HCI Group Inc

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 each insurance subsidiary are supported by HCI Group, Inc. and certain HCI subsidiaries. The operations of TypTap are also supported by TypTap Insurance Group, Inc. (“TTIG”), the Company’s majority-owned subsidiary, and certain TTIG subsidiaries. The Company emphasizes the use of internally developed technologies to collect and analyze claims and other supplemental data to assist in the underwriting process and generate savings as well as efficiency for the operations of the insurance subsidiaries and other insurance-related businesses. The Company also provides an attorney-in-fact (“AIF”) service. The Company's subsidiary, Core Risk Managers, LLC (“CRM”), serves as the AIF for Condo Owners Reciprocal Exchange (“CORE”), a reciprocal insurance exchange owned by its policyholders. Although the Company does not have any equity interest in CORE, the Company is required to consolidate CORE as its primary beneficiary. See Note 13 -- “Variable Interest Entity” for additional information. 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.

Assumed Business

Citizens Assumption

During the first quarter of 2024, the Company continued to participate in a take-out program through which the Company assumed insurance policies held by Citizens Property Insurance Corporation (“Citizens”), a Florida state-supported insurer. Approximately 9,800 policies were assumed by TypTap and CORE, representing approximately $87,800 in annualized premiums written.

Note 2 -- Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of 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 March 31, 2024 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, 2024. 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, 2023 included in the Company’s Form 10-K, which was filed with the SEC on March 8, 2024.

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, allowance for credit losses, and stock-based compensation expense involve significant judgments and estimates material to the Company’s consolidated financial statements.

In the case of assumed business, the Company relies entirely on the ceding insurance company to provide information about premiums, losses, and loss adjustment expenses. When the information is not available at the reporting date, the Company will make estimates based on all recent available data. Accordingly, the actual results could differ significantly from those estimates.

All significant intercompany balances and transactions have been eliminated.

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 months ended March 31, 2024 and 2023, revenues from claims processing services were $0 and $527, respectively.

Noncontrolling Interests

A noncontrolling interest arises when the Company has less than 100% of the voting rights and economic interests in a subsidiary or a consolidated variable interest entity (“VIE”). The Company has noncontrolling interests attributable to TTIG and CORE, a VIE consolidated by the Company under the VIE model. The noncontrolling interest related to TTIG is periodically adjusted for the expensing of TTIG’s stock-based awards granted to its employees, the interest’s share of TTIG’s net income or loss to common stockholders and change in other comprehensive income or loss. The noncontrolling interest related to CORE is periodically adjusted for CORE’s net surplus contribution and net income or loss since the Company has no equity interest in CORE.

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.

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

In connection with the sale of the retail shopping center investment property in Melbourne, Florida to a non-affiliate, $87 of restricted cash was deposited in escrow in March 2023 and released in February 2024 as post-sale conditions were met.

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 March 31, 2024 and December 31, 2023, 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:

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 March 31, 2024 and December 31, 2023 are as follows:

Securities on Deposit

The fair value of fixed-maturity securities on deposit with various regulatory authorities at March 31, 2024 and December 31, 2023 was $1,668 and $1,660, respectively.

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 thethree months ended March 31, 2024 and 2023 were as follows:

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

Securities with gross unrealized loss positions at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

At March 31, 2024 and December 31, 2023, there were 83 and 65 securities, respectively, in an unrealized loss position.

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

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

•

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

•

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

•

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

•

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

•

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

There wasno balance or activity in theallowance for credit losses of available-for-sale fixed-maturity securities during the three months ended March 31, 2024 and 2023.

b) Equity Securities

The Company holds investments in equity securities measured at fair values which are readily determinable. At March 31, 2024 and December 31, 2023, the cost, gross unrealized gains and losses, and estimated fair value of the Company’s equity securities were as follows:

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.

Sales of Equity Securities

Proceeds received, and the gross realized gains and losses from sales of equity securities, for thethree months ended March 31, 2024 and 2023 were as follows:

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:

(a)

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

(b)

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

(c)

The term is expected to be 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)

Effective July 1, 2023, this investment is in the process of winding down. 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 totwo additionalone-year periods.

