Newswires
FEDNAT HOLDING CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q (the "Form 10-Q"). In addition, please refer to our audited consolidated financial statements and notes thereto and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K").
Unless the context requires otherwise, as used in the remainder of this Form
10-Q, the terms "FNHC," "
Below, in addition to providing consolidated revenues and net income (loss), we also provide adjusted operating revenues and adjusted operating income (loss) because we believe these performance measures that are notUnited States of America generally accepted accounting principles ("GAAP") measures allow for a better understanding of the underlying trend in our business, as the excluded items are not necessarily indicative of our operating fundamentals or performance. Non-GAAP measures do not replace the most directly comparable GAAP measures and we have included a detailed reconciliation thereof in "Results of Operations" below.
We exclude the after-tax (using our prevailing income tax rate) effects of the
following items from GAAP net income (loss) to arrive at adjusted operating
income (loss):
•Net realized and unrealized investment gains (losses); •Gains (losses) associated early extinguishment of debt; •Merger and acquisition, integration and other strategic costs and the amortization of specifically identifiable intangibles (other than value of business acquired); •Impairment of intangibles; •Income (loss) from initial adoption of new regulations and accounting guidance; and •Income (loss) from discontinued operations.
We also exclude the pre-tax effect of the first bullet above from GAAP revenues
to arrive at adjusted operating revenues.
Forward-Looking Statements
This Form 10-Q or the documents that are incorporated by reference into this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "budget," "contemplate," "continue," "could," "envision," "estimate," "expect," "forecast," "guidance," "indicate," "intend," "may," "might," "outlook," "plan," "possibly," "potential," "predict," "probably," "pro-forma," "project," "seek," "should," "target," "will," "would," "will be," "will continue" or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Management cautions that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assume that such statements will be realized, or the forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed under "Risk Factors" in our 2020 Form 10-K, and discussed from time to time in our other reports filed with theSecurities and Exchange Commission ("SEC"), including this Form 10-Q. -31- -------------------------------------------------------------------------------- Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this Form 10-Q are made only as of the date hereof. We do not undertake and specifically disclaim any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments. GENERAL The Company is a regional insurance holding company that controls substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual relationships with independent agents and general agents. We, through our wholly owned subsidiaries, are authorized to underwrite, and/or place homeowners multi-peril ("homeowners"), federal flood and other lines of insurance inFlorida and other states. We market, distribute and service our own and third-party insurers' products and other services through a network of independent and general agents.FedNat Insurance Company ("FNIC"), our largest wholly-owned insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance by the state insurance departments inFlorida ,Louisiana ,Texas ,South Carolina ,Alabama ,Georgia andMississippi .Maison Insurance Company ("MIC" or "Maison"), an insurance subsidiary that we acquired inDecember 2019 , is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail only exposures by the state insurance departments inLouisiana ,Texas andFlorida . Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of MIC's insurance operations.
Monarch National Insurance Company ("MNIC"), an insurance subsidiary, is
licensed to write homeowners property and casualty insurance in
Through our wholly-owned subsidiary,FedNat Underwriters, Inc. ("FNU"), we serve as managing general agent for FNIC, MIC and MNIC.ClaimCor, LLC ("ClaimCor"), a wholly-owned subsidiary, is a claims solutions company that processes claims for Maison and FNIC.
Material Distribution Relationships
We are a party to an insurance agency master agreement withIvantage Select Agency, Inc. ("ISA"), an affiliate of Allstate Insurance Company ("Allstate"), pursuant to which we have been authorized by ISA to appoint Allstate agents to offer our FNIC homeowners insurance products to consumers inFlorida . We are a party to a managing general underwriting agreement withSageSure Insurance Managers, LLC ("SageSure") in which they underwrite our FNIC homeowners business outside ofFlorida . Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of FNIC non-Florida's insurance operations.
Overview of Insurance Lines of Business
Homeowners Property and Casualty Insurance FNIC, MIC and MNIC underwrite homeowners insurance inFlorida and FNIC also underwrites insurance inAlabama ,Texas ,Louisiana ,South Carolina andMississippi and MIC inLouisiana andTexas . Homeowners insurance generally protects an owner of real and personal property against covered causes of loss to that property. As ofSeptember 30, 2021 , the total homeowners policies in-force was 301,000, of which 168,000 were inFlorida and 133,000 were outside ofFlorida . As ofDecember 31, 2020 , the total homeowners policies in-force was 361,000, of which 207,000 were inFlorida and 154,000 were outside ofFlorida . Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of our non-Florida's insurance operations.
Our homeowners insurance products provide maximum dwelling coverage of approximately$3.6 million , with the aggregate maximum policy limit being approximately$6.3 million . We currently offer dwelling coverage "A" up to$4.0 million with an aggregate total insured value of$6.5 million . We continually review and update these limits. The typical deductible is either$2,500 or$1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims. Premium rates charged to our homeowners insurance policyholders are continually evaluated to assure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive, inadequate or discriminatory). -32- --------------------------------------------------------------------------------
Premium rates in
respective states' office of insurance regulation. We continuously monitor and
seek appropriate adjustment to our rates in order to remain competitive and
profitable.
Through MIC, we have assumed
The following are our recent rate actions that we have taken across our three
insurance subsidiaries:
•In 2020, FNIC received approval from theFlorida Office of Insurance Regulations ("OIR") for a statewide-average rate increase of 6.7% forFlorida homeowners multiple-peril insurance policies, which became effective for new policies onFebruary 8, 2021 and for renewal policies onMarch 30, 2021 . •In 2020, FNIC received OIR approval for a statewide-average rate increase of 8.3% forFlorida dwelling fire insurance policies, which became effective for new policies onFebruary 2, 2021 and for renewal policies onMarch 30, 2021 . •In 2020, MIC received OIR approval for a statewide-average rate increase of 15.0% forFlorida manufactured home insurance policies, which became effective for new policies onMarch 10, 2021 . •In 2021, FNIC received OIR approval for a statewide-average rate increase of 9.0% forFlorida homeowners multiple-peril insurance policies, which became effective for new policies onMarch 1, 2021 and for renewal policies onApril 15, 2021 . •In 2021, FNIC received approval from the OIR for a statewide-average rate increase of 0.9% forFlorida homeowners multiple-peril insurance policies, which became effective for new policies onSeptember 1, 2021 and for renewal policies onOctober 15, 2021 . •Other rate filings have been filed with the OIR and are pending approval.
