable by the Company were $2,858.

Note 21 -- Subsequent Events

In connection with the Company’s quota share reinsurance agreement to provide 100% reinsurance on all of United’s in-force, new and renewal policies in the Southeast Region from June 1, 2022 through May 31, 2023, the Company began renewing and/or replacing United’s policies in Georgia on October 1, 2022.

On October 5, 2022, 231,516 shares of restricted stock issued to employees vested one year subsequent to satisfaction of a market-based vesting condition on October 5, 2021. The restricted shares were granted in February 2021 with a grant date fair value of $36.57 per share. The Company repurchased and retired a total of 80,339 shares surrendered to satisfy payroll tax liabilities associated with the vesting of these restricted shares.

On October 7, 2022, the Company received the entirety of the $5,457 amount receivable pursuant to retrospective provisions under the Company’s previous two multi-year reinsurance contracts which were commuted effective May 31, 2022.

On October 13, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 16, 2022 to stockholders of record on November 18, 2022.

On November 7, 2022, the Company executed an amendment to the revolving credit facility with Fifth Third Bank. Under the terms of the amendment, the maximum debt-to-capital ratio as defined in the credit agreement is set at 67.5% and the borrowing capacity of the line of credit is set at $50,000. This summary of the amendment is qualified in its entirety by reference to the Fourth Amendment to Credit Agreement, which is filed as Exhibit 10.61 to this Quarterly Report on Form 10-Q.

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 10, 2022. 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; the severity and impact of a pandemic; 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 InsurTech company with operations in property and casualty insurance, reinsurance, real estate and information technology. After the reorganization of our business in the first quarter of 2021, we now manage our operations in the following organizational segments, based on managerial emphasis and evaluation of financial and operating performances:

HCPCI Insurance Operations

▪

Property and casualty insurance

▪

Reinsurance and other auxiliary operations

TypTap Group

▪

Property and casualty insurance

▪

Information technology

Real Estate Operations

Other Operations

▪

Holding company operations

For the three months ended September 30, 2022 and 2021, revenues from HCPCI insurance operations before intracompany elimination represented 60.5% and 73.9%, respectively, and revenues from TypTap Group represented 29.9% and 24.0%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2022 and 2021, revenues from HCPCI insurance operations before intracompany

elimination represented 66.6% and 76.4%, respectively, and revenues from TypTap Group represented 28.7% and 20.7%, respectively, of total revenues of all operating segments. At September 30, 2022 and December 31, 2021, HCPCI insurance operations’ total assets represented 55.9% and 58.7%, respectively, and TypTap Group’s total assets represented 36.7% and 29.3%, respectively, of the combined assets of all operating segments. See Note 13 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

HCPCI Insurance Operations

Property and Casualty Insurance

HCPCI provides various forms of residential insurance products such as homeowners insurance, fire insurance, flood insurance and wind-only insurance. HCPCI is authorized to write residential property and casualty insurance in the states of Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas. Currently, Florida is HCPCI’s primary market.

In 2021, HCPCI began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. HCPCI began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.

In February 2022, HCPCI entered into another reinsurance agreement with United where HCPCI provides 85% quota share reinsurance on all of United’s personal lines insurance business in the states of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”) from December 31, 2021 through May 31, 2022. Under this agreement, HCPCI paid United a catastrophe allowance of 9% of premium and a provisional ceding commission of 25% of premium. In September 2022, HCPCI began renewing United’s policies in South Carolina.

Reinsurance and other auxiliary operations

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 HCPCI and TypTap by depositing funds into a trust account. Claddaugh may mitigate a portion of its risk through retrocession contracts, however Claddaugh did not enter into any retrocession contracts for the 2022-2023 treaty year. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services.

TypTap Group

Property and Casualty Insurance

TypTap Insurance Group, Inc. (“TTIG”), our majority-owned subsidiary, currently has four subsidiaries: TypTap Insurance Company (“TypTap”), TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India. TTIG is primarily engaged in the property and casualty insurance business and is currently using internally developed technology to collect and analyze claims and other supplemental data to generate savings and efficiency for its insurance operations.

TypTap, TTIG’s insurance subsidiary, has been the primary source of our organic growth in gross written premium since 2016. TypTap’s policies in force have increased from 6,721 in January 2018 to 85,781 at September 30, 2022. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently. As of November 2, 2022, TypTap has been approved to offer

homeowners coverage in 19 states outside of Florida. TypTap is currently operating in 12 states. In addition to the expansion in TypTap business, we also expect continued growth from the United policies assigned to TypTap through the renewal rights agreements acquired by HCI.

In 2021, TypTap began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. TypTap began renewing and/or replacing United policies in two states in December 2021, a third state in January 2022, and the fourth state in April 2022.

In June 2022, TypTap entered into a new reinsurance agreement with United where TypTap provides 100% quota share reinsurance on all of United’s personal lines insurance business in the Southeast Region from June 1, 2022 through May 31, 2023. In exchange, TypTap pays United a ceding commission of 16% of premium. Simultaneously, TypTap began renewing United’s policies in South Carolina.

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 and services that support in-house operations as well as our third-party relationships with our agency partners and claim vendors. These products include SAMSTM, HarmonyTM, AtlasViewer® and ClaimColonyTM.

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 one Tampa office building and an insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.

In July 2022, we closed on our agreement to sell 1.5 acres of land in Tampa, Florida to the FDOT in connection with an eminent domain proceeding for a planned road improvement project. See Real Estate Investments under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Other Operations

Holding company operations

Activities of our holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a reportable segment comprise the operations of this segment.