(f)

Expected to have aten-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 tothree additionalone-year periods.

(h)

Expected to have aneight-year term from the commencement date, which can be extended for up totwo additionalone-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 tofour additionalone-year periods at the general partner’s discretion, and up totwo additionalone-year periods with the consent of the advisory committee.

(k)

Expected to have aneight-year term after the final admission date. The term may be extended for an additionalone-year period at the general partner’s discretion, and up totwo additionalone-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.

*Includes net change in unrealized gains or losses on investments.

For the three months ended March 31, 2024 and 2023, the Company recognized net investment income from limited partnerships of $195 and $553, respectively. Included in net investment income for the three months ended March 31, 2024 was an estimated favorable change in net asset value of $100. During thethree months ended March 31, 2024 and 2023, the Company received total cash distributions of $162 and $1,905, respectively, including returns on investment of $0 and $303, respectively.

At March 31, 2024 and December 31, 2023, the Company’s net cumulative contributed capital to the partnerships at each respective balance sheet date totaled $23,583 and $23,346, respectively, and the Company’s maximum exposure to loss aggregated $24,015 and $23,583, respectively.

d) Real Estate Investments

Real estate investments consist of the following as of March 31, 2024 and December 31, 2023:

Depreciation and amortization expense related to real estate investments was $269 and $453 for thethree months ended March 31, 2024 and 2023, respectively.

e) Net Investment Income

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

For the three months ended March 31, 2023, income from real estate investments included a net realized gain of $6,476 resulting from the sale of the retail shopping center investment property in Melbourne, Florida in March 2023 for a price of $18,500, and also included a net realized gain of $2,460 resulting from the sale of the retail shopping center investment property in Sorrento, Florida in March 2023 for a price of $13,418.

f) 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 March 31, 2024 and 2023, net realized gains related to other investments were $0 and $4, 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 available-for-sale fixed-maturity securities 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:

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:

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 Secured Overnight Financing Rate (“SOFR”) plus a ten basis points adjustment plus a margin based on the debt-to-capital ratio. As a result, carrying value, when outstanding, approximates fair value.

Long-Term Debt

The following table summarizes components of the Company’s long-term debt and methods used in estimating their fair values:

*Debt derecognized in March 2024. See Note 10 -- “Long-Term Debt” for additional information.

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 March 31, 2024 and December 31, 2023:

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 March 31, 2024 and December 31, 2023:

Note 7 -- Intangible Assets, Net

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

(a)

Amortization related to the Haines City property is expected to start in June 2024.

(b)

Fully amortized

The remaining weighted-average amortization periods for the intangible assets as of March 31, 2024 are summarized in the table below:

At March 31, 2024 and December 31, 2023, contingent liabilities related to renewal rights intangible assets were $371, and are included in other liabilities on the consolidated balance sheets.

Note 8 -- Other Assets

The following table summarizes the Company’s other assets:

Note 9 -- Revolving Credit Facility

As of March 31, 2024, the Company had $50,000 outstanding under the credit facility, which was used to partially fund the redemption of the TTIG Series A Preferred Stock held by Centerbridge Partners, L.P. (“Centerbridge”) on January 22, 2024. See Note 19 -- “Redeemable Noncontrolling Interest” for additional information. For the three months ended March 31, 2024 and 2023, interest expense was$738 and $25, respectively, including $15 and $25 of amortization of issuance costs, respectively. At March 31, 2024, the Company was in compliance with all required covenants and had available borrowing capacityof $25,000.

Note 10 -- Long-Term Debt

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

(a)

Notes converted or redeemed during the first quarter of 2024

The following table summarizes future maturities of long-term debt as of March 31, 2024, which takes into consideration the assumption that the 4.75% Convertible Senior Notes are repurchased at their next earliest call date:

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

(b)

Represents amortization of debt issuance costs.

