HCI GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion under this Item 2 in conjunction with
our consolidated financial statements and related notes and information included
elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with
the
context requires otherwise, as used in this Form 10-Q, the terms "HCI," "we,"
"us," "our," "the Company," "our company," and similar references refer to
Group, Inc.
All dollar amounts in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are in whole dollars unless specified
otherwise.
Forward-Looking Statements
In addition to historical information, this quarterly report contains
forward-looking statements as defined under federal securities laws. Such
statements involve risks and uncertainties, such as statements about our plans,
objectives, expectations, assumptions or future events. These statements involve
estimates, assumptions, known and unknown risks, uncertainties and other factors
that could cause actual results to differ materially from any future results,
performances or achievements expressed or implied by the forward-looking
statements. Typically, forward-looking statements can be identified by
terminology such as "anticipate," "estimate," "plan," "project," "continuing,"
"ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and
similar expressions. The important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include but are not limited to the effects of governmental regulation; changes
in insurance regulations; the frequency and extent of claims; uncertainties
inherent in reserve estimates; catastrophic events; changes in the demand for,
pricing of, availability of or collectability of reinsurance; restrictions on
our ability to change premium rates; increased rate pressure on premiums; the
severity and impact of a pandemic; and other risks and uncertainties detailed
herein and from time to time in our
OVERVIEW - General
and casualty insurance, reinsurance, real estate and information technology.
After the reorganization of our business in the first quarter of 2021, we now
manage our operations in the following organizational segments, based on
managerial emphasis and evaluation of financial and operating performances:
a)
HCPCI Insurance Operations
?
Property and casualty insurance
?
Reinsurance and other auxiliary operations
b)
?
Property and casualty insurance
? Information technology c) Real Estate Operations d) Other Operations ? Holding company operations
For the three months ended
insurance operations before intracompany elimination represented 60.5% and
73.9%, respectively, and revenues from
respectively, of total revenues of all operating segments. For the nine months
ended
before intracompany
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elimination represented 66.6% and 76.4%, respectively, and revenues from
Group
operating segments. At
operations' total assets represented 55.9% and 58.7%, respectively, and
Group's
assets of all operating segments. See Note 13 -- "Segment Information" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q for additional information.
HCPCI Insurance Operations
HCPCI provides various forms of residential insurance products such as
homeowners insurance, fire insurance, flood insurance and wind-only insurance.
HCPCI is authorized to write residential property and casualty insurance in the
states of
In 2021, HCPCI began providing quota share reinsurance on all in-force, new and
renewal policies issued by United in the
and/or replacing United policies in two states in
in
In
where HCPCI provides 85% quota share reinsurance on all of United's personal
lines insurance business in the states of
Carolina
31, 2022
of premium and a provisional ceding commission of 25% of premium. In
2022
Reinsurance and other auxiliary operations
We have a
Casualty Insurance Company Ltd.
reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its
exposure to HCPCI and TypTap by depositing funds into a trust account. Claddaugh
may mitigate a portion of its risk through retrocession contracts, however
Claddaugh did not enter into any retrocession contracts for the 2022-2023 treaty
year. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other
auxiliary operations also include claim adjusting and processing services.
has four subsidiaries:
Company
primarily engaged in the property and casualty insurance business and is
currently using internally developed technology to collect and analyze claims
and other supplemental data to generate savings and efficiency for its insurance
operations.
TypTap, TTIG's insurance subsidiary, has been the primary source of our organic
growth in gross written premium since 2016. TypTap's policies in force have
increased from 6,721 in
been successful in using internally developed proprietary technology to
underwrite, select and write policies efficiently. As of
TypTap has been approved to offer
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homeowners coverage in 19 states outside of
operating in 12 states. In addition to the expansion in TypTap business, we also
expect continued growth from the United policies assigned to TypTap through the
renewal rights agreements acquired by HCI.