Impact of Hurricane Ian

On September 28, 2022, Hurricane Ian made landfall in southwestern Florida as a dangerous, high-end Category 4 storm. After crossing the Florida peninsula, it made a second landfall on September 30, 2022 in coastal South Carolina. On a pre-tax consolidated basis, estimated gross losses related to Hurricane Ian totaled $970,000,000. After anticipated reinsurance recoveries, we incurred a net estimated loss of approximately $65,000,000. Gross loss estimates, including loss adjustment expenses, for HCPCI and TypTap were $550,518,000 and $419,482,000, respectively.

As a result of Hurricane Ian, the balance of previously accrued benefits under one multi-year reinsurance contract with retrospective provisions was decreased by $12,600,000 during the third quarter of 2022. Assuming the lack of more storm events, benefits remain available in future periods but at reduced amounts. In addition, we recognized an allowance for credit losses of approximately $399,000 related to Hurricane Ian’s unpaid ceded reinsurance recoverable.

Recent Events

In connection with our quota share reinsurance agreement to provide 100% reinsurance on all of United’s in-force, new and renewal policies in the Southeast Region from June 1, 2022 through May 31, 2023, we began renewing and/or replacing United’s policies in Georgia on October 1, 2022.

On October 5, 2022, 231,516 shares of restricted stock issued to employees vested one year subsequent to satisfaction of a market-based vesting condition on October 5, 2021. The restricted shares were granted in February 2021 with a grant date fair value of $36.57 per share. We repurchased and retired a total of 80,339 shares surrendered to satisfy payroll tax liabilities associated with the vesting of these restricted shares.

On October 7, 2022, we received the entirety of the $5,457,000 amount receivable pursuant to retrospective provisions under our previous two multi-year reinsurance contracts which were commuted effective May 31, 2022.

On October 13, 2022, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 16, 2022 to stockholders of record on November 18, 2022.

On November 7, 2022, we executed an amendment to our revolving credit facility with Fifth Third Bank. Under the terms of the amendment, the maximum debt-to-capital ratio as defined in the credit agreement is set at 67.5% and the borrowing capacity of the line of credit is set at $50,000,000. This summary of the amendment is qualified in its entirety by reference to the Fourth Amendment to Credit Agreement, which is filed as Exhibit 10.61 to this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021 (dollar amounts in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenue
Gross premiums earned	$	181,713		$	149,809		$	541,762		$	420,191
Premiums ceded		(74,741	)		(55,577	)		(184,108	)		(145,112	)
Net premiums earned		106,972			94,232			357,654			275,079
Net investment income		18,530			2,520			25,082			9,749
Net realized investment (losses) gains		(884	)		1,232			(1,204	)		4,952
Net unrealized investment losses		(347	)		(1,869	)		(8,157	)		(649	)
Policy fee income		1,071			1,000			3,180			2,962
Other income		1,312			2,102			3,065			3,502
Total revenue		126,654			99,217			379,620			295,595
Expenses
Losses and loss adjustment expenses		139,794			62,664			299,328			164,332
Policy acquisition and other underwriting expenses		24,678			23,340			80,949			69,574
General and administrative personnel expenses		15,848			11,537			45,183			31,733
Interest expense		2,813			1,664			4,929			5,743
Debt conversion expense		—			1,273			—			1,273
Other operating expenses		7,123			5,243			20,392			14,245
Total expenses		190,256			105,721			450,781			286,900
(Loss) income before income taxes		(63,602	)		(6,504	)		(71,161	)		8,695
Income tax (benefit) expense		(12,099	)		(1,636	)		(13,907	)		2,888
Net (loss) income		(51,503	)		(4,868	)		(57,254	)		5,807
Net loss (income) attributable to noncontrolling interests		544			(1,369	)		(2,783	)		(3,979	)
Net (loss) income after noncontrolling interests	$	(50,959	)	$	(6,237	)	$	(60,037	)	$	1,828
Ratios to Net Premiums Earned:
Loss Ratio		130.68	%		66.50	%		83.69	%		59.74	%
Expense Ratio		47.18	%		45.69	%		42.35	%		44.56	%
Combined Ratio		177.86	%		112.19	%		126.04	%		104.30	%
Ratios to Gross Premiums Earned:
Loss Ratio		76.93	%		41.83	%		55.25	%		39.11	%
Expense Ratio		27.77	%		28.74	%		27.96	%		29.17	%
Combined Ratio		104.70	%		70.57	%		83.21	%		68.28	%
(Loss) Earnings Per Share Data:
Basic	$	(5.66	)	$	(0.72	)	$	(6.26	)	$	0.23
Diluted	$	(5.66	)	$	(0.72	)	$	(6.26	)	$	0.22

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Our results of operations for the three months ended September 30, 2022 reflect net loss of approximately $51,503,000 or $5.66 loss per share, compared with approximately $4,868,000 or $0.72 loss per share, for the three months ended September 30, 2021. The quarter-over-quarter decrease was primarily due to a $77,130,000 increase in losses and loss adjustment expenses, a $4,311,000 increase in general and administrative personnel expenses, and a $1,880,000 increase in other operating expenses, offset by a $15,416,000 net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses) and a $12,740,000 increase in net premiums earned.

Revenue

Gross Premiums Earned on a consolidated basis for the three months ended September 30, 2022 and 2021 were approximately $181,713,000 and $149,809,000, respectively. HCPCI gross premiums earned were $98,985,000 for the three months ended September 30, 2022 compared to $98,256,000 for the three months ended September 30, 2021. Gross premiums earned from the United insurance policies assumed were $15,597,000 for the three months ended September 30, 2022 compared to $29,046,000 for the three months ended September 30, 2021. TypTap’s gross premiums earned were $82,728,000 versus $51,553,000 for the same comparative period with the increase due to a greater number of policies in force from the organic growth in TypTap’s business and from the business assumed from United beginning June 1, 2022.

