HCI Group, Inc.

Previous wording

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Current wording

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This section is intended to (i) provide material information relevant to the assessment of our results of operations and cash flows; (ii) enhance the understanding of our financial condition, changes in financial condition, and results of operations; and (iii) discuss material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future performance or of future financial condition.

Previous wording

Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. Our growth strategies also include assumption of policies from other insurance companies with the intention of renewing and/or replacing them with our policies.

Current wording

Our general operating and growth strategies are to continually optimize our existing book of insurance business, organically expand our insurance business, manage our costs and expenses, diversify our business operations, develop and deploy new technologies to streamline operational processes, and maintain a strong balance sheet so we can quickly pursue accretive opportunities when they arise. Our growth strategies also include policy assumption from third-party insurance companies with the intention of renewing and/or replacing them with our policies.

Previous wording

Premiums Ceded for the years ended December 31, 2024 and 2023 were approximately $405,659,000 and $269,627,000, respectively, representing 37.5% and 35.2%, respectively, of gross premiums earned. 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 defined in a quota share agreement. The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned. The $136,032,000 increase was attributable to higher reinsurance costs for the 2024-2025 contract year, increased coverage due to growth in the number of policies in force and total insured value, and the reversal of previously accrued benefits as described in Note 14 -- “Reinsurance” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Current wording

Our premiums ceded represent costs of reinsurance (i) to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts, (ii) to provide additional loss coverage on a high-value individual risk basis through facultative reinsurance, or (iii) 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. Under contracts in effect prior to June 1, 2025, reinsurance costs could be adjusted by retrospective provisions under reinsurance contracts. There were no adjustments to premiums ceded related to retrospective provisions during 2025 as opposed to an increase of $44.3 million during 2024.

Previous wording

Net Premiums Written for the years ended December 31, 2024 and 2023 totaled approximately $761,108,000 and $628,995,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The $132,113,000 increase in 2024 resulted primarily from an increase in gross premiums written from the assumption of Citizens insurance policies as well as premium rate increases, offset by an increase in premiums ceded. Gross premiums written from insurance operations were approximately $1,085,355,000 and $898,622,000, respectively, for 2024 and 2023. Gross premiums written by reciprocal exchange operations were approximately $81,412,000 in 2024 compared with $0 in 2023. We had approximately 271,300 policies in force at December 31, 2024 as compared with approximately 247,000 policies in force at December 31, 2023.

Current wording

Net Premiums Written represent premiums charged on policies issued during the period less any applicable reinsurance costs.

Previous wording

The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for the years ended December 31, 2024 and 2023 (amounts in thousands):

Current wording

The following is a reconciliation of our Net Premiums Written to Net Premiums Earned for 2025 and 2024 (in thousands):

Previous wording

Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2024 and 2023 were approximately $99,402,000 and $90,822,000, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies and premium taxes. The overall increase was primarily attributable to increased premiums in force, offset by lower policy acquisition costs in Florida resulting from lower commissions.

Current wording

Policy Acquisition and Other Underwriting Expenses primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies and premium taxes. The overall increase was primarily due to a higher volume of premiums in force in the comparative periods.

Previous wording

General and Administrative Personnel Expenses for the years ended December 31, 2024 and 2023 were approximately $63,152,000 and $53,868,000, respectively. Our general and administrative personnel expenses include salaries, wages, payroll taxes, stock-based compensation expense, 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 projects 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 year-over-year increase of $9,284,000 was primarily attributable to lower payroll costs recoverable from reinsurers, an increase in stock-based compensation expense, an increase in employee health benefits, and merit increases for non-executive employees effective in late February 2024.

Current wording

General and Administrative Personnel Expenses include salaries, wages, payroll taxes, stock-based and other incentive 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 projects 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 year-over-year increase was primarily attributable to an increase in stock-based and other incentive compensation as well as an increase in salaries and wages.

Previous wording

The expense ratio applicable to the year ended December 31, 2024 (total expenses excluding losses and loss adjustment expenses and interest expense related to net premiums earned) was 27.8% compared with 33.7% for the year ended December 31, 2023. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned, offset by the increase in general and administrative personnel expenses and the increase in policy acquisition and other underwriting expenses.

Current wording

The net expense ratio decreased primarily due to the increase in net premiums earned, partially offset by the increase in policy acquisition and other underwriting expenses and the increase in general and administrative personnel expenses.

Previous wording

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. Substantially all of our losses and loss adjustment expenses, excluding litigated claims, are fully settled and paid within approximately 90 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.

Current wording

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 approximately 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.

Previous wording

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.

Current wording

As of December 31, 2025, we have $1.2 billion of cash and cash equivalents. 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.

Previous wording

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.

Current wording

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

Previous wording

The following table summarizes the principal and interest payment obligations for our indebtedness at December 31, 2024:

Current wording

The following table summarizes the principal and interest payment obligations for our long-term debt as of December 31, 2025 (principal in thousands):

Previous wording

See Note 13 -- “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Current wording

Refer to Note 11 “Long-Term Debt” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Previous wording

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.