4.25% Convertible Senior Notes

During the first quarter of 2024, the Company notified the holders of its outstanding 4.25% Convertible Senior Notes due 2037 that the Company had elected to redeem the remaining $23,916 principal balance of the 4.25% Convertible Senior Notes. As a result of this notice, the 4.25% Convertible Senior Notes became immediately convertible into the Company’s common shares, with a redemption date of March 15, 2024. The conversion rate of the Company’s 4.25% Convertible Senior Notes was 16.5892 shares of common stock for each $1 in principal amount, which was the equivalent of approximately $60.25 per share. The Company converted $23,450 in aggregate principal of 4.25% Convertible Senior Notes for aggregate consideration of 389,087 shares of HCI’s common stock plus $1 cash consideration in lieu of fractional shares. The remaining 4.25% Convertible Senior Notes were redeemed for $466 on March 15, 2024.

4.75% Convertible Senior Notes

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 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 March 31, 2024, the remaining amortization period of the debt issuance costs was expected to be 3.17 years for the 4.75% Convertible Senior Notes.

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.

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 1 st 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:

During the three months ended March 31, 2024 and 2023, the Company recognized ceded losses of $0 and $2,751, respectively, as reductions in losses and loss adjustment expenses. At March 31, 2024 and December 31, 2023, there were 58 and 33 reinsurers, respectively, participating in the Company’s reinsurance program. Total net amounts recoverable and receivable from reinsurers at March 31, 2024 and December 31, 2023 were $330,670 and $350,294, respectively. Approximately 64.7% of the reinsurance recoverable balance at March 31, 2024 was receivable from four reinsurers. Based on all available information considered in the rating-based method, the Company recognized decreases in credit loss expense of $49 and $1 for thethree months ended March 31, 2024 and 2023, respectively. Allowances for credit losses related to the reinsurance recoverable balance were $69 and $118 at March 31, 2024 and December 31, 2023, respectively.

One of the existing reinsurance contracts includes retrospective provisions that adjust premiums in the event losses are minimal or zero. For the three months ended March 31, 2024 and 2023, the Company recognized reductionsin premiums ceded of $6,993 in each of the respective periods, related to these adjustments in the consolidated statements of income. See Note 21 -- “Commitments and Contingencies” for additional information.

Amounts receivable pursuant to retrospective provisions are reflected in other assets. At March 31, 2024 and December 31, 2023, other assets included $51,282 and $44,289, respectively, of amounts receivable pursuant to retrospective provisions. Management believes the credit risk associated with the collectability of these accrued benefits is minimal as the amount receivable is concentrated with one reinsurer with a good credit rating and the Company monitors the creditworthiness of this reinsurer based on available information about the reinsurer’s financial condition.

Reinsurance provided to other insurance companies

United

From 2021 to 2022, the Company, through HCPCI and TypTap, provided 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”). From 2022 to 2023, the Company’s insurance subsidiaries also provided 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”). In conjunction with these reinsurance agreements, the Company entered into renewal rights agreements with United which provided the Company with the right to renew and/or replace United’s insurance policies at the end of their respective policy periods. In February 2023, United’s Florida-domiciled residential insurance subsidiary was placed into receivership by the State of Florida due to its financial insolvency and, as a result, the Company ceased providing quota share reinsurance on United policies. The majority of the policies under these reinsurance agreements have been renewed and/or replaced by the Company.

On February 14, 2024, upon approval from the receiver of United, TypTap received $15,000 from the trust account that holds funds withheld for the assumed business on the Southeast Region quota share reinsurance agreement. In addition, $4,462 was withdrawn in February 2024 by the receiver from the trust accounts to settle for paid losses and LAE related to the Northeast Region and the Southeast Region quota share reinsurance agreements.

At March 31, 2024 and December 31, 2023, the Company had a net balance of $582 due to United related to the Northeast Region, representing ceding commission payable.