Premiums Ceded for the three months ended September 30, 2022 and 2021 were approximately $74,741,000 and $55,577,000, respectively, representing 41.1% and 37.1%, respectively, of gross premiums earned. The $19,164,000 increase was primarily attributable to higher reinsurance costs for the 2022 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion. In addition, ceded premiums were increased by a reversal of $12,600,000 of previously accrued benefits attributable to retrospective provisions under multi-year reinsurance contracts due to the effects of Hurricane Ian.

Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses as defined in a quota share agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. Reinsurance costs can be decreased by a reduction in premiums ceded attributable to retrospective provisions under multi-year reinsurance contracts. For the three months ended September 30, 2022, premiums ceded included a decrease of $3,843,000 related to retrospective provisions compared with a decrease of $1,364,000 for the three months ended September 30, 2021. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended September 30, 2022 and 2021 totaled approximately $116,440,000 and $118,689,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The decrease in 2022 resulted from an increase in premiums ceded to reinsurers as described above. We had approximately 214,000 policies in force at September 30, 2022 (excluding policies assumed from United) as compared with approximately 156,000 policies in force at September 30, 2021.

Net Premiums Earned for the three months ended September 30, 2022 and 2021 were approximately $106,972,000 and $94,232,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended September 30, 2022 and 2021 (amounts in thousands):


	Three Months Ended
	September 30,
	2022			2021
Net Premiums Written	$	116,440		$	118,689
Increase in Unearned Premiums		(9,468	)		(24,457	)
Net Premiums Earned	$	106,972		$	94,232

Net Investment Income for the three months ended September 30, 2022 and 2021 was approximately $18,530,000 and $2,520,000, respectively. The $16,010,000 increase was primarily attributable to a $13,592,000 increase in income from real estate investments, a $1,859,000 increase in income from available-for-sale fixed-maturity securities and a $916,000 increase in interest income from cash and cash equivalents. See Net Investment Income (Loss) under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Realized Investment Losses for the three months ended September 30, 2022 were approximately $884,000 versus $1,232,000 of net realized investment gains for the three months ended September 30, 2021. The $2,116,000 decrease was primarily attributable to net realized losses of approximately $932,000 from selling equity securities during the three months ended September 30, 2022 as opposed to net realized gains of approximately $953,000 from selling equity securities during the corresponding period in 2021.

Net Unrealized Investment Losses for the three months ended September 30, 2022 and 2021 were approximately $347,000 and $1,869,000, respectively. The decrease was primarily attributable to an overall improvement in the equity market compared with the three months ended September 30, 2021.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $139,794,000 and $62,664,000 for the three months ended September 30, 2022 and 2021, respectively. HCPCI losses and loss adjustment expenses were $73,228,000 for the three months ended September 30, 2022 compared to $36,928,000 for the three months ended September 30, 2021. The increase was primarily attributable to $42,346,000 of losses attributable to Hurricane Ian which struck the Southeastern United States in late September. Losses and loss adjustment expenses for TypTap were $62,153,000 versus $24,224,000 for the same comparative period. The increase was attributable to $22,251,000 of losses attributable to Hurricane Ian, $6,750,000 of losses due to the greater number of TypTap policies in force, $2,064,000 of additional losses from policies assumed from United or any subsequent renewal or replacement of United policies, and $6,818,000 of prior period loss development. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2022 and 2021 were approximately $24,678,000 and $23,340,000 on a consolidated basis, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, catastrophe allowance payable to United, and premium taxes. Policy acquisition expenses for HCPCI insurance operations were $12,081,000 for the three months ended September 30, 2022 compared to $13,035,000 for the three months ended September 30, 2021. The decrease was due to amortization of decreased costs associated with the policies assumed from United or any subsequent renewal or replacement of United policies. An increase in policy acquisition costs primarily results from premium growth. TypTap Group policy acquisition expenses were $12,626,000 versus $10,360,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months.

General and Administrative Personnel Expenses for the three months ended September 30, 2022 and 2021 were approximately $15,848,000 and $11,537,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-based compensation expenses, and employee benefit costs. Factors such as merit increases, changes in headcount, and periodic restricted stock grants, among others, cause fluctuations in this expense. In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The period-over-period increase of $4,311,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2022, and higher stock-based compensation expense.

Interest Expense for the three months ended September 30, 2022 and 2021 was approximately $2,813,000 and $1,664,000, respectively. The increase primarily resulted from interest expense related to our 4.75% convertible senior notes issued in May 2022, offset by conversions of our 4.25% convertible senior notes during the second half of 2021.

Income Tax Benefits for the three months ended September 30, 2022 and 2021 were approximately $12,099,000 and $1,636,000, respectively, for state, federal, and foreign income taxes resulting in effective tax rates of 19.0% and 25.2%, respectively. The decrease in the effective tax rate was primarily attributable to a valuation allowance established during the third quarter of 2022 and an increase in non-deductible compensation expense related to certain executive compensation, offset by the increased Florida corporate tax rate effective January 1, 2022.

Ratios:

The loss ratio applicable to the three months ended September 30, 2022 (losses and loss adjustment expenses incurred related to net premiums earned) was 130.7% compared with 66.5% for the three months ended September 30, 2021. The increase was primarily due to the increase in losses and loss adjustment expenses due to Hurricane Ian, offset in part by the increase in net premiums earned.

The expense ratio applicable to the three months ended September 30, 2022 (defined as total expenses excluding losses and loss adjustment expenses related to net premiums earned) was 47.2% compared with 45.7% for the three months ended September 30, 2021. The increase in our expense ratio was primarily attributable to the increase in general and administrative personnel and other operating expenses, offset in part by the decrease in debt conversion expense.

The combined ratio (total of all expenses in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the three months ended September 30, 2022 was 177.9% compared with 112.2% for the three months ended September 30, 2021. The increase in 2022 was attributable to the factors described above.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the three months ended September 30, 2022 was 104.7% compared with 70.6% for the three months ended September 30, 2021. The increase in 2022 was primarily attributable to the increase in losses and loss adjustment expenses due to Hurricane Ian, offset by the increase in gross premiums earned.