Non-
Our non-Florida FNIC homeowners insurance products, which have been produced through our agreement with SageSure, provide maximum dwelling coverage "A" up to$1.8 million , with the aggregate maximum policy limit being approximately$3.6 million . The typical deductible is either$2,500 or$1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims. EffectiveDecember 1, 2020 , FNIC entered into a 80% quota-share treaty with Anchor Re, a wholly-ownedArizona captive reinsurance subsidiary of SageSure, the non-affiliated managing general underwriter that writes FNIC's non-Florida homeowners business. EffectiveJanuary 31, 2021 , the Company terminated its existing quota-share reinsurance treaty with Anchor Re and commuted the agreement. Immediately after the commutation, the Company entered into 80% quota-share treaty with Anchor Re onFebruary 1, 2021 on an in-force, new and renewal basis, which covers the thirteen month period throughFebruary 28, 2022 , subject to certain limitations. The treaty arrangement is fully collateralized through Anchor Re.
Our MIC non-
manufactured home insurance and dwelling fire insurance. MIC has written both
full peril property policies as well as wind/hail only exposures.
The following are our recent rate actions that we have taken across our
insurance subsidiaries that do business outside of
•In 2021, FNIC applied for a statewide-average rate increase of 6.9% forSouth Carolina homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies onApril 1, 2021 and for renewal policies onMay 1, 2021 . •In 2021, FNIC applied for a statewide-average rate increase of 9.0% forTexas homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies onApril 8, 2021 and for renewal policies onMay 1, 2021 . •In 2021, MIC applied for a statewide-average rate increase of 11.1% forLouisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies onMay 15, 2021 and for renewal policies onJuly 1, 2021 . •In 2021, FNIC applied for a statewide-average rate increase of 11.0% forLouisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies onJuly 1, 2021 and for renewal policies onJuly 1, 2021 . •Rate filings have been applied for by FNIC and MIC outside ofFlorida and are pending to be approved by the respective regulators. InNovember 2021 , the Company announced its plan to re-focus its operations on theFlorida market, which has been the Company's historical focus. In conjunction with this shift in strategy, the Company intends to commence an orderly runoff of Maison's insurance operations. In that regard, Maison will be filing appropriate documentation with its insurance regulators inLouisiana ,Florida andTexas concerning Maison's withdrawal plan. This withdrawal plan is subject to regulatory review periods of 60 days inTexas , and 45 days inFlorida (except that no action can be taken inFlorida in furtherance of the withdrawal for 90 days -33- -------------------------------------------------------------------------------- following submission of the withdrawal plan). Subject to such review, we expect to begin non-renewing Maison'sLouisiana policies as on their anniversary dates beginning inJanuary 2022 . Nonrenewal of Maison'sTexas policies is expected to begin inFebruary 2022 , and the nonrenewal of Maison'sFlorida policies is expected to begin inJune 2022 . With respect to FNIC'sTexas andLouisiana books, the Company and SageSure (the third-party MGU that wrote the business and owns the renewal rights thereof) expect to begin transferring policies onto an alternative insurance carrier partners of SageSure inDecember 2021 , by virtue of making an offer of coverage to FNIC policyholders. FNIC policies inSouth Carolina ,Alabama andMississippi will continue to be renewed by FNIC until such time as SageSure's alternative insurance carrier partners obtain the necessary licensing in those states. The rollover of all existing policies are governed by the appropriate regulatory requirements of each state in which the policy is located. Other Insurance Lines of Business FNIC writes flood insurance through the National Flood Insurance Program ("NFIP"). We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. FNIC offers this line of business inFlorida ,Louisiana ,Texas ,Alabama ,South Carolina andMississippi . FNIC plans to file an admitted flood endorsement as an alternative to the NFIP program. MIC writes flood insurance through a partnership with Bintech who assumes 100% of the risk, inLouisiana only.
See the discussion in Item 1: "Business" in our 2020 Form 10-K, for additional
information with respect to our business.
Regulation
All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the OIR orLouisiana Department of Insurance ("LDI"), our primary regulators.
COVID-19 Impact
Refer to in "Part 1, Item 1, Business" and "Part I, Item 1A., Risk Factors" of
our 2020 Form 10-K for information with respect to the Company's response to
COVID-19's impact to our business.
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RESULTS OF OPERATIONS
Operating Results Overview - Three Months Ended
Three Months Ended
The following overview does not address all of the matters covered in the other
sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations or contain all of the information that may be important to
our shareholders or the investing public. This overview should be read in
conjunction with the other sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations herein and in our 2020 Form 10-K.