Current wording

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 available-for-sale fixed-maturity and equity securities.

Previous wording

At December 31, 2024, we had $774,737,000 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.

Current wording

As of December 31, 2025, we had $663.2 million of available-for-sale fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new available-for-sale fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing available-for-sale fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new available-for-sale fixed-maturity investments but increases the market value of existing available-for-sale fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

Previous wording

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. Under certain circumstances, we may be required to provide additional capital for the four remaining funds with expired capital commitments. At December 31, 2024, there was an aggregate unfunded capital balance of $3,255,000. Seec) Limited Partnership Investments under Note 5 -- “Investments” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Current wording

Our limited partnership investments consist of six private equity funds managed by their general partners. Withdrawals from limited partnership investments are generally not permitted and distributions occur when the underlying investments of the limited partnership investments are liquidated. Additionally, 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 the four remaining funds have expired, the general partners may request additional funds under certain circumstances. As of December 31, 2025, there were unexpired capital commitments of $3.7 million. Refer to Note 5 “Investments” of our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Previous wording

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 assets. Thus, we may consider expanding our real estate investment portfolio should an opportunity arise.

Current wording

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

Previous wording

On January 14, 2025, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on March 21, 2025 to stockholders of record on February 21, 2025.

Current wording

On January 14, 2026, our Board declared a quarterly dividend of $0.40 per common share. The dividends will be paid on March 20, 2026 to stockholders of record on February 20, 2026.

Previous wording

Net cash provided by operating activities for the year ended December 31, 2023 was approximately $230,658,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $244,060,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $4,269,000 was primarily due to the proceeds from calls, repayments and maturities of fixed-maturity securities of $328,719,000, the proceeds from sales of fixed-maturity and equity securities of $34,528,000, the proceeds from sales of real estate investments of $21,746,000, and distributions received from limited partnership investments of $3,115,000, offset by the purchases of fixed-maturity and equity securities of $352,653,000, the purchases of property and equipment of $6,502,000, the purchases of real estate investments of $21,405,000, and the purchase of intangible assets of $1,786,000. Net cash provided by financing activities totaled $67,117,000, which was primarily due to net proceeds from the issuance of common stock of $84,572,000 and proceeds from issuance of long-term debt of $12,000,000, offset by $13,719,000 of cash dividend payments, the redemption of long-term debt of $6,895,000, cash dividends paid to redeemable noncontrolling interest of $6,763,000, $784,000 of share repurchases, and repayments of long-term debt of $562,000.

Current wording

Net cash provided by operating activities during 2025 was approximately $444.4 million, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $146.1 million less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $87.3 million was primarily due to the proceeds from calls, repayments and maturities of available-for-sale fixed-maturity securities of $627.6 million, the proceeds from sales of available-for-sale fixed-maturity and equity securities of $42.7 million, distributions of return of capital from limited partnership investments of $2.3 million, and proceeds from sales of real estate investments of $2.0 million, offset by purchases of available-for-sale fixed-maturity, equity securities, and other investments of $555.3 million, purchases of real estate investments of $28.4 million, and purchases of property and equipment of $3.6 million. Net cash provided by financing activities totaled $146.2 million, which was primarily due to proceeds from the issuance of noncontrolling interests of $156.2 million, proceeds from the issuance of long-term debt of $17.0 million, and net surplus contribution from subscribers of $6.7 million, offset by $19.3 million of cash dividend payments, net repayment of the line of credit agreement of $8.0 million, net share settlements of $1.5 million, and net share settlements of noncontrolling interests of $1.5 million.

Previous wording

Net cash provided by operating activities for the year ended December 31, 2024 was approximately $331,816,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $131,593,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $260,110,000 was primarily due to the purchases of fixed-maturity and equity securities of $836,636,000, the purchases of real estate investments of $16,066,000, the purchases of property and equipment of $4,052,000, and additional investments in limited partnership interests of $1,233,000, offset by the proceeds from calls, repayments and maturities of fixed-maturity securities of $457,102,000, the proceeds from sales of fixed-maturity and equity securities of $137,170,000, and distributions received from limited partnership investments of $3,591,000. Net cash used in financing activities totaled $75,174,000, which was primarily due to the redemption of redeemable noncontrolling interests of $100,000,000, $16,598,000 of cash dividend payments, cash dividends paid to redeemable noncontrolling interests of $2,923,000, $1,037,000 of share repurchases, and repayments of long-term debt of $519,000, offset by net borrowing under the line of credit agreement of $44,000,000 and net surplus contribution from noncontrolling interests of $2,949,000.

Current wording

Net cash provided by operating activities during 2024 was approximately $331.8 million, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $131.6 million less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $260.1 million was primarily due to the purchases of available-for-sale fixed-maturity and equity securities of $836.6 million, the purchases of real estate investments of $16.1 million, the purchases of property and equipment of $4.1 million, and additional investments in limited partnership interests of $1.2 million, offset by the proceeds from calls, repayments and maturities of available-for-sale fixed-maturity securities of $457.1 million, the proceeds from sales of available-for-sale fixed-maturity and equity securities of $137.2 million, and distributions received from limited partnership investments of $3.6 million. Net cash used in financing activities totaled $75.2 million, which was primarily due to the redemption of redeemable noncontrolling interests of $100.0 million, $16.6 million of cash dividend payments, cash dividends paid to redeemable noncontrolling interests of $2.9 million, $1.0 million of net share settlements, and repayments of long-term debt of $0.5 million, offset by net borrowing under the line of credit agreement of $44.0 million and net surplus contribution from noncontrolling interests of $2.9 million.