For the three months ended March 31, 2023, $7,569 of assumed premiums written related to the Southeast 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 the Southeast Region. At March 31, 2024, the Company had a net balance of $1,438 due to United related to the Southeast Region, consisting of premiums payable of $1,712 offset by ceding commission receivable of $274. At December 31, 2023, the Company had a net balance of $4,203 due to United related to the Southeast Region, consisting of premiums payable of $1,712 and payable on paid losses and loss adjustment expenses of $2,765, offset by ceding commission receivable of $274.

At March 31, 2024, the Company had a net amount due to United of $2,020 and funds withheld for assumed business in trust accounts totaling $14,181 for the benefit of policies assumed from United. The Company ceased providing TPA services to United in March 2023. The Company cannot predict the actions a receiver might take, which may include restrictions on, or use of, funds held in trust. Any such actions could have a material adverse effect on the Company’s financial position and results of operations.

At March 31, 2024 and December 31, 2023, the balance of funds withheld for assumed business related to the Company’s quota share reinsurance agreements with United was $14,181 and $30,087, respectively.

Citizens Assumption

Assumed premiums written related to Citizens policies were $43,091 for thethree months ended March 31, 2024 as opposed to $0 for thethree months ended March 31, 2023.

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 claims 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 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:

*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. Losses and LAE for the three months ended March 31, 2024 included net estimated losses of approximately $21,678 related to Citizens policies assumed. Excluding Citizens-related losses, lower losses and LAE for the three months ended March 31, 2024 resulted from a decrease in claims and litigation related to Florida policies.

Note 13 -- Variable Interest Entity

CORE, a Florida-domiciled reciprocal insurance exchange, is owned by its policyholders, referred to as subscribers, and was organized to offer commercial residential multiple peril and wind insurance products. Each subscriber owns part of CORE by buying an insurance policy and making a surplus contribution. CORE is managed by CRM, an AIF company which is a wholly-owned subsidiary of HCI. At the formation date of CORE, management determined that CORE is a variable interest entity (“VIE”).

Since HCI has the power to direct the activities of CORE that most significantly affect CORE’s economic performance and the obligation to absorb losses or the right to receive benefits from CORE via the subordinated surplus note and the management and service agreements, HCI is considered the primary beneficiary of CORE and is required to consolidate CORE. As HCI has no equity at risk, CORE’s equity and results of operations are included in noncontrolling interests.

CORE’s assets are legally restricted for the purpose of fulfilling obligations specific to CORE. The creditors of CORE have no legal right to pursue additional sources of payment from the Company. The following table summarizes the assets and liabilities related to CORE, a consolidated VIE, which are included in the accompanying consolidated balance sheets:

Note 14 -- Segment Information

The Company identifies its operating divisions based on managerial emphasis, organizational structure and revenue source. The Company hasfive reportable segments: HCPCI insurance operations, TypTap Group, reciprocal exchange operations, 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 and reciprocal exchange operations, 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 reciprocal exchange segment represents the insurance operations of CORE, a consolidated VIE. 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 March 31, 2024 and 2023, revenues from the HCPCI insurance operations segment before intracompany elimination represented 63.7% and 61.2%, respectively, and revenues from the TypTap Group segment represented 33.8% and 36.5%, respectively, of total revenues of all operating segments. At March 31, 2024 and December 31, 2023, HCPCI insurance operations’ total assets represented 53.1% and 55.3%, respectively, and TypTap Group’s total assets represented 34.9% and 33.6%, respectively, of the combined assets of all operating segments.

The following tables present segment information reconciled to the Company’s consolidated statements of income. Intersegment transactions are not eliminated from segment results. However, intracompany transactions are eliminated in segment results below.

(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 and management fees for attorney-in-fact services.

(c)

Gross premiums earned under HCPCI Insurance Operations consist of $149,271 from HCPCI and $6,111 from a reinsurance company.

(d)

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

(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 $92,456 from HCPCI and $4,535 from a reinsurance company.

(d)

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:

Note 15 -- Leases

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

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

(a)

There are no variable lease payments.

(b)

Rent escalation provisions exist.

(c)

There is a bargain purchase option.