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Our results of operations for the nine months ended September 30, 2022 reflect net loss of approximately $57,254,000 or $6.26 loss per share, compared with net income of approximately $5,807,000 or $0.22 diluted earnings per share, for the nine months ended September 30, 2021. The period-over-period decrease was primarily due to a $134,996,000 increase in losses and loss adjustment expenses, a $13,450,000 increase in general and administrative personnel expenses, and an $11,375,000 increase in policy acquisition and other underwriting expenses, offset by an increase in net premiums earned of $82,575,000, a $1,669,000 net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains/losses), and an $814,000 decrease in interest expense.

Revenue

Gross Premiums Earned on a consolidated basis for the nine months ended September 30, 2022 and 2021 were approximately $541,762,000 and $420,191,000, respectively. HCPCI gross premiums earned were $330,969,000 for the nine months ended September 30, 2022 compared to $300,827,000 for the nine months ended September 30, 2021. Gross premiums earned from the United insurance policies assumed were $61,913,000 for the nine months ended September 30, 2022 compared to $73,403,000 for the nine months ended September 30, 2021. TypTap’s gross premiums earned were $210,793,000 versus $119,364,000 for the same comparative period with the increase due to a greater number of policies in force from the organic growth in TypTap’s business and from the business assumed from United beginning June 1, 2022.

Premiums Ceded for the nine months ended September 30, 2022 and 2021 were approximately $184,108,000 and $145,112,000, respectively, representing 34.0% and 34.5%, respectively, of gross premiums earned. The $38,996,000 increase was primarily attributable to higher reinsurance costs for the 2022 contract year due to an increased overall reinsurance coverage amount as a result of premium growth and expansion. In addition, ceded premiums were increased by a reversal of $12,600,000 of previously accrued benefits attributable to retrospective provisions under multi-year reinsurance contracts due to the effects of Hurricane Ian.

For the nine months ended September 30, 2022, premiums ceded included a decrease of $11,717,000 related to retrospective provisions compared with a net reduction of $9,619,000 for the nine months ended September 30, 2021. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the nine months ended September 30, 2022 and 2021 totaled approximately $370,519,000 and $339,980,000, respectively. The $30,539,000 increase in 2022 resulted primarily from the factors described earlier.

Net Premiums Earned for the nine months ended September 30, 2022 and 2021 were approximately $357,654,000 and $275,079,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months ended September 30, 2022 and 2021 (amounts in thousands):


	Nine Months Ended
	September 30,
	2022			2021
Net Premiums Written	$	370,519		$	339,980
Increase in Unearned Premiums		(12,865	)		(64,901	)
Net Premiums Earned	$	357,654		$	275,079

Net Investment Income for the nine months ended September 30, 2022 and 2021 was approximately $25,082,000 and $9,749,000, respectively. The $15,333,000 increase was primarily attributable to a $12,136,000 increase in income from real estate investments, a $2,619,000 increase in income from available-for-sale fixed-maturity securities and a $1,050,000 increase in interest income from cash and cash equivalents. See Net Investment Income (Loss) under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Unrealized Investment Losses for the nine months ended September 30, 2022 and 2021 were approximately $8,157,000 and $649,000, respectively. The increase was primarily attributable to an overall deterioration in the equity market compared with the nine months ended September 30, 2021.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $299,328,000 and $164,332,000 for the nine months ended September 30, 2022 and 2021, respectively. HCPCI losses and loss adjustment expenses were $165,915,000 for the nine months ended September 30, 2022 compared to $110,008,000 for the nine months ended September 30, 2021. The increase was primarily attributable to $42,346,000 of losses from Hurricane Ian, and a $14,928,000 net increase in losses attributable to the United policies due to an increase in the number of policies assumed from United or any subsequent renewal or replacement of United policies. Losses and loss adjustment expenses for TypTap were $129,833,000 versus $52,976,000 for the same comparative period. The increase was attributable to $22,251,000 of losses attributable to Hurricane Ian, $36,500,000 of losses due to the greater number of TypTap policies in force, $7,015,000 of additional losses from policies assumed from United or any subsequent renewal or replacement of United policies, and $10,990,000 of prior period losses. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2022 and 2021 were approximately $80,949,000 and $69,574,000 on a consolidated basis, respectively. Policy acquisition expenses for HCPCI insurance operations were $48,429,000 for the nine months ended September 30, 2022 compared to $46,076,000 for the nine months ended September 30, 2021. The increase was due to amortization of increased costs associated with the policies assumed from United or any subsequent renewal or replacement of United policies. TypTap Group policy acquisition expenses were $32,633,000 versus $23,612,000 for the same comparative period, with the increase attributable to amortization of increased commission costs related to the growth of TypTap’s policies in force over the past 12 months and the policies assumed from United or any subsequent renewal or replacement of United policies.

General and Administrative Personnel Expenses for the nine months ended September 30, 2022 and 2021 were approximately $45,183,000 and $31,733,000, respectively. The period-over-period increase of $13,450,000 was primarily attributable to an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2022, and higher stock-based compensation expense.

Interest Expense for the nine months ended September 30, 2022 and 2021 was approximately $4,929,000 and $5,743,000, respectively. The decrease primarily resulted from conversions of our 4.25% convertible senior notes during the second half of 2021, offset by interest expense related to our 4.75% convertible senior notes issued in May 2022.

Income Tax Benefit for the nine months ended September 30, 2022 was approximately $13,907,000 for state, federal, and foreign income taxes resulting in an effective tax rate of 19.5% for 2022. This compared with approximately $2,888,000 of income tax expense for the nine months ended September 30, 2021, resulting in an effective tax rate of 33.2% for 2021. The decrease in the effective tax rate was primarily attributable to a valuation

allowance established during the third quarter of 2022 and the recognition of tax benefits attributable to restricted stock that vested in February and May of 2022.

