HCI 10-Q Quarter ended June 30, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2019

OR

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

Commission File Number

001-34126

HCI Group, Inc.

(Exact name of Registrant as specified in its charter)

Florida		20-5961396
(State of Incorporation)		(IRS Employer Identification No.)

5300 West Cypress Street, Suite 100

Tampa, FL 33607

(Address, including zip code, of principal executive offices)

(813) 849-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Shares, no par value		HCI		New York Stock Exchange

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

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

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

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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

HCI GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

				Page
		PART I — FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets:
		June 30, 2019 (unaudited) and December 31, 2018			1-2
		Consolidated Statements of Income:
		Three and six months ended June 30, 2019 and 2018 (unaudited)			3
		Consolidated Statements of Comprehensive Income:
		Three and six months ended June 30, 2019 and 2018 (unaudited)			4
		Consolidated Statements of Stockholders’ Equity:
		Three and six months ended June 30, 2019 and 2018 (unaudited)			5-8
		Consolidated Statements of Cash Flows:
		Six months ended June 30, 2019 and 2018 (unaudited)			9-10
		Notes to Consolidated Financial Statements (unaudited)			11-42
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			43-56
Item 3		Quantitative and Qualitative Disclosures about Market Risk			57-58
Item 4		Controls and Procedures			59
		PART II — OTHER INFORMATION
Item 1		Legal Proceedings			59
Item 1A		Risk Factors			59-60
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			60-61
Item 3		Defaults upon Senior Securities			61
Item 4		Mine Safety Disclosures			61
Item 5		Other Information			61
Item 6		Exhibits			62-69
Signatures					70
Certifications

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar amounts in thousands)

		June 30, 2019				December 31, 2018
		(Unaudited)
Assets
Fixed-maturity securities, available for sale, at fair value (amortized cost: $207,563 and $184,670, respectively)		$	209,914			$	182,723
Equity securities, at fair value (cost: $27,770 and $45,671, respectively)			29,861				41,143
Short-term investments, at fair value			508				66,479
Limited partnership investments, at equity			30,790				32,293
Investment in unconsolidated joint venture, at equity			791				845
Assets held for sale			10,025				9,810
Real estate investments			63,228				54,490
Total investments			345,117				387,783
Cash and cash equivalents			217,153				239,458
Restricted cash			700				700
Accrued interest and dividends receivable			1,682				1,792
Income taxes receivable			1,511				971
Premiums receivable			26,398				16,667
Prepaid reinsurance premiums			29,543				17,932
Reinsurance recoverable:
Paid losses and loss adjustment expenses			19,183				11,151
Unpaid losses and loss adjustment expenses			58,897				112,760
Deferred policy acquisition costs			20,851				16,507
Property and equipment, net			13,873				13,338
Intangible assets, net			4,498				4,800
Other assets			12,734				9,004
Total assets		$	752,140			$	832,863

(continued)

1

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets — continued

(Dollar amounts in thousands)

		June 30, 2019				December 31, 2018
		(Unaudited)
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses		$	154,242			$	207,586
Unearned premiums			193,426				157,729
Advance premiums			13,652				6,192
Assumed reinsurance balances payable			—				14
Accrued expenses			11,099				6,483
Deferred income taxes, net			2,750				1,068
Revolving credit facility			9,500				—
Long-term debt			162,293				250,150
Other liabilities			18,684				22,200
Total liabilities			565,646				651,422
Commitments and contingencies (Note 18)
Stockholders’ equity:
7% Series A cumulative convertible preferred stock (no par value, 1,500,000 shares authorized, no shares issued or outstanding)			—				—
Series B junior participating preferred stock (no par value, 400,000 shares authorized, no shares issued or outstanding)			—				—
Preferred stock (no par value, 18,100,000 shares authorized, no shares issued or outstanding)			—				—
Common stock (no par value, 40,000,000 shares authorized, 8,053,573 and 8,356,730 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)			—				—
Additional paid-in capital			—				—
Retained income			184,739				182,894
Accumulated other comprehensive income (loss), net of taxes			1,755				(1,453	)
Total stockholders’ equity			186,494				181,441
Total liabilities and stockholders’ equity		$	752,140			$	832,863