The following table sets forth results of operations for the periods presented:
Three Months Ended
September 30,
2021 % Change 2020
(Dollars in thousands)
Revenues:
Gross premiums written $ 157,003 (12.8) % $ 180,152
Gross premiums earned 178,368 (2.8) % 183,518
Ceded premiums (124,439) 24.5 % (99,972)
Net premiums earned 53,929 (35.4) % 83,546
Net investment income 1,685 (29.9) % 2,404
Net realized and unrealized gains (losses) 1,273 (3.9) % 1,324
Direct written policy fees 3,179 (11.8) % 3,603
Other income 6,658 3.4 % 6,439
Total revenues 66,724 (31.4) % 97,316
Costs and expenses:
Losses and loss adjustment expenses 59,644 (39.8) %
99,016
Commissions and other underwriting expenses 23,591 (4.0) %
24,580
General and administrative expenses 5,974 12.0 % 5,333 Interest expense 2,296 19.9 % 1,915 Total costs and expenses 91,505 (30.1) % 130,844 Income (loss) before income taxes (24,781) (26.1) % (33,528) Income tax expense (benefit) - (100.0) % (12,783) Net income (loss)$ (24,781) 19.5 %$ (20,745) Ratios to net premiums earned: Net loss ratio 110.6 % 118.5 % Net expense ratio 54.8 % 35.8 % Combined ratio 165.4 % 154.3 % (1)Net loss ratio is calculated as losses and loss adjustment expenses ("LAE") divided by net premiums earned. (2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned. (3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned. -35- -------------------------------------------------------------------------------- The following table sets forth a reconciliation of GAAP to non-GAAP measures: Three Months Ended September 30, 2021 2020 (Dollars in thousands) Revenue Total revenues$ 66,724 $ 97,316 Less: Net realized and unrealized investment gains (losses) 1,273 1,324 Adjusted operating revenues$ 65,451 $ 95,992 Net Income (Loss) Net income (loss)$ (24,781) $ (20,745) Less: Net realized and unrealized investment gains (losses) 1,273
793
Acquisition and strategic costs (9)
(15)
Amortization of identifiable intangibles (38)
(22)
Adjusted operating income (loss)$ (26,007)
Income tax rate assumed for reconciling items above - % 40.10 % Revenue Total revenue decreased$30.6 million or 31.4%, to$66.7 million for the three months endedSeptember 30, 2021 , compared with$97.3 million for the three months endedSeptember 30, 2020 . The decrease was driven primarily by increases in ceded premiums from incremental quota-share agreements and lower gross premiums earned, which are discussed in further detail below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods
presented:
Three Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums written:
Homeowners Florida $ 91,370 $ 106,101
Homeowners non-Florida 59,660 68,447
Federal flood 5,993 5,660
Non-core (1) (20) (56)
Total gross premiums written $ 157,003 $ 180,152
(1)Reflects exited lines of business.
Gross premiums written decreased$23.2 million , or 12.8%, to$157.0 million in the quarter compared with$180.2 million for the same three-month period last year, which was driven by a reduction in our policies-in-force and exposure across all states, as a result of our rigorous exposure management in response to the challenging litigation environment, partially offset by rate actions that we have taken across our insurance subsidiaries. -36- --------------------------------------------------------------------------------
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods
presented:
Three Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums earned:
Homeowners Florida $ 108,193 $ 115,346
Homeowners non-Florida 65,017 63,759
Federal flood 5,178 4,469
Non-core (1) (20) (56)
Total gross premiums earned $ 178,368 $ 183,518
(1)Reflects exited lines of business.
Gross premiums earned decreased$5.1 million , or 2.8%, to$178.4 million for the three months endedSeptember 30, 2021 , as compared to$183.5 million for the three months endedSeptember 30, 2020 . The lower gross premiums earned was primarily driven by the exposure management discussed earlier.
Ceded Premiums Earned
Ceded premiums earned increased$24.4 million , or 24.5%, to$124.4 million in the quarter, compared to$100.0 million in the same three-month period last year. The increase was driven by approximately$26 million of higher quota-share ceded premiums:$20 million related to new and incremental treaties for FNIC'sFlorida book of business and$6 million related to the quota-share treaty for FNIC's non-Florida book of business cession percentage increasing to 80% from 50% during the fourth quarter of 2020. The increase to ceded premium earned associated with the aforementioned quota-share treaties is largely offset by corresponding reductions in loss and LAE, and commission and other underwriting expenses when comparing the periods. Refer to Note 5 of the notes to our Consolidated Financial Statements for additional information regarding these quota-share treaties. Net Investment Income Net investment income decreased$0.7 million , or 29.9%, to$1.7 million during the three months endedSeptember 30, 2021 , as compared to$2.4 million during the three months endedSeptember 30, 2020 . This decrease was driven by a smaller fixed income portfolio as well as a decline in the associated yield as a result of declining interest rates during the last year. Related to the former, we have been impacted by several catastrophes, hail and wind-related severe weather events. As a result, sales of our portfolio of fixed income securities was a significant source of liquidity over the last year.
Net realized and Unrealized Gains (Losses)
Net realized and unrealized gains (losses) remained relatively flat at$1.3 million for the three months endedSeptember 30, 2021 , compared to the prior year period. We recognized less than$(0.1) million and$0.3 million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized investment gains are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Direct Written Policy Fees Direct written policy fees decreased$0.4 million , or 11.8%, to$3.2 million for the three months endedSeptember 30, 2021 , compared with$3.6 million for the three months endedSeptember 30, 2020 . The decrease is primarily driven by lower policy fees due to a reduction in our policies in-force and exposure in the state ofFlorida , as a result of our rigorous exposure management in response to the challenging litigation environment. -37- --------------------------------------------------------------------------------
Other Income
Other income included the following for the periods presented:
Three Months Ended
September 30,
2021 % Change 2020
(Dollars in thousands)
Other income:
Commission income $ 968 12.4 % $ 861
Brokerage 5,319 2.7 % 5,181
Financing and other revenue 371 (6.5) % 397
Total other income $ 6,658 3.4 % $ 6,439
The increase in other income was primarily driven by higher brokerage revenue.
The brokerage revenue increase is the result of higher excess of loss
reinsurance spend from the reinsurance programs in place, including
reinstatement premiums and/or additional purchases, during the third quarter of
2021 as compared to the third quarter of 2020.