Ratios:

The loss ratio applicable to the nine months ended September 30, 2022 (losses and loss adjustment expenses incurred related to net premiums earned) was 83.7% compared with 59.7% for the nine months ended September 30, 2021. The increase was primarily due to the increase in losses and loss adjustment expenses as further described above, offset in part by the increase in net premiums earned.

The expense ratio applicable to the nine months ended September 30, 2022 was 42.3% compared with 44.6% for the nine months ended September 30, 2021. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in debt conversion expense, offset in part by the increase in policy acquisition, underwriting and personnel expenses.

The combined ratio is the measure of overall underwriting profitability before other income. Our combined ratio for the nine months ended September 30, 2022 was 126.0% compared with 104.3% for the nine months ended September 30, 2021. The increase in 2022 was attributable to the factors described above.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance. The combined ratio to gross premiums earned for the nine months ended September 30, 2022 was 83.2% compared with 68.3% for the nine months ended September 30, 2021. The increase in 2022 was primarily attributable to the increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.

Seasonality of Our Business

Our insurance business is seasonal as hurricanes and tropical storms affecting Florida, our primary market, and other southeastern states typically occur during the period from June 1st through November 30th of each year. Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. Also, with our reinsurance treaty year typically effective June 1st of each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates, coverage levels or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1st of each year.

LIQUIDITY AND CAPITAL RESOURCES

Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations. We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by our insurance subsidiaries from premiums written and investment income. We may consider raising additional capital through debt and equity offerings to support our growth and future investment opportunities.

Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses. In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets. In the insurance industry, cash collected for premiums from policies written is invested, interest and dividends are earned thereon, and losses and loss adjustment expenses are paid out over a period of years. This period of time varies by the circumstances surrounding each claim. With the exception of litigated claims, substantially all of our losses and loss adjustment expenses are fully settled and paid within 100 days of the claim receipt date.

Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.

We believe that we maintain sufficient liquidity to pay claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions.

Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and Finance Leases

The following table summarizes the principal and interest payment obligations of our indebtedness at September 30, 2022:


	Maturity Date	Payment Due Date
4.75% Convertible Senior Notes*	June 2042	June 1 and December 1**
4.25% Convertible Senior Notes	March 2037	March 1 and September 1
3.75% Callable Promissory Note	Through September 2036	1st day of each month
4.55% Promissory Note	Through August 2036	1st day of each month
3.90% Promissory Note	Through April 2032	1st day of each month
Finance leases	Through October 2024	Various
Revolving credit facility	Through December 2023	January 1, April 1, July 1, October 1


*	At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on June 1, 2027, June 1, 2032 or June 1, 2037.
**	The cash interest is payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2022.

See Note 10 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Share Repurchase Plan

In March 2022, the Board approved a plan to repurchase up to $20,000,000 of common shares during 2022 under which we may purchase shares of common stock in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. At September 30, 2022, there was approximately $11,941,000 available under the plan. See Note 18 -- “Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for more information.

Limited Partnership Investments

Our limited partnership investments consist of six private equity funds managed by their general partners. Two of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund. Although capital commitments for four of the remaining funds have expired, the general partners may request additional funds under certain circumstances. At September 30, 2022, there was an aggregate unfunded capital balance of $6,262,000. See Limited Partnership Investments under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Real Estate Investment

Real estate has long been a significant component of our overall investment portfolio. It diversifies our portfolio and helps offset the volatility of other higher-risk investments. Thus, we may consider increasing our real estate investment portfolio should an opportunity arise.

We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. In June 2022, FMKT Mel JV sold its last outparcel and recognized a net gain of $572,000. FMKT Mel JV distributed its earnings during the third quarter of 2022 and is expected to be liquidated by December 31, 2022.

Sources and Uses of Cash

Cash Flows for the Nine Months Ended September 30, 2022

Net cash used in operating activities for the nine months ended September 30, 2022 was approximately $18,261,000, which consisted primarily of cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments less cash received from net premiums written and reinsurance recoveries (of approximately $34,222,000). Net cash used in investing activities of $311,352,000 was primarily due to the purchases of fixed-maturity and equity securities of $414,066,000, the purchases of property and equipment of $5,431,000, and the purchase of intangible assets from United of $3,800,000, offset by the proceeds from calls, repayments and maturities of fixed-maturity securities of $52,023,000, the proceeds from sales of fixed-maturity and equity securities of $41,010,000, $14,500,000 of compensation received for the property relinquished through eminent domain, and distributions received from limited partnership investments of $4,732,000. Net cash provided by financing activities totaled $56,955,000, which was primarily due to the proceeds from issuance of 4.75% Convertible Senior Notes of $172,500,000, offset by $76,166,000 of share repurchases, net repayment of our revolving credit facility of $15,000,000, $11,697,000 of net cash dividend payments, debt issuance costs paid of $6,014,000, cash dividends paid to redeemable noncontrolling interest of $5,508,000, and repayments of long-term debt of $754,000.

Cash Flows for the Nine Months Ended September 30, 2021

Net cash provided by operating activities for the nine months ended September 30, 2021 was approximately $48,671,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $38,484,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $35,087,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $100,130,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $16,734,000, and distributions received from limited partnership investments of $3,635,000, offset by the purchases of fixed-maturity and equity securities of $83,211,000, and the purchases of property and equipment of $2,583,000. Net cash provided by financing activities totaled $54,077,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $9,713,000 of net cash dividend payments, net repayment of our revolving credit facility of $23,750,000, and $1,308,000 used in share repurchases.

Investments

The main objective of our investment policy is to maximize our after-tax investment income with a reasonable level of risk given the current financial market. Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities.