See accompanying Notes to Consolidated Financial Statements

2

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Revenue
Gross premiums earned		$	83,315			$	85,919			$	165,912			$	171,691
Premiums ceded			(31,317	)			(32,954	)			(62,730	)			(65,204	)
Net premiums earned			51,998				52,965				103,182				106,487
Net investment income			4,226				3,399				7,504				6,617
Net realized investment (losses) gains			(133	)			2,662				(505	)			4,894
Net unrealized investment gains (losses)			1,326				(1,557	)			6,619				(4,157	)
Net other-than-temporary impairment losses			—				(40	)			—				(80	)
Policy fee income			800				855				1,595				1,720
Other			413				529				869				1,071
Total revenue			58,630				58,813				119,264				116,552
Expenses
Losses and loss adjustment expenses			24,293				21,803				51,289				41,458
Policy acquisition and other underwriting expenses			10,077				9,959				19,750				19,319
General and administrative personnel expenses			7,998				7,840				15,362				14,123
Interest expense			2,884				4,505				7,221				8,975
Other operating expenses			3,063				3,186				6,044				6,353
Total expenses			48,315				47,293				99,666				90,228
Income before income taxes			10,315				11,520				19,598				26,324
Income tax expense			2,762				5,117				5,307				9,130
Net income		$	7,553			$	6,403			$	14,291			$	17,194
Basic earnings per share		$	0.93			$	0.96			$	1.75			$	2.21
Diluted earnings per share		$	0.90			$	0.92			$	1.72			$	2.03

See accompanying Notes to Consolidated Financial Statements.

3

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Net income		$	7,553			$	6,403			$	14,291			$	17,194
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments:
Net unrealized gain (loss) arising during the period			1,626				(65	)			4,330				(2,693	)
Other-than-temporary impairment loss charged to income			—				40				—				80
Call and repayment losses charged to investment income			1				3				1				4
Reclassification adjustment for net realized loss (gain)			—				35				(33	)			(661	)
Net change in unrealized gain (loss)			1,627				13				4,298				(3,270	)
Deferred income taxes on above change			(413	)			(3	)			(1,090	)			829
Total other comprehensive income (loss), net of income taxes			1,214				10				3,208				(2,441	)
Comprehensive income		$	8,767			$	6,413			$	17,499			$	14,753

See accompanying Notes to Consolidated Financial Statements.

4

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended June 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

		Common Stock								Additional Paid-In Capital				Retained Income				Accumulated Other Comprehensive Income Net of Tax				Total Stockholders’ Equity
		Shares				Amount
Balance at March 31, 2019			8,359,889			$	—			$	103			$	186,396			$	541			$	187,040
Net income			—				—				—				7,553				—				7,553
Total other comprehensive income, net of income taxes			—				—				—				—				1,214				1,214
Exercise of common stock options			10,000				—				63				—				—				63
Issuance of restricted stock			133,160				—				—				—				—				—
Forfeiture of restricted stock			(264,211	)			—				—				—				—				—
Repurchase and retirement of common stock			(24,478	)			—				(1,005	)			—				—				(1,005	)
Repurchase and retirement of common stock under share repurchase plan			(160,787	)			—				(6,668	)			—				—				(6,668	)
Common stock dividends ($0.40 per share)			—				—				—				(3,192	)			—				(3,192	)
Stock-based compensation			—				—				1,489				—				—				1,489
Additional paid-in capital shortfall allocated to retained income			—				—				6,018				(6,018	)			—				—
Balance at June 30, 2019			8,053,573			$	—			$	—			$	184,739			$	1,755			$	186,494

See accompanying Notes to Consolidated Financial Statements.