Expenses
Losses and LAE
Losses and LAE incurred, net of reinsurance, included the following for the
periods presented:
Three Months Ended
September 30,
2021 2020
Net Loss Net Loss
Amount Ratio Amount Ratio
(In thousands)
Current accident year, excluding catastrophes:
Homeowners $ 38,671 71.7 % $ 61,396 73.5 %
Non-core (1) - - % - - %
Total current accident year, excluding
catastrophes 38,671 71.7 % 61,396 73.5 %
Current year catastrophes (2):
Florida 14,648 27.2 % 21,268 25.4 %
Texas 4,700 8.7 % 1,885 2.3 %
Louisiana 286 0.5 % 15,111 18.1 %
Other states 696 1.3 % - - %
Total current year catastrophes 20,330 37.7 % 38,264 45.8 %
Prior year loss development (redundancy):
Homeowners 648 1.2 % (1,100) (1.3) %
Non-core (1) (5) - % 672 0.8 %
Ceded losses subject to offsetting experience
account adjustments (3) - - % (216) (0.3) %
Total prior year loss development (redundancy) 643 1.2 % (644) (0.8) %
Total net losses and LAE $ 59,644 110.6 % $ 99,016 118.5 %
(1)Reflects exited lines of business.
(2)Includes Property Claims Services ("PCS") weather events and other events
impacting multiple insureds for which the Company's insurance carriers
established catastrophe event codes, net of the benefit of claims handling
services. These catastrophe events are typically wind, hail and tornado related
weather events. Any individual catastrophe event with gross losses greater than
$20 million , on a pre-tax basis, are considered significant and specifically
addressed in the commentary below. Also includes net catastrophe losses from
current or prior quarter events, net of claims handling services, which
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were adjusted in the specific period noted above. Excludes any catastrophe
related activity recorded in other financial statement accounts, outside of loss
and loss adjustment expenses.
(3)Reflects homeowners losses ceded under retrospective reinsurance treaties to
the extent there is an offsetting experience account adjustment, such that there
is no impact on pre-tax net income (loss).
Losses and LAE decreased $39.4 million , or 39.8%, to $59.6 million for the three
months ended September 30, 2021 , compared to $99.0 million for 2020 driven by
higher ceded losses under quota-share reinsurance treaties and lower net
catastrophe losses. The net loss ratio decreased 7.9 percentage points, to
110.6% in the current quarter, as compared to 118.5% in the third quarter of
2020. The lower loss ratio was primarily the result of higher ceded losses, as
discussed earlier, and lower net catastrophe losses, partially offset by higher
ceded premiums earned, the denominator on the net loss ratio calculation. The
current quarter included approximately $20.3 million of catastrophe losses, net
of reinsurance and claims handling fee income, driven by Hurricane Ida as well
as other severe weather events, which together impacted Louisiana , Florida and
Texas . By comparison, the third quarter of 2020 catastrophe net losses were
$38.3 million , net of reinsurance, which included Hurricanes Laura and Sally as
well as other severe weather events. Additionally, higher ceded losses through
our quota-share treaties and lower attritional losses in FNIC's Florida book of
business drove lower current accident year losses, excluding catastrophes,
compared to the prior year.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses
for the periods presented:
Three Months Ended
September 30,
2021 2020
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida$ 12,539 $ 13,736 All others 13,108 13,337 Ceding commissions (16,546) (7,909) Total commissions 9,101 19,164 Fees 1,271 1,358 Salaries and wages 3,124 3,351
Other underwriting expenses 10,095
707
Total commissions and other underwriting expenses
Commissions and other underwriting expenses decreased$1.0 million , or 4.0%, to$23.6 million for the three months endedSeptember 30, 2021 , compared with$24.6 million for the three months endedSeptember 30, 2020 . This decrease was due to higher ceding commissions as a result of the incremental quota-share treaties in FNIC'sFlorida and non-Florida books of business. Refer to Ceded Premium Earned above for additional information. The higher ceding commission was partially offset by an increase in other underwriting expenses, which was the result of prior period expense being reduced by the benefit from the 50% profit-sharing agreement, as FNIC's non-Florida business experienced high weather losses in prior period. The net expense ratio increased 19.0 percentage points to 54.8% in the third quarter of 2021, as compared to 35.8% in the third quarter of 2020 due primarily to higher ceded reinsurance premiums in 2021. Our gross expense ratio was 25.9% during the three months endedSeptember 30, 2021 , as compared to 20.6% during the three months endedSeptember 30, 2020 , demonstrating the Company's continued focus on expense control.
General and Administrative Expenses
General and administrative expenses increased
million
in the third quarter of 2020.
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Interest Expense
Interest expense increased$0.4 million or 19.9% to$2.3 million for the three months endedSeptember 30, 2021 compared to$1.9 million for the three months endedSeptember 30, 2020 . Refer to Note 8 of the notes to our Consolidated Financial Statements for information related to changes to our existing debt and new debt issuance, which will increase interest expense during the remainder of 2021 as compared to 2020. Income Taxes Income tax expense (benefit) increased$12.8 million , to$0.0 million for the three months endedSeptember 30, 2021 , compared to$(12.8) million for the three months endedSeptember 30, 2020 . Refer to Note 9 of the notes to our Consolidated Financial Statements for information related to the increase in our valuation allowance for the three months endedSeptember 30, 2021 and our effective income tax rate. -40- --------------------------------------------------------------------------------
Operating Results Overview - Nine Months Ended
Nine Months Ended
The following overview does not address all of the matters covered in the other
sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations or contain all of the information that may be important to
our shareholders or the investing public. This overview should be read in
conjunction with the other sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations herein and in our 2020 Form 10-K.