At September 30, 2022, we had $394,585,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2022, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements. See Note 20 -- “Commitments and Contingencies” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe our accounting policies specific to losses and loss adjustment expenses, reinsurance recoverable, reinsurance with retrospective provisions, deferred income taxes, stock-based compensation expense, limited partnership investments, acquired intangible assets, warrants, and redeemable noncontrolling interest involve our most significant judgments and estimates material to our consolidated financial statements.

Reserves for Losses and Loss Adjustment Expenses

Our liability for losses and loss adjustment expense (“Reserves”) is specific to property insurance, which is our insurance subsidiaries’ only line of business. The Reserves include both case reserves on reported claims and our reserves for incurred but not reported (“IBNR”) losses. At each period end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Changes in the estimated liability are charged or credited to operations as the losses and loss adjustment expenses are adjusted.

The IBNR represents our estimate of the ultimate cost of all claims that have occurred but have not been reported to us, and in some cases may not yet be known to the insured, and future development of reported claims. Estimating the IBNR component of our Reserves involves considerable judgment on the part of management. At September 30, 2022, $1,109,823,000 of the total $1,201,842,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $92,019,000 relates to known cases which have been reported but not yet fully settled in which case we have established a reserve based on currently available information and our best estimate of the cost to settle each claim. At September 30, 2022, $39,773,000 of the $92,019,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $237,165,000 at December 31, 2021 to $1,201,842,000 at September 30, 2022. The $964,677,000 increase is comprised of $1,078,310,000 in reserves established for the 2022 loss year, offset by reductions in our Reserves of $30,787,000 specific to Hurricane Irma, Hurricane Michael, Hurricane Sally and Tropical Storm Eta, and reductions in our non-catastrophe Reserves of $59,085,000 for 2021 and $23,761,000 for 2020 and prior loss years. The Reserves established for 2022 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2022. The decrease of $82,846,000 specific to our 2021 and prior loss-year reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at September 30, 2022 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us. However, these estimates are continually reviewed by management as they are subject to significant variability and may be impacted by trends in claim severity and frequency or unusual exposures that have not yet been identified. As part of the process, we review historical data and consider various factors, including known and anticipated regulatory and legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases to the existing unpaid losses and loss adjustment expenses. Adjustments are reflected in the results of operations in the period in which they are made, and the liabilities may deviate substantially from prior estimates.

Economic Impact of Reinsurance Contracts with Retrospective Provisions

From time to time, our reinsurance contracts may include retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

Due to Hurricane Ian, the balance of previously accrued benefits under one multi-year reinsurance contract with retrospective provisions was decreased by $12,600,000 during the third quarter of 2022. For the three months ended September 30, 2022 and 2021, we accrued benefits of $3,843,000 and $1,364,000, respectively. For the nine months ended September 30, 2022 and 2021, we accrued benefits of $11,717,000 and $9,619,000, respectively. The accrual of benefits was recognized as a reduction in ceded premiums.

As of September 30, 2022, we had $14,781,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.

We believe the credit risk associated with the collectability of accrued benefits is minimal based on available information about each reinsurer’s financial position and each reinsurer’s demonstrated ability to comply with contract terms. In October 2022, we received $5,457,000 in connection with the previous two multi-year reinsurance contracts which were commuted in May 2022.

The above and other accounting estimates and their related risks that we consider to be our critical accounting estimates are more fully described in our Annual Report on Form 10-K, which we filed with the SEC on March 10, 2022. For the nine months ended September 30, 2022, there have been no other material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

There have been no recent accounting pronouncements or changes in recent accounting pronouncements during the nine months ended September 30, 2022, as compared to those described in our Annual Report on Form

10-K for the fiscal year ended December 31, 2021, that are of significance, or potential significance, to the Company.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolios at September 30, 2022 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our Board of Directors. From time to time, our investment committee may decide to invest in low risk assets such as U.S. government bonds.

Our investment portfolios are exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios.

We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. In addition, we recognize any unrealized gains or losses related to our equity securities in our statement of income. As a result, our results of operations can be materially affected by the volatility in the equity market.

Interest Rate Risk

Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at September 30, 2022 (amounts in thousands):


Hypothetical Change in Interest Rates	Estimated Fair Value		Change in Estimated Fair Value			Percentage Increase (Decrease) in Estimated Fair Value
300 basis point increase	$	344,606	$	(16,033	)		-4.45	%
200 basis point increase		349,950		(10,689	)		-2.96	%
100 basis point increase		355,294		(5,345	)		-1.48	%
100 basis point decrease		365,983		5,344			1.48	%
200 basis point decrease		371,323		10,684			2.96	%
300 basis point decrease		376,653		16,014			4.44	%

Credit Risk

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.

The following table presents the composition of our fixed-maturity securities, by rating, at September 30, 2022 (amounts in thousands):


			% of Total				% of Total
	Amortized		Amortized		Estimated		Estimated
Comparable Rating	Cost		Cost		Fair Value		Fair Value
AAA	$	97,275		26	$	97,154		27
AA+, AA, AA-		245,206		66		235,391		65
A+, A, A-		13,041		3		12,388		3
BBB+, BBB, BBB-		14,542		4		13,913		4
CCC+, CC and Not rated		1,813		1		1,793		1
Total	$	371,877		100	$	360,639		100

Equity Price Risk

Our equity investment portfolio at September 30, 2022 included common stocks, perpetual preferred stocks, mutual funds and exchange-traded funds. We may incur losses due to adverse changes in equity security prices. We manage the risk primarily through industry and issuer diversification and asset mix.