5

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended June 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

		Common Stock								Additional Paid-In Capital				Retained Income				Accumulated Other Comprehensive (Loss) Income, Net of Tax				Total Stockholders’ Equity
		Shares				Amount
Balance at March 31, 2018			8,593,850			$	—			$	—			$	193,971			$	(1,069	)		$	192,902
Net income			—				—				—				6,403				—				6,403
Total other comprehensive income, net of income taxes			—				—				—				—				10				10
Issuance of restricted stock			143,360				—				—				—				—				—
Forfeiture of restricted stock			(27,115	)			—				—				—				—				—
Repurchase and retirement of common stock			(17,256	)			—				(730	)			—				—				(730	)
Repurchase and retirement of common stock under share repurchase plan			(174,951	)			—				(7,174	)			—				—				(7,174	)
Common stock dividends ($0.375 per share)			—				—				—				(1,423	)			—				(1,423	)
Stock-based compensation			—				—				1,033				—				—				1,033
Additional paid-in capital shortfall allocated to retained income			—				—				6,871				(6,871	)			—				—
Balance at June 30, 2018			8,517,888			$	—			$	—			$	192,080			$	(1,059	)		$	191,021

See accompanying Notes to Consolidated Financial Statements.

6

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share amount)

		Common Stock								Additional Paid-In Capital				Retained Income				Accumulated Other Comprehensive (Loss) Income, Net of Tax				Total Stockholders’ Equity
		Shares				Amount
Balance at December 31, 2018			8,356,730			$	—			$	—			$	182,894			$	(1,453	)		$	181,441
Net income			—				—				—				14,291				—				14,291
Total other comprehensive income, net of income taxes			—				—				—				—				3,208				3,208
Exercise of common stock options			10,000				—				63				—				—				63
Issuance of restricted stock			173,160				—				—				—				—				—
Forfeiture of restricted stock			(268,892	)			—				—				—				—				—
Repurchase and retirement of common stock			(24,849	)			—				(1,023	)			—				—				(1,023	)
Repurchase and retirement of common stock under share repurchase plan			(192,576	)			—				(8,006	)			—				—				(8,006	)
Common stock dividends ($0.80 per share)			—				—				—				(6,428	)			—				(6,428	)
Stock-based compensation			—				—				2,948				—				—				2,948
Additional paid-in capital shortfall allocated to retained income			—				—				6,018				(6,018	)			—				—
Balance at June 30, 2019			8,053,573			$	—			$	—			$	184,739			$	1,755			$	186,494

See accompanying Notes to Consolidated Financial Statements.

7

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2018

(Unaudited)

(Dollar amounts in thousands, except per share amount)

		Common Stock								Additional Paid-In Capital				Retained Income				Accumulated Other Comprehensive Income (Loss), Net of Tax				Total Stockholders’ Equity
		Shares				Amount
Balance at December 31, 2017			8,762,416			$	—			$	—			$	189,409			$	4,566			$	193,975
Net income			—				—				—				17,194				—				17,194
Total other comprehensive loss, net of income taxes			—				—				—				—				(2,441	)			(2,441	)
Cumulative effect adjustments for adoption of new accounting standards:
Reclassification of after-tax net unrealized holding gains related to equity securities			—				—				—				4,168				(4,168	)			—
Reclassification of stranded tax effects related to available-for-sale fixed-maturity and equity securities			—				—				—				(984	)			984				—
Issuance of restricted stock			183,360				—				—				—				—				—
Forfeiture of restricted stock			(45,020	)			—				—				—				—				—
Repurchase and retirement of common stock			(23,346	)			—				(941	)			—				—				(941	)
Repurchase and retirement of common stock under share repurchase plan			(359,522	)			—				(13,711	)			—				—				(13,711	)
Purchase of noncontrolling interest			—				—				(539	)			—				—				(539	)
Common stock dividends ($0.725 per share)			—				—				—				(4,421	)			—				(4,421	)
Stock-based compensation			—				—				1,905				—				—				1,905
Additional paid-in capital shortfall allocated to retained income			—				—				13,286				(13,286	)			—				—
Balance at June 30, 2018			8,517,888			$	—			$	—			$	192,080			$	(1,059	)		$	191,021

See accompanying Notes to Consolidated Financial Statements.