The following table sets forth results of operations for the periods presented:
Nine Months Ended
September 30,
2021 % Change 2020
(Dollars in thousands)
Revenues:
Gross premiums written $ 527,495 (5.6) % $ 558,492
Gross premiums earned 535,848 (0.6) % 538,988
Ceded premiums (406,693) 70.8 % (238,054)
Net premiums earned 129,155 (57.1) % 300,934
Net investment income 5,092 (47.2) % 9,637
Net realized and unrealized gains (losses) 10,949 23.3 %
8,882 Direct written policy fees 9,730 (8.7) % 10,662 Other income 23,584 39.4 % 16,919 Total revenues 178,510 (48.6) % 347,034 Costs and expenses: Losses and LAE 185,090 (37.9) % 297,862
Commissions and other underwriting expenses 61,977 (31.3) %
90,205
General and administrative expenses 17,854 3.6 % 17,241 Interest expense 6,451 12.3 % 5,745 Total costs and expenses 271,372 (34.0) % 411,053 Income (loss) before income taxes (92,862) 45.1 % (64,019) Income tax expense (benefit) 1,669 (107.0) % (23,928) Net income (loss)$ (94,531) 135.8 %$ (40,091) Ratios to net premiums earned: Net loss ratio 143.3 % 99.0 % Net expense ratio 61.8 % 35.7 % Combined ratio 205.1 % 134.7 % (1)Net loss ratio is calculated as losses and LAE divided by net premiums earned. (2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned. (3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned. -41- -------------------------------------------------------------------------------- The following table sets forth a reconciliation of GAAP to non-GAAP measures: Nine Months Ended September 30, 2021 2020 (Dollars in thousands) Revenue Total revenues$ 178,510 $ 347,034 Less: Net realized and unrealized investment gains (losses) 1,524
8,882
Adjusted operating revenues$ 176,986 $ 338,152 Net Income (Loss) Net income (loss)$ (94,531) $ (40,091) Less: Net realized and unrealized investment gains (losses) 1,524
5,320
Acquisition and strategic costs (26)
(41)
Amortization of identifiable intangibles (113)
(67)
Adjusted operating income (loss)$ (95,916)
Income tax rate assumed for reconciling items above - % 40.10 % Revenue Total revenue decreased$168.5 million , or 48.6%, to$178.5 million for the nine months endedSeptember 30, 2021 , compared with$347.0 million for the nine months endedSeptember 30, 2020 . The decrease was driven primarily by increases in ceded premiums from incremental quota-share agreements and higher catastrophe reinsurance costs, as well as lower net investment income, slightly offset by higher other income, all of which are discussed in further detail below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods
presented:
Nine Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums written:
Homeowners Florida $ 320,613 $ 339,799
Homeowners non-Florida 190,148 203,897
Federal flood 16,874 14,967
Non-core (1) (140) (171)
Total gross premiums written $ 527,495 $ 558,492
(1)Reflects exited lines of business.
Gross premiums written decreased$31.0 million , or 5.6%, to$527.5 million for the nine months endedSeptember 30, 2021 , compared with$558.5 million for the nine months endedSeptember 30, 2020 , which was driven by a reduction in our policies-in-force and exposure across all states, as a result of our rigorous exposure management in response to the challenging litigation environment, partially offset by rate actions that we have taken across our insurance subsidiaries. -42- --------------------------------------------------------------------------------
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods
presented:
Nine Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums earned:
Homeowners Florida $ 326,956 $ 347,237
Homeowners non-Florida 194,160 179,071
Federal flood 14,872 12,851
Non-core (1) (140) (171)
Total gross premiums earned $ 535,848 $ 538,988
(1)Reflects exited lines of business.
Gross premiums earned decreased$3.2 million , or 0.6%, to$535.8 million for the nine months endedSeptember 30, 2021 , as compared to$539.0 million for the nine months endedSeptember 30, 2020 .
Ceded Premiums Earned
Ceded premiums increased$168.6 million , or 70.8%, to$406.7 million for the nine months endedSeptember 30, 2021 , compared to$238.1 million for the nine months endedSeptember 30, 2020 . The increase was driven by approximately$114 million of higher quota-share ceded premium:$60 million related to new and incremental quota-share treaties for FNIC'sFlorida book of business and$54 million related to the 80% quota-share treaty for FNIC's non-Florida book of business. Additionally, there was approximately$51 million higher catastrophe reinsurance spend, driven by higher rate-on-line prices in the 2020-2021 catastrophe excess of loss reinsurance program as well as additional purchases of supplemental coverage to backfill layers and gaps in coverage stemming from the non-cascading portion of our reinsurance tower, following the six retention catastrophe events that have occurred sinceJuly 1, 2020 . This increase to ceded premium earned associated with the aforementioned quota-share treaties is largely offset by corresponding reductions in loss and LAE, and commission and other underwriting expenses when comparing the periods. Refer to Note 5 of the notes to our Consolidated Financial Statements for additional information regarding these quota-share treaties.
Net Investment Income
Net investment income decreased$4.5 million , or 47.2%, to$5.1 million during the nine months endedSeptember 30, 2021 , compared to$9.6 million during the nine months endedSeptember 30, 2020 . This decrease was driven by a smaller fixed income portfolio as well as a decline in the associated yield as a result of declining interest rates during the last year. Related to the former, we have been impacted by several catastrophes, hail and wind-related severe weather events and private reinsurers have raised the cost of their coverages. As a result, sales of our portfolio of fixed income securities was a significant source of liquidity over the last year.
Net Realized and Unrealized Gains (Losses)
Net realized and unrealized gains (losses) were$10.9 million for the nine months endedSeptember 30, 2021 , compared to$8.9 million in the prior year period. We recognized$0.1 million and$0.4 million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized investment gains are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Furthermore, to mitigate the potential COVID-19 related adverse impact on the financial stability of the issuers of securities we hold, certain positions were liquidated during 2020. During the first six months of 2021, we purchased additional reinsurance limit for our excess of loss catastrophe reinsurance program for 2020-2021, which we determined had an embedded derivative. For the nine months endedSeptember 30, 2021 , the Company recognized$9.4 million in realized and unrealized embedded derivative gains. Refer to Notes 2, 3 and 5 of the notes to our Consolidated Financial Statements for further information related to our embedded derivative. -43- --------------------------------------------------------------------------------
Direct Written Policy Fees
Direct written policy fees decreased by$1.0 million , or 8.7%, to$9.7 million for the nine months endedSeptember 30, 2021 , compared with$10.7 million during the nine months endedSeptember 30, 2020 . The decrease is primarily driven by lower policy fees due to a reduction in our policies in-force and exposure inFlorida , as a result of our rigorous exposure management in response to the challenging litigation environment.