The following table illustrates the composition of our equity securities at September 30, 2022 (amounts in thousands):


			% of Total
	Estimated		Estimated
	Fair Value		Fair Value
Stocks by sector:
Consumer	$	6,294		18
Financial		4,984		15
Technology		1,664		5
Other (1)		2,481		7
		15,423		45
Mutual funds and exchange-traded funds by type:
Debt		15,468		46
Equity		2,319		7
Alternative		736		2
		18,523		55
Total	$	33,946		100

(1)

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At September 30, 2022, we did not have any material exposure to foreign currency related risk.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, our chief executive officer and our chief financial officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, implementation of possible controls and procedures depends on management’s judgment in evaluating their benefits relative to costs.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The Company is a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

ITEM 1A – RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 10, 2022.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

Sales of Unregistered Securities and Use of Proceeds

All information related to sales of unregistered securities have been reported in Current Report on Form 8-K filings.

(b)

Repurchases of Securities

The table below summarizes the number of common shares repurchased under the 2022 repurchase plan approved by our Board of Directors (dollar amounts in thousands, except share and per share amounts):


	Total Number of Shares		Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans		Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plans
For the Month Ended	Purchased		Per Share		or Programs (a)		or Programs (b)
July 31, 2022		2,668	$	65.74		2,668	$	17,941
August 31, 2022		55,201	$	54.35		55,201	$	14,941
September 30, 2022		61,593	$	48.71		61,593	$	11,941
		119,462	$	51.69		119,462

(a)

In March 2022, our Board of Directors authorized a plan announced March 14, 2022 to repurchase up to $20,000 of the Company’s common shares before commissions and fees during 2022.

(b)

Represents the balances before commissions and fees at the end of each month. See Note 18 -- “Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Working Capital Restrictions and Other Limitations on Payment of Dividends

We are not subject to working capital restrictions or other limitations on the payment of dividends. Our insurance subsidiaries, however, are subject to restrictions on the dividends they may pay. Those restrictions could impact HCI’s ability to pay future dividends.

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

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Office of Insurance Regulation (1) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (2) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (3) the insurer files a notice of the dividend or distribution with the Florida Office of Insurance Regulation at least ten business days prior to the dividend payment or distribution and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (1) subject to prior approval by the Florida Office of Insurance Regulation or (2) 30 days after the Florida Office of Insurance Regulation has received notice of such dividend or distribution and has not disapproved it within such time.

During the nine months ended September 30, 2022, our insurance subsidiaries paid dividends of $12,000,000 to HCI.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

The following documents are filed as part of this report:


EXHIBIT
NUMBER		DESCRIPTION

3.1		Articles of Incorporation, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 7, 2013.

3.1.1		Articles of Amendment to Articles of Incorporation designating the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed October 18, 2013.

3.1.2		Articles of Amendment to Articles of Incorporation cancelling the rights, preferences and limitations of Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed May 15, 2020.

3.2		Bylaws, with amendments. Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K filed September 13, 2019.

4.1		Form of common stock certificate. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed November 7, 2013.

4.2		Common Stock Purchase Warrant, dated February 26, 2021, issued by HCI Group, Inc. to CB Snowbird Holdings, L.P. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 1, 2021.

4.3		Indenture, dated May 23, 2022, by and between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 9, 2022.

4.6		Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 12, 2021.

4.9		See Exhibits 3.1, 3.1.1, 3.1.2 and 3.2 of this report for provisions of the Articles of Incorporation, as amended, and our Bylaws, as amended, defining certain rights of security holders.

4.10		Indenture, dated March 3, 2017, between HCI Group, Inc. and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.

4.11		Form of Global 4.25% Convertible Senior Note due 2037 (included in Exhibit 4.1). Incorporated by reference to Exhibit 4.1 of our Form 8-K filed March 3, 2017.

10.1		Preferred Stock Purchase Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., HCI Group, Inc., and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

10.2		Amended and Restated Articles of Incorporation of TypTap Insurance Group, Inc. filed February 26, 2021. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

10.3		Shareholders Agreement, dated February 26, 2021, among TypTap Insurance Group, Inc., CB Snowbird Holdings, L.P., HCI Group, Inc., and the other shareholders party thereto. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.


10.4		Parent Guaranty Agreement, dated February 26, 2021, between HCI Group, Inc. and CB Snowbird Holdings, L.P. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed March 1, 2021.

10.5**		HCI Group, Inc. 2012 Omnibus Incentive Plan as revised April 26, 2022. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed May 6, 2022.

10.6**		HCI Group, Inc. (formerly known as Homeowners Choice, Inc.) 2007 Stock Option and Incentive Plan. Incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q filed August 29, 2008.

10.7**		Executive Employment Agreement dated November 23, 2016 between Mark Harmsworth and HCI Group, Inc. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 3, 2017.

10.8		Multi-Year Working Layer Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.131 to our Form 10-Q filed August 9, 2022.

10.9		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.132 to our Form 10-Q filed August 9, 2022.

10.10		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.133 to our Form 10-Q filed August 9, 2022.

10.11		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.134 to our Form 10-Q filed August 9, 2022.

10.12		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.135 to our Form 10-Q filed August 9, 2022.

10.13		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.136 to our Form 10-Q filed August 9, 2022.

10.14		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.137 to our Form 10-Q filed August 9, 2022.

10.15		Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.138 to our Form 10-Q filed August 9, 2022.



10.16		Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.139 to our Form 10-Q filed August 9, 2022.

10.17		Sixth Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.140 to our Form 10-Q filed August 9, 2022.

10.18		Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.141 to our Form 10-Q filed August 9, 2022.

10.19		Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.142 to our Form 10-Q filed August 9, 2022.

10.20		Flood Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.143 to our Form 10-Q filed August 9, 2022.

10.21		Property Catastrophe Shared Multi-Region Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.144 to our Form 10-Q filed August 9, 2022.

10.22		Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2022 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to Regulation S-K Item 601(b)(10)(iv). Incorporated by reference to Exhibit 10.145 to our Form 10-Q filed August 9, 2022.

10.23		Reimbursement Contract effective June 1, 2022 between TypTap Insurance Company and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to Exhibit 10.146 to our Form 10-Q filed August 9, 2022.