8

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

		Six Months Ended June 30,
		2019				2018
Cash flows from operating activities:
Net income		$	14,291			$	17,194
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation			2,948				1,905
Net amortization of premiums on investments in fixed-maturity securities			127				528
Depreciation and amortization			4,702				5,439
Deferred income tax expense			592				1,932
Net realized investment losses (gains)			505				(4,894	)
Net unrealized investment (gains) losses			(6,619	)			4,157
Other-than-temporary impairment losses			—				80
Loss (income) from unconsolidated joint venture			54				(330	)
Net income from limited partnership interests			(832	)			(852	)
Distributions received from limited partnership interests			3,616				609
Foreign currency remeasurement (gain) loss			(5	)			115
Other			271				—
Changes in operating assets and liabilities:
Accrued interest and dividends receivable			110				511
Income taxes			(540	)			13,084
Premiums receivable			(9,731	)			(8,090	)
Prepaid reinsurance premiums			(11,611	)			(7,294	)
Reinsurance recoverable			45,831				7,203
Deferred policy acquisition costs			(4,344	)			(3,374	)
Other assets			(1,393	)			1,520
Losses and loss adjustment expenses			(53,344	)			(26,191	)
Unearned premiums			35,697				29,932
Advance premiums			7,460				8,202
Assumed reinsurance balances payable			(14	)			118
Reinsurance recovered in advance on unpaid losses			—				(13,885	)
Accrued expenses and other liabilities			1,063				(28	)
Net cash provided by operating activities			28,834				27,591
Cash flows from investing activities:
Investments in limited partnership interests			(1,751	)			(2,638	)
Distributions received from limited partnership interests			470				114
Purchase of property and equipment			(1,313	)			(1,045	)
Purchase of real estate investments			(9,892	)			(6,520	)
Purchase of intangible assets			—				(409	)
Purchase of fixed-maturity securities			(75,727	)			(50,976	)
Purchase of equity securities			(15,778	)			(20,832	)
Purchase of short-term and other investments			(684	)			(125,001	)
Proceeds from sales of fixed-maturity securities			2,985				77,769
Proceeds from calls, repayments and maturities of fixed-maturity securities			47,788				27,207
Proceeds from sales of equity securities			32,841				40,436
Proceeds from sales, redemptions and maturities of short-term and other investments			66,897				15,117
Net cash provided by (used in) investing activities			45,836				(46,778	)

9

HCI GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

(Unaudited)

(Amounts in thousands)

		Six Months Ended June 30,
		2019				2018
Cash flows from financing activities:
Cash dividends paid			(6,581	)			(5,011	)
Cash dividends received under share repurchase forward contract			153				590
Proceeds from revolving credit facility			9,500				—
Proceeds from exercise of common stock options			63				—
Repayment of long-term debt			(90,647	)			(520	)
Repurchases of common stock			(1,023	)			(941	)
Repurchases of common stock under share repurchase plan			(8,006	)			(13,711	)
Purchase of non-controlling interest			—				(539	)
Debt issuance costs			(459	)			—
Net cash used in financing activities			(97,000	)			(20,132	)
Effect of exchange rate changes on cash			25				(112	)
Net decrease in cash, cash equivalents, and restricted cash			(22,305	)			(39,431	)
Cash, cash equivalents, and restricted cash at beginning of period			240,158				256,693
Cash, cash equivalents, and restricted cash at end of period		$	217,853			$	217,262
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	5,254			$	43
Cash paid for interest		$	5,453			$	5,309
Non-cash investing and financing activities:
Unrealized gain (loss) on investments in available-for-sale securities, net of tax		$	3,208			$	(2,441	)
Receivable from sales of equity securities		$	—			$	530
Receivable from maturities of fixed-maturity securities		$	2,000			$	15,000

See accompanying Notes to Consolidated Financial Statements.