Other Income
Other income included the following for the periods presented:
Nine Months Ended
September 30,
2021 % Change 2020
(In thousands)
Other income:
Commission income $ 3,084 24.2 % $ 2,484
Brokerage 19,368 47.0 % 13,173
Financing and other revenue 1,132 (10.3) % 1,262
Total other income $ 23,584 39.4 % $ 16,919
The increase in other income was primarily driven by higher brokerage revenue.
The brokerage revenue increase is the result of higher excess of loss
reinsurance spend from the reinsurance programs in place, including
reinstatement premiums and/or additional purchases, during the first nine months
of 2021 as compared to the first nine months of 2020.
-44-
--------------------------------------------------------------------------------
Expenses
Losses and LAE
Loss and LAE incurred, net of reinsurance, included the following for the
periods presented:
Nine Months Ended
September 30,
2021 2020
Net Loss Net Loss
Amount Ratio Amount Ratio
(In thousands)
Current accident year, excluding catastrophes:
Homeowners $ 105,252 81.5 % $ 183,768 61.1 %
Non-core (1) - - % - - %
Total current accident year, excluding
catastrophes 105,252 81.5 % 183,768 61.1 %
Current year catastrophes (2):
Florida 20,546 15.9 % 47,963 15.9 %
Texas 48,174 37.4 % 26,672 8.9 %
Louisiana 7,268 5.6 % 31,551 10.5 %
Other states 2,055 1.6 % 1,740 0.6 %
Total current year catastrophes 78,043 60.5 % 107,926 35.9 %
Prior year loss development (redundancy):
Homeowners 1,868 1.4 % 4,355 1.4 %
Non-core (1) (5) - % 2,557 0.8 %
Ceded losses subject to offsetting experience
account adjustments (3) (68) (0.1) % (744) (0.2) %
Total prior year loss development (redundancy) 1,795 1.3 % 6,168 2.0 %
Total net losses and LAE $ 185,090 143.3 % $ 297,862 99.0 %
(1)Reflects exited lines of business.
(2)Includes PCS weather events and other events impacting multiple insureds for
which the Company's insurance carriers established catastrophe event codes, net
of the benefit of claims handling services. These catastrophe events are
typically wind, hail and tornado related weather events. Any individual
catastrophe event with gross losses greater than $20 million , on a pre-tax
basis, are considered significant and specifically addressed in the commentary
below. Also includes net catastrophe losses from current or prior quarter
events, net of claims handling services, which were adjusted in the specific
period noted above. Excludes any catastrophe related activity recorded in other
financial statement accounts, outside of loss and loss adjustment expenses.
(3)Reflects homeowners losses ceded under retrospective reinsurance treaties to
the extent there is an offsetting experience account adjustment, such that there
is no impact on pre-tax net income (loss).
Losses and LAE decreased $112.8 million , or 37.9%, to $185.1 million for the
nine months ended September 30, 2021 , compared with $297.9 million for the same
period last year driven by higher ceded losses under quota-share reinsurance
treaties and lower net catastrophe losses. The net loss ratio increased 44.3
percentage points, to 143.3% in the first nine months of 2021, as compared to
99.0% in the first nine months of 2020. The higher loss ratio was primarily the
result of higher ceded premiums, as discussed earlier, which reduces net earned
premiums, the denominator on the net loss ratio calculation.
The first nine months of 2021, net losses were driven by approximately $78.0
million of net catastrophe losses, net of reinsurance and claims handling fee
income, which was partially offset by $10.7 million of income recognized within
realized and unrealized gains in our consolidated statement of operations (refer
to Notes 2, 3 and 5 for further information). The first nine months of 2021
weather events were driven by Hurricane Ida, Winter Storm Uri as well as a
number of convective storm and hail events impacting Louisiana , Florida and
Texas . The net catastrophe losses were adversely impacted by having reached the
net loss limit contained in the FNIC non-Florida quota-share treaty, which
reduced the amount of net losses that we were able to cede in the current
period. Prospective catastrophe cessions into this treaty will be dependent on
future profits in the related book of business through the end
-45-
--------------------------------------------------------------------------------
of the treaty period. The first nine months of 2020, net losses were driven by
net catastrophe losses of $107.9 million and prior period reserve strengthening
of $6.9 million . Additionally, higher ceded losses through our quota-share
treaties and lower attritional losses in FNIC's Florida book of business drove
lower current accident year losses, excluding catastrophes, compared to the
prior year.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses
for the periods presented:
Nine Months Ended
September 30,
2021 2020
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida$ 36,963 $ 41,181 All others 36,318 37,789 Ceding commissions (55,991) (13,969) Total commissions 17,290 65,001 Fees 3,839 3,694 Salaries and wages 9,759 10,068 Other underwriting expenses 31,089
11,442
Total commissions and other underwriting expenses
Commissions and other underwriting expenses decreased$28.2 million , or 31.3%, to$62.0 million for the nine months endedSeptember 30, 2021 , compared with$90.2 million for the nine months endedSeptember 30, 2020 . This decrease was primarily due to a higher ceding commission driven primarily by the new quota-share treaties in FNIC'sFlorida and non-Florida books of business. Refer to Ceded Premium Earned above for additional information. The higher ceding commission was partially offset by an increase in other underwriting expenses, which was the result of prior period expense being reduced by the benefit from the 50% profit-sharing agreement, as FNIC's non-Florida business experienced high weather losses in prior period. The net expense ratio increased 26.1 percentage points to 61.8% in the first nine months of 2021, as compared to 35.7% in the first nine months of 2020 due primarily to higher ceded reinsurance premiums in 2021. Our gross expense ratio was 25.3% during the nine months endedSeptember 30, 2021 and 2020, demonstrating the company's continued focus on expense control.