As of March 31, 2024, maturities of lease liabilities were as follows:

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

*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:

(d)

There are no purchase options.

Note 16 -- Income Taxes

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, and projected future taxable income. As of December 31, 2023, management concluded, based on the evaluation of the positive and negative evidence, that is more likely than not that the deferred tax assets will be realized and therefore no valuation allowance on the Company’s deferred tax assets is required. The Company evaluates the realizability of its deferred tax assets each quarter, and as of March 31, 2024, based on all of the available evidence, management concluded that it is more likely than not that the deferred tax assets will be realized.

During the three months ended March 31, 2024 and 2023, the Company recorded approximately $20,474 and $5,343, respectively, of income tax expense, which resulted in effective tax rates of 26.4% and 23.1%, respectively. The increase in the effective tax rate as compared with the corresponding period in the prior year was primarily attributable to a lower prior year effective tax rate resulting from the release of the valuation allowance during 2023. 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 17 -- 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:

(a)

Shares in thousands.

• For the three months ended March 31, 2023, warrants were excluded due to anti-dilutive effect.

Note 18 -- Redeemable Noncontrolling Interest

On January 22, 2024, TTIG entered into a Stock Redemption Agreement with Centerbridge which allowed TTIG to redeem all of the TTIG Series A Preferred Stock held by Centerbridge. The redemption totaled $100,000 plus accrued and unpaid dividends of approximately $2,923. At redemption, the difference between the consideration transferred of $102,923 and the redemption date carrying value of $96,695 is recorded as a deemed dividend and is included in net income attributable to redeemable noncontrolling interest which is subtracted from net income when calculating income available to common stockholders.

The following table summarizes the activity of redeemable noncontrolling interest during thethree months ended March 31, 2024 and 2023:

For the three months ended March 31, 2024, net income attributable to redeemable noncontrolling interest was $10,149, consisting of accrued cash dividends of $424, accretion related to increasing dividend rates of $111, an adjustment to maximum redemption value of $6,228, and a deemed dividend resulting from warrant modifications of $3,386. See Note 19 -- “Equity” for additional information regarding the modifications to the warrants held by Centerbridge. For the three months ended March 31, 2023, net income attributable to redeemable noncontrolling interest was $2,324, consisting of accrued cash dividends of $1,637 and accretion related to increasing dividend rates of $687.

Note 19 -- Equity

Stockholders’ Equity

Common Stock

On January 22, 2024, a new shelf registration statement on Form S-3 (the “Shelf Registration”) was filed, replacing the Company’s old universal shelf registration statement filed in September 2023. The new Shelf Registration permits the Company to offer and sell its common stock, preferred stock, debt securities, warrants, and stock purchase contracts and units, from time to time, subject to market conditions and its capital needs. The Shelf Registration will also enable Centerbridge to sell all or a portion of the amended and restated warrant or the shares issuable pursuant to the warrant. As a part of the Shelf Registration, the Company also announced the implementation of an “at-the-market” facility (the “ATM facility”) under which the Company would have the ability to raise up to $75,000 through the issuance of new shares of common stock into the market if it were to so choose.

On January 24, 2024, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends were paid on March 15, 2024 to stockholders of record on February 16, 2024.

Warrants

In connection with the redemption of the TTIG Series A Preferred Stock held by Centerbridge in January 2024, HCI, for the benefit of TTIG, extended the expiration dates of 450,000 of the underlying warrant shares, which will now expire in 150,000 share increments on December 31, 2026, December 31, 2027, and December 31, 2028. The remaining 300,000 share warrants retained their original expiration date of February 26, 2025 and were exercised on March 11, 2024 through a cashless transaction. The warrant modifications resulted in a $3,386 increase in the fair value of the warrants, which is recorded as a deemed dividend by decreasing retained income and increasing additional paid-in capital. The amount of deemed dividend is included in net income attributable to redeemable noncontrolling interest which is subtracted from net income when calculating net income available to common stockholders.