10

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

All significant intercompany balances and transactions have been eliminated.

Adoption of New Accounting Standards

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

11

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

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

Leases

The Company leases office equipment, storage units, and office space from non-affiliates under terms ranging from one month up to ten years. In assessing whether a contract is or contains a lease, the Company first determines whether there is an identified asset in the contract. The Company then determines whether the contract conveys the right to obtain substantially all of the economic benefits from use of the identified asset or the right to direct the use of the identified asset. The Company elects not to record any lease with a term of 12 months or less on the consolidated balance sheet. For such short-term leases, the Company recognizes the lease payments in expense on a straight-line basis over the lease term.

If the contract is or contains a lease and the Company has the right to control the use of the identified asset, the ROU asset and the lease liability is measured from the lease component of the contract and recognized on the consolidated balance sheet. In measuring the lease liability, the Company uses its incremental borrowing rate for a loan secured by a similar asset that has a term similar to the lease term to discount the lease payments. The contract is further evaluated to determine the classification of the lease as to whether it is finance or operating. If the lease is a finance lease, the ROU asset is depreciated to depreciation expense over the shorter of the useful life of the asset or the lease term. Interest expense is recorded in connection with the lease liability using the effective interest method. If the lease is an operating lease, the ROU asset is amortized to lease expense on a straight-line basis over the lease term. For the presentation of finance leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with property and equipment, net, and long-term debt, respectively. For the presentation of operating leases on the Company’s consolidated balance sheet, ROU assets and corresponding lease liabilities are included with other assets and other liabilities, respectively.

The Company as a lessor leases its commercial and retail properties, boat slips, and docks to non-affiliates at various terms. If the contract gives the Company’s customer the right to control the use of the identified asset, revenue is recognized on a straight-line basis over the lease term. Initial direct costs incurred by the Company are deferred and amortized on a straight-line basis over the lease term. The Company also records an unbilled receivable, which is the amount by which straight-line revenue exceeds the amount billed in accordance with the lease.

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Reclassification

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

Note 2 — Recent Accounting Pronouncements

Accounting Standard to be Adopted in Fiscal Year 2020

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments—Credit Losses (Topic 326), effective January 1, 2020. This update amends guidance on the recognition and measurement of credit losses for assets held at amortized cost and available-for-sale debt securities. For assets held at amortized cost, ASU 2016-13 eliminates the probable initial recognition threshold and, instead, requires credit losses to be measured using the Current Expected Credit Loss (“CECL”) model. The CECL model requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts which incorporate forward-looking information. For available-for-sale debt securities, credit losses will continue to be measured in a manner similar to the current standard. ASU 2016-13 requires a valuation allowance, rather than a write-down, to be recognized for the Company’s expected credit losses. The valuation allowance account is a deduction from the amortized cost basis of the financial assets to reflect the net amount expected to be collected. Any subsequent changes to the expected credit losses of the financial assets will be recorded in earnings. The Company is required to use the modified-retrospective method by recognizing a cumulative-effect adjustment to the beginning retained income of fiscal year 2020. As for debt securities in which an other-than-temporary impairment had been recognized before the effective date, the prospective transition method will be used. The Company does not anticipate a material impact on its financial position as a result of adopting this update.