General and Administrative Expenses
General and administrative expenses increased
million
for the nine months ended 2020.
Interest Expense
Interest expense increased$0.8 million to$6.5 million for the nine months endedSeptember 30, 2021 , compared with$5.7 million in the prior year period. Refer to Note 8 of the notes to our Consolidated Financial Statements for information related to changes to our existing debt and new debt issuance, which will increase interest expense during the remainder of 2021 as compared to 2020.
Income Taxes
Income tax expense (benefit) increased$25.6 million , to$1.7 million for the nine months endedSeptember 30, 2021 , compared to$(23.9) million for the nine months endedSeptember 30, 2020 . Refer to Note 9 of the notes to our Consolidated Financial Statements for information related to the increase in our valuation allowance for the nine months endedSeptember 30, 2021 and our effective income tax rate. -46- --------------------------------------------------------------------------------
Consolidated Company Outlook - Potential Changes in Financial Trends
As discussed under Overview of Insurance Lines of Business - Non-Florida above, the Company intends to re-focus its operations on itsFlorida homeowners business. The orderly runoff of MIC and the transfer-upon-renewal of FNIC's non-Florida business to alternative insurance carrier partners of SageSure impact forward-looking expectations with respect to financial trends. Such impacts with respect to the Company non-Florida business include, but are not limited to: •Declines in gross written and gross earned premiums; •Declines in loss and loss adjustment expenses as well as in commissions and other underwriting expenses; •Declines in exposure to catastrophe weather losses; •Declines in the expected cost of excess of loss reinsurance coverages over the runoff period; and •Reduced need or potential need for surplus infusions into FNIC and MIC, and corresponding reductions in the Company's overall capital needs. Overall, the Company anticipates lower consolidated earnings. However, if catastrophe losses were to continue at the elevated levels experience in the past eighteen months, it is expected that the orderly exit of the non-Florida business will have proven beneficial to the Company's earnings over the runoff period.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of funds are gross written premiums, investment income, commission income and fee income. Our primary uses of funds are the payment of claims, catastrophe and other reinsurance premiums and operating expenses. As ofSeptember 30, 2021 , on a consolidated basis, the Company held$166.9 million in cash and cash equivalents and$355.3 million in investments. As ofDecember 31, 2020 , on a consolidated basis, the Company held$102.4 million in cash and cash equivalents and$491.4 million in investments. Total shareholders' equity decreased$87.0 million , to$71.2 million as ofSeptember 30, 2021 , compared with$158.2 million as ofDecember 31, 2020 due primarily to a net loss and unrealized losses on our bond portfolio, partially offset by issuance of common stock. The Company has outstanding$100 million of 2029 Notes ("2029 Notes"), which at issuance bore interest at the annual rate of 7.50%. In connection with the amendment of the indenture covenants to increase the maximum debt-to-capital ratio applicable to the incurrence of debt to 60% and decreasing the maximum debt-to-capital ratio applicable to restricted payments, including cash dividends on our common stock, to 20%, the interest rate was increased by 0.25% to 7.75% per annum beginningMarch 15, 2021 . Refer to Note 10 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of the 2020 Form 10-K, for additional information regarding the 2029 Notes. The Company has outstanding$21 million of Convertible Senior Unsecured Notes due 2026 ("2026 Notes"), which bear interest at the annual rate of 5.0%. The 2026 Notes are convertible in part or in whole at the option of the holders at any time until the close of business on the second trading day prior to the maturity date onApril 19, 2026 ("Maturity Date") into shares of the Company's common stock at an initial conversion rate of 166.6667 shares of the Company's common stock per$1,000 principal amount of the 2026 Notes (equivalent to an initial conversion price of$6.00 per share), subject to customary adjustments in certain circumstances. The Company will not have the right to redeem the 2026 Notes prior to the Maturity Date. Holders of the 2026 Notes may require the Company to purchase their 2026 Notes upon a change of control at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of purchase.
The Company's actual debt to capital ratio as of
approximately 62.5%.
OnMarch 15, 2021 , the Company closed an underwritten public offering of 3,500,000 shares of its common stock at a price of$4.75 per share for gross proceeds of$16.6 million . The offering generated net proceeds to the Company of approximately$15.1 million , after deducting the underwriter's discount and offering expenses payable by the Company. InApril 2021 , the Company sold an additional 100,650 shares upon the partial exercise of the underwriter's overallotment option and received net proceeds of$0.4 million . This offering, the offering of 2026 Notes and changes to our 2029 Notes, are part of our ongoing execution of the strategic review process initiated by the Company's Board of Directors announced inNovember 2020 . Historically, we have met our liquidity requirements primarily through cash generated from operations. Beginning in 2020, property and casualty businesses, including FNHC's insurance carriers, have been impacted by multiple catastrophes, hail, and wind-related severe weather events and private reinsurers have tightened coverage provisions and raised the cost of their coverages. As a result, sales of our portfolio of fixed income securities was a significant source of liquidity for the Company. Quota-share reinsurance -47- -------------------------------------------------------------------------------- treaties are another liquidity management tool, via the ceding commission the Company receives upon inception and the related reduction to statutory surplus requirements. New quota-share treaties entered or increased were responsive to these purposes, as well as to reduce the Company's exposure to non-named storm catastrophes. Management continually monitors and adjusts its liquidity and capital plans for FNHC and its subsidiaries in light of the aforementioned challenges to ensure that we have adequate liquidity and capital. The Company's Board and management continue to explore all options to strengthen the Company's capital position. Additional weather-related events and actions by reinsurers could adversely affect the Company's ability to access sources of liquidity. There can be no assurances that the Company will be able to obtain additional capital on satisfactory terms, if at all.