10.24		Reimbursement Contract effective June 1, 2022 between Homeowners Choice Property & Casualty Insurance Company, Inc. and the State Board of Administration of the State of Florida which administers the Florida Hurricane Catastrophe Fund. Incorporated by reference to Exhibit 10.147 to our Form 10-Q filed August 9, 2022.


10.31		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.32		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.33		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.34		Joinder, Second Amendment to Credit Agreement and Modification of Other Loan Documents. Incorporated by reference to the corresponding numbered exhibit to our Form 8-K filed January 28, 2021.

10.40		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.41		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.42		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.43		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.44		7th Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.



10.45		Flood Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.48**		TypTap Insurance Group, Inc. 2021 Equity Incentive Plan. Incorporated by reference to Exhibit 10.5 of our Form 8-K filed March 1, 2021.

10.49**		Form of Restricted Stock Award Agreement of TypTap Insurance Group, Inc. Incorporated by reference to Exhibit 10.6 of our Form 8-K filed March 1, 2021.

10.50		Exchange Agreement, dated August 26, 2021, by and between HCI Group, Inc. and Citadel Equity Fund Ltd. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed November 9, 2021.

10.51**		Stock Option Agreement between Paresh Patel and TypTap Insurance Group, Inc. dated October 1, 2021. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed October 7, 2021.

10.52**		TypTap Insurance Group, Inc. 2021 Omnibus Incentive Plan. Incorporated by reference to Exhibit 99.2 of our Form 8-K filed October 7, 2021.

10.53		Purchase Agreement, dated May 18, 2022, by and among HCI Group, Inc., JMP Securities LLC and Truist Securities, Inc., as representatives of the several purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed May 23, 2022.

10.57**		Form of executive restricted stock award contract. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed May 1, 2014.

10.58		Purchase Agreement, dated February 28, 2017, by and between HCI Group, Inc. and JMP Securities LLC and SunTrust Robinson Humphrey, Inc., as representatives of the several initial purchasers named therein. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed February 28, 2017.

10.59		Prepaid Forward Contract, dated February 28, 2017 and effective as of March 3, 2017, between HCI Group, Inc. and Societe Generale. Incorporated by reference to Exhibit 10.1 of our Form 8-K filed March 3, 2017.

10.60		Credit Agreement, Promissory Note, Security and Pledge Agreement, dated December 5, 2018, between HCI Group, Inc. and Fifth Third Bank. Incorporated by reference to Exhibits 99.1, 99.2, and 99.3 of our Form 8-K filed December 6, 2018.

10.61		Fourth Amendment to Credit Agreement and Modification of Note and Other Loan Documents, dated November 7, 2022.

10.88**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 11, 2017.

10.99**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 7, 2017. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 11, 2017.

10.101**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed February 14, 2018.

10.102**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated February 8, 2018. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed February 14, 2018.


10.103**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 22, 2019.

10.104**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 15, 2019. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 22, 2019.

10.105**		Restricted Stock Award Contract between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.1 to our Form 8-K filed January 23, 2020.

10.106**		Nonqualified Stock Option Agreement between Paresh Patel and HCI Group, Inc. dated January 16, 2020. Incorporated by reference to Exhibit 99.2 to our Form 8-K filed January 23, 2020.

10.107		Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.108		Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.109		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.110		Non-Florida Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021, issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.111		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021, issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.112		Top Layer Flood/Wind Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.113		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.


10.114		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.115		Reinstatement Premium Protection Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.116		Property Catastrophe First Excess of Loss Reinsurance Contract effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.117		Reinstatement Premium Protection Reinsurance Contract (For First Excess Cat) effective June 1, 2021 issued to TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.118		Non-Florida Property Catastrophe $6MXS$4M Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.119		Non-Florida Reinstatement Premium Protection Reinsurance Contract (For $6MXS$4M Excess Cat) effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.120		Reimbursement Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.121		Reimbursement Contract effective June 1, 2021 issued to TypTap Insurance Company by the State Board of Administration of the State of Florida. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.122		Multi-Year Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.

10.123		Multi-Year Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 issued to Homeowners Choice Property & Casualty Insurance Company, Inc. and TypTap Insurance Company by subscribing reinsurers. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 6, 2021.


10.124		Property Quota Share Reinsurance Contract effective December 31, 2020 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.125		Renewal Rights Agreement effective January 18, 2021 by and among United Property and Casualty Insurance Company, Inc., United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.126		Property Quota Share Reinsurance Contract effective June 1, 2021 issued to United Property and Casualty Insurance Company by Homeowners Choice Property & Casualty Insurance Company and TypTap Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.127		Renewal Rights Agreement effective December 30, 2021 by and among United Property and Casualty Insurance Company, Inc., United Insurance Holdings Corp., United Insurance Management, L.C. and Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.128		Property Quota Share Reinsurance Contract effective December 31, 2021 issued to United Property and Casualty Insurance Company, by Homeowners Choice Property & Casualty Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-K filed March 10, 2022.

10.129		Property Quota Share Reinsurance Contract effective June 1, 2022 issued to United Property and Casualty Insurance Company by TypTap Insurance Company. Incorporated by reference to the corresponding numbered exhibit to our Form 10-Q filed August 9, 2022.

31.1		Certification of the Chief Executive Officer

31.2		Certification of the Chief Financial Officer

32.1		Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350

32.2		Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350

101.INS		Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL documents.

101.SCH		Inline XBRL Taxonomy Extension Schema.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF		Inline XBRL Definition Linkbase.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

** Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who has signed this report on behalf of the Company.


	HCI GROUP, INC.

November 9, 2022	By:	/s/ Paresh Patel
		Paresh Patel
		Chief Executive Officer
		(Principal Executive Officer)

November 9, 2022	By:	/s/ James Mark Harmsworth
		James Mark Harmsworth
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

A signed original of this document has been provided to HCI Group, Inc. and will be retained by HCI Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.