Note 3 — Cash, Cash Equivalents, and Restricted Cash

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

		June 30, 2019				December 31, 2018
Cash and cash equivalents		$	217,153			$	239,458
Restricted cash			700				700
Total		$	217,853			$	240,158

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

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HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Note 4 — Investments

a) Available-for-Sale Fixed-Maturity Securities

The Company holds investments in fixed-maturity securities that are classified as available-for-sale. At June 30, 2019 and December 31, 2018, the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale securities by security type were as follows:

		Cost or Amortized Cost				Gross Unrealized Gain				Gross Unrealized Loss				Estimated Fair Value
As of June 30, 2019
U.S. Treasury and U.S. government agencies		$	26,577			$	88			$	(13	)		$	26,652
Corporate bonds			162,512				2,049				(288	)			164,273
State, municipalities, and political subdivisions			10,012				188				—				10,200
Exchange-traded debt			8,344				328				(5	)			8,667
Redeemable preferred stock			118				4				—				122
Total		$	207,563			$	2,657			$	(306	)		$	209,914
As of December 31, 2018
U.S. Treasury and U.S. government agencies		$	61,979			$	24			$	(206	)		$	61,797
Corporate bonds			103,580				134				(1,809	)			101,905
State, municipalities, and political subdivisions			10,567				98				(3	)			10,662
Exchange-traded debt			8,426				82				(261	)			8,247
Redeemable preferred stock			118				—				(6	)			112
Total		$	184,670			$	338			$	(2,285	)		$	182,723

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

		Amortized Cost				Estimated Fair Value
As of June 30, 2019
Due in one year or less		$	43,816			$	44,011
Due after one year through five years			151,617				153,201
Due after five years through ten years			7,576				7,916
Due after ten years			4,554				4,786
		$	207,563			$	209,914

		Amortized Cost				Estimated Fair Value
As of December 31, 2018
Due in one year or less		$	50,659			$	50,574
Due after one year through five years			117,826				116,498
Due after five years through ten years			11,602				11,253
Due after ten years			4,583				4,398
		$	184,670			$	182,723

14

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Sales of Available-for-Sale Fixed-Maturity Securities

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

		Proceeds				Gross Realized Gains				Gross Realized Losses
Three months ended June 30, 2019		$	74			$	—			$	—
Three months ended June 30, 2018		$	559			$	—			$	(35	)
Six months ended June 30, 2019		$	2,985			$	34			$	(1	)
Six months ended June 30, 2018		$	77,769			$	1,161			$	(500	)

Other-than-temporary Impairment

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

•

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

•

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

•

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

•

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

•

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

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

15

HCI GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

		Less Than Twelve Months								Twelve Months or Longer								Total
As of June 30, 2019		Gross Unrealized Loss				Estimated Fair Value				Gross Unrealized Loss				Estimated Fair Value				Gross Unrealized Loss				Estimated Fair Value
U.S. Treasury and U.S. government agencies		$	—			$	—			$	(13	)		$	2,675			$	(13	)		$	2,675
Corporate bonds			—				—				(288	)			31,727				(288	)			31,727
Exchange-traded debt			(5	)			1,060				—				—				(5	)			1,060
Total		$	(5	)		$	1,060			$	(301	)		$	34,402			$	(306	)		$	35,462

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

		Less Than Twelve Months								Twelve Months or Longer								Total
As of December 31, 2018		Gross Unrealized Loss				Estimated Fair Value				Gross Unrealized Loss				Estimated Fair Value				Gross Unrealized Loss				Estimated Fair Value
U.S. Treasury and U.S. government agencies		$	(59	)		$	21,031			$	(147	)		$	35,393			$	(206	)		$	56,424
Corporate bonds			(542	)			19,932				(1,267	)			36,682				(1,809	)			56,614
State, municipalities, and political subdivisions			(3	)			715				—				—				(3	)			715
Exchange-traded debt			(261	)			5,275				—				—				(261	)			5,275
Redeemable preferred stock			(6	)			112				—				—				(6	)			112
Total		$	(871	)		$	47,065			$	(1,414	)		$	72,075			$	(2,285	)		$	119,140

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

b) Equity Securities

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

		Cost				Gross Unrealized Gain				Gross Unrealized Loss				Estimated Fair Value
June 30, 2019		$	27,770			$	2,421			$	(330	)		$	29,861
December 31, 2018		$	45,671			$	1,059			$	(5,587	)		$	41,143

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