As described more fully in Part I, Item 1. Business, Regulation of our 2020 Form 10-K, the Company's insurance operations are subject to the laws and regulations of the states in which we operate. The OIR and their regulatory counterparts in other states utilize theNational Association of Insurance Commissions ("NAIC") risk-based capital ("RBC") requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight. The RBC ratio is a measure of the sufficiency of an insurer's statutory capital and surplus. In addition, the RBC ratio is used by insurance industry ratings services in the determination of the financial strength ratings (i.e., claims paying ability) they assign to insurance companies. Our rating agency,Demotech, Inc. requires a minimum RBC ratio of 300% for a carrier to maintain the "A" rating that our insurance companies currently have. As ofSeptember 30, 2021 andDecember 31, 2020 , FNIC's statutory surplus, which includes MNIC, was$90.9 million and$105.9 million , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , MIC's statutory surplus was$19.3 million and$39.3 million , respectively. FNIC'sSeptember 30, 2021 surplus reflects a surplus infusion of$20 million inNovember 2021 with, effective date as ofSeptember 30, 2021 , as approved by theFlorida regulator. In conjunction with the Company'sNovember 2021 decision to re-focus on itsFlorida homeowners business as discussed under Overview of Insurance Lines of Business - Non-Florida above, the Company intends to execute an orderly runoff of MIC's business. Consequently, no surplus infusion was made to MIC as ofSeptember 30, 2021 . The Company remains committed to maintaining statutory surplus in MIC that satisfies minimum regulatory requirements through the runoff period. As a result of the Company's decision to support Maison to the level of minimum regulatory capital but not to a 300% RBC level, Demotech has withdrawn its rating of Maison. The ratings of FNIC and MNIC remain in place and are independent of this action. As ofSeptember 30, 2021 , the Company has approximately$60 million of liquidity in its holding company and non-regulated subsidiaries (collectively referred to "holding company liquidity"), including$30 million of cash and investments, that is available for general corporate purposes, including supporting the capital requirements of its insurance subsidiaries. This figure was reduced by$20 million inNovember 2021 as a result of the surplus infusion described above. As a result, the Company has approximately$40 million of holding company liquidity heading into the fourth quarter of 2021.
Based upon the 2020 statutory financial statements for FNIC, MIC and MNIC,
statutory surplus exceeded the regulatory action levels established by the
NAIC's RBC requirements.
Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer's statutory surplus to its ACL, as calculated under the NAIC's requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC, MIC and MNIC had ratios of statutory surplus to its ACL of 303%, 736% and 348%, respectively, as ofDecember 31, 2020 . As described above, the Company intends to maintain no less than the minimum required regulatory capital within MIC, but does not intend to maintain a 300% RBC ratio. The Company will continue to closely coordinate with all applicable state insurance departments with respect to its plan of operation throughout the runoff period. Refer to "Part I, Item 1A., Risk Factors" of our 2020 Form 10-K for more information on how over time, additional weather-related events and actions by reinsurers, including loss limitations in reinsurance treaties and our ability to renew existing reinsurance treaties, could adversely affect the Company's ability to maintain a 300% RBC ratio in FNIC and MNIC and minimum required regulatory capital in MIC or FNHC's ability to contribute necessary capital. In addition, because of the valuation allowance on the Company's NOL deferred tax assets, the insurance carriers will not benefit from immediate tax benefits of any future quarterly losses they incur. As such, any surplus infusions required will be large than they would have been if our net deferred tax assets were deemed fully realizable. -48- --------------------------------------------------------------------------------
Cash Flows Discussion
We currently believe that existing cash and investment balances, when combined with anticipated cash flows, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future, including maintaining regulatory minimum capital levels in our insurance carriers. However, our ability to maintain 300% RBC levels in FNIC and MNIC may be dependent on our ability to raise additional capital in the future. There can be no guarantee additional capital will be available to the Company, if needed. Future strategies and catastrophe events would require additional external financing and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that the terms of any such financing would not negatively impact our results of operations.
Operating Activities
Net cash provided by (used in) operating activities was$(90.7) million in the nine months endedSeptember 30, 2021 compared to$(78.8) million in the same period in 2020. This decrease primarily reflects higher reinsurance spend, partially offset by lower expenses from losses and LAE, primarily from reinsurance recoveries.
Investing Activities
Net cash provided by (used in) investing activities was$119.7 million in the nine months endedSeptember 30, 2021 , as compared to$8.9 million in the nine months endedSeptember 30, 2020 . The change primarily reflects lower purchases of debt and equity investment securities of$147.9 million for the nine months endedSeptember 30, 2021 , as compared to$407.6 million for the nine months endedSeptember 30, 2020 , partially offset by lower sales, maturities and redemptions of our debt and equity investment securities of$268.8 million in 2021 as compared to$419.1 million in 2020.
Financing Activities
Net cash provided by (used in) financing activities for the nine months endedSeptember 30, 2021 of$35.5 million as compared to$(14.2) million for the nine months endedSeptember 30, 2020 . The change primarily reflects proceeds from issuance of long-term debt of$20.0 million and issuance of shares of our common stock of$15.6 million in our 2021 public offering as compared to repurchases of$10.4 million ofFedNat Holding Company common stock and payment of dividends of$3.8 million in 2020.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE. Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby materially adversely affect future liability requirements.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP"), which requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates. We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair value measurements of our investments; (ii) accounting for investments; (iii) premium and unearned premium calculation; (iv) reinsurance contracts; (v) the amount and recoverability of deferred acquisition costs and value of business acquired; (vi) goodwill and other intangible assets; (vii) reserve for loss and losses adjustment expenses; and (viii) income taxes. The accounting estimates require the -49- -------------------------------------------------------------------------------- use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.
There have been no significant changes to our critical accounting estimates
during the nine months ended
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Estimates" included in our 2020 Form 10-K for a
more complete description of our critical accounting estimates.
The Hartford promises $2.5 billion to promote carbon-free energy and will pull out of tar-sands investments by end of year [Hartford Courant]
The Hartford promises $2.5 billion to promote carbon-free energy and will pull out of tar sands investments by end of year [Hartford Courant]
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