At March 31, 2024, there were warrants outstanding and exercisable, held by Centerbridge, to purchase 450,000 shares of HCI common stock at an exercise price of $54.40.

Noncontrolling Interests

TTIG

During the three months ended March 31, 2024 and 2023, TTIG repurchased and retired a total of 22,787 and 34,108 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 thethree months ended March 31, 2024 and 2023 was $33 and $198, respectively.

At March 31, 2024, there were 80,329,238 shares of TTIG’s common stock outstanding, of which 5,329,238 shares were not owned by HCI.

CORE

As described in Note 13 -- “Variable Interest Entity,” the Company has no equity interest at risk in CORE and CORE receives surplus contributions from its subscribers in addition to policy premiums. The surplus contribution is payable to CORE on or prior to the initial effective date of coverage and on or prior to the effective date of all endorsements generating an additional premium. The surplus contribution made during a policy term may be returned on a pro-rata basis to a subscriber in the event of policy cancellation. CORE, organized in November 2023, did not write any policies during the first quarter of 2024.

Note 20 -- 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 March 31, 2024, there were 962,406 shares available for grant.

Stock Options

Stock options granted and outstanding under the incentive plan generally vest over a period offour years, except for those with market conditions, and are exercisable over the contractual term often years.

A summary of the stock option activity for thethree months ended March 31, 2024 and 2023 is as follows (option amounts not in thousands):

There wereno options exercised during the three months ended March 31, 2024 and 2023. For the three months ended March 31, 2024 and 2023, the Company recognized $14 and $90, respectively, of compensation expense related to stock options which is included in general and administrative personnel expenses. There wereno deferred tax benefits related to stock options recognizedfor the three months ended March 31, 2024 and 2023. At March 31, 2024 and December 31, 2023, there was $0 and $14, respectively, of unrecognized compensation expense related to nonvested stock options.

Restricted Stock Awards

From time to time, the Company has granted and may grant restricted stock awards to certain executive officers, other employees, and non-employee 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.

Information with respect to the activity of unvested restricted stock awards during thethree months ended March 31, 2024 and 2023 is as follows:

The Company recognized compensation expense related to restricted stock, which is included in general and administrative personnel expenses, of $867 and $1,187 for thethree months ended March 31, 2024 and 2023, respectively. At March 31, 2024 and December 31, 2023, there was approximately $3,165 and $4,043, 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 1.4 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 thethree months ended March 31, 2024 and 2023.

Subsidiary Equity Plan

For the three months ended March 31, 2024 and 2023, TypTap Group recognized compensation expense related to its stock-based awards of $701 and $829, respectively. At March 31, 2024 and December 31, 2023, there was $3,696 and $4,438, respectively, of unrecognized compensation expense related to nonvested restricted stock and stock options.

Note 21 -- Commitments and Contingencies

Obligations under One Multi-Year Reinsurance Contract

As of March 31, 2024, the Company has a contractual obligation related toone multi-year reinsurance contract entered into effective June 1, 2022. The contract may be cancelled only with the other party’s consent or when its experience account is positive at the end of each contract year. The future minimum aggregate premium amount payable to the reinsurer is $91,350 due in June 2024.

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 March 31, 2024, there was an aggregate unfunded balance of $3,806.

FIGA Assessments

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 March 31, 2024, the FIGA assessments payable by the Company were $1,651.

Note 22 -- Subsequent Events

On April 1, 2024, the Company repaid $2,000 to the line of credit, reducing the outstanding balance under the revolving credit facility to $48,000.

On April 17, 2024, the Company awarded Paresh Patel, its Chief Executive Officer,200,000 restricted shares of common stock. The shares will vest equally over a period offour years, with vesting dates of March 15, 2025, 2026, 2027, and 2028, under the condition that the price per share reaches $200 for a period of 30 consecutive trading days.

On April 23, 2024, CORE assumed 148 policies from Citizens, representing approximately $15,700 in annualized premiums written.

On April 24, 2024, the Company’s Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on June 21, 2024 to stockholders of record on May 17, 2024.