Previous wording

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.

Current wording

We believe our accounting policies and estimates specific to losses and loss adjustment expenses, reinsurance recoverable, income taxes, stock-based compensation expense, and limited partnership investments involve our most significant judgments and estimates material to our consolidated financial statements.

Previous wording

Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (LAE). Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been incurred, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to us (“IBNR”). Reserves established by us represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of our company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, we give careful consideration to all available data and actuarial analyses.

Current wording

Reserves for Losses and Loss Adjustment Expenses. We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (LAE). LAE are costs associated with the investigation, evaluation, adjustment, and settlement of insurance claims and can be either allocated, costs directly attributable to a specific claim, or unallocated, costs that cannot be directly attributed to a specific claim. Loss and LAE reserves reflect management’s best estimate of the total cost of (i) claims that have been reported, but not yet paid in full, and (ii) claims that have been incurred but not yet reported to us (“IBNR”). Reserves established by us represent an estimate of the outcome of future events and, as such, cannot be considered an exact calculation of our liability. Rather, loss and LAE reserves represent management’s best estimate of our company’s liability based on the application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss and LAE reserves is complex and inherently imprecise, as it involves the estimation of the outcome of future uncertain events. The impact of both internal and external variables on ultimate losses and LAE costs is difficult to estimate. In determining loss and LAE reserves, we give careful consideration to all available data and actuarial analyses.

Previous wording

Reinsurance Recoverable. Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss adjustment expenses that is recoverable from reinsurers. This estimate is determined in a manner consistent with the terms of the applicable reinsurance contracts and based on the ultimate losses and loss adjustment expenses we expect to incur. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimate may vary significantly from the eventual outcome.

Current wording

Reinsurance Recoverable. In the normal course of business, we seek to reduce the loss that may arise from catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Our reinsurance recoverable balance represents an estimate of the amount of paid and unpaid losses and loss adjustment expenses that is recoverable from reinsurers. This estimate is determined in a manner consistent with the terms of the applicable reinsurance contracts and based on the ultimate losses and loss adjustment expenses we expect to incur. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimate may vary significantly from the eventual outcome.

Previous wording

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. As described earlier, there is considerable uncertainty regarding the estimation of future losses. In accordance with U.S. GAAP, 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.

Current wording

From time to time, our reinsurance contracts may include retrospective provisions that adjust premiums based on the loss experience under the contract. In accordance with U.S. GAAP, 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. In such cases, a with-and-without method is used to estimate the asset or liability amount to be recognized at each reporting date. The amount of the estimate is the difference between the net contract costs before and after the loss experience under the contract. Estimates related to premium adjustments are recognized in ceded premiums earned. These estimates are reviewed monthly based on the loss experience to date and as adjustments become necessary. Such adjustments to the asset or liability, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

Previous wording

Stock-Based Compensation. We account for stock-based compensation awards under our stockholder-approved incentive plans in accordance with the fair value recognition provisions of U.S. GAAP, which require the measurement, and recognition of compensation for all stock-based awards made to employees, non-employee directors, and third-party award recipients including stock options, restricted stock and warrant issuances based on estimated fair values. For restricted stock with service-based vesting conditions, fair value is determined by the market price of the stock on the grant date. Compensation expense is then recognized ratably over the requisite or derived service period of the award. Restricted stock awards with market-based vesting conditions require the use of a Monte Carlo simulation model with the assistance of a third-party valuation specialist to estimate the fair value and derived service period of the award. We then recognize the compensation expense ratably over this derived service period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility and derived service periods. We develop our estimates based on historical data and market information. We primarily use the Black-Scholes option-pricing model, which requires the following variables for input to calculate the fair value of each stock award on the option grant date: 1) expected volatility of our stock price, 2) the risk-free interest rate, 3) expected term of each award, 4) expected dividends, and 5) an expected forfeiture rate. For stock-based awards granted by non-public subsidiaries, we determine the fair value with the assistance of an independent valuation specialist who may use different valuation methods such as a Monte Carlo simulation model and a binomial distribution model. Inputs such as an estimated stock price of our private subsidiary and expected price volatility used in these valuation methods are derived mathematically from a data analysis of many public peer companies with similar characteristics.

Current wording

For stock-based awards granted by a non-public subsidiary, an independent valuation specialist will assist in determining the fair value of the underlying stock price of the subsidiary using different valuation methods such as a Monte Carlo simulation model and a binomial distribution model. Inputs such as an estimated stock price of our private subsidiary and expected price volatility used in these valuation methods are derived mathematically from a data analysis of many public peer companies with similar characteristics.