In 2021, TypTap began providing quota share reinsurance on all in-force, new and
renewal policies issued by United in the
and/or replacing United policies in two states in
in
In
TypTap provides 100% quota share reinsurance on all of United's personal lines
insurance business in the
2023
Simultaneously, TypTap began renewing United's policies in
Information Technology
Our information technology operations include a team of experienced software
developers with extensive knowledge in developing web-based products and
applications for mobile devices. The operations, which are in
Noida,
services that support in-house operations as well as our third-party
relationships with our agency partners and claim vendors. These products include
SAMSTM, HarmonyTM, AtlasViewer® and ClaimColonyTM.
Real Estate Operations
Our real estate operations consist of properties we own and use for our own
operations and multiple properties we own and operate for investment purposes.
Properties used in operations consist of one
insurance operations site in
retail shopping centers, one office building, two marinas, and undeveloped land
near TTIG's headquarters in
In
Florida
planned road improvement project. See Real Estate Investments under Note 4 --
"Investments" to our unaudited consolidated financial statements under Item 1 of
this Quarterly Report on Form 10-Q for additional information.
Other Operations
Holding company operations
Activities of our holding company,
not meet the quantitative and qualitative thresholds for a reportable segment
comprise the operations of this segment.
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Impact of Hurricane Ian
On
dangerous, high-end Category 4 storm. After crossing the
made a second landfall on
pre-tax consolidated basis, estimated gross losses related to Hurricane Ian
totaled
net estimated loss of approximately
loss adjustment expenses, for HCPCI and TypTap were
As a result of Hurricane Ian, the balance of previously accrued benefits under
one multi-year reinsurance contract with retrospective provisions was decreased
by
events, benefits remain available in future periods but at reduced amounts. In
addition, we recognized an allowance for credit losses of approximately
related to Hurricane Ian's unpaid ceded reinsurance recoverable.
On
emergency order in response to Hurricane Ian preventing insurers regulated under
the Florida Insurance Code from cancelling or non-renewing a policy as well as
issuing a notice of cancellation or nonrenewal of a policy between
2022
This rule does not apply to new policies effective on or after
2022
Recent Events
In connection with our quota share reinsurance agreement to provide 100%
reinsurance on all of United's in-force, new and renewal policies in the
and/or replacing United's policies in
On
vested one year subsequent to satisfaction of a market-based vesting condition
on
grant date fair value of
80,339 shares surrendered to satisfy payroll tax liabilities associated with the
vesting of these restricted shares.
On
pursuant to retrospective provisions under our previous two multi-year
reinsurance contracts which were commuted effective
On
stockholders of record on
On
with
debt-to-capital ratio as defined in the credit agreement is set at 67.5% and the
borrowing capacity of the line of credit is set at
the amendment is qualified in its entirety by reference to the Fourth Amendment
to Credit Agreement, which is filed as Exhibit 10.61 to this Quarterly Report on
Form 10-Q.
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three and nine months endedSeptember 30, 2022 and 2021 (dollar amounts in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenue Gross premiums earned$ 181,713 $ 149,809 $ 541,762 $ 420,191 Premiums ceded (74,741 ) (55,577 ) (184,108 ) (145,112 ) Net premiums earned 106,972 94,232 357,654 275,079 Net investment income 18,530 2,520 25,082 9,749
Net realized investment (losses) gains (884 ) 1,232 (1,204 ) 4,952
Net unrealized investment losses
(347 ) (1,869 ) (8,157 ) (649 ) Policy fee income 1,071 1,000 3,180 2,962 Other income 1,312 2,102 3,065 3,502 Total revenue 126,654 99,217 379,620 295,595
Expenses
Losses and loss adjustment expenses 139,794 62,664 299,328 164,332
Policy acquisition and other
underwriting expenses
24,678 23,340 80,949 69,574 General and administrative personnel expenses 15,848 11,537 45,183 31,733 Interest expense 2,813 1,664 4,929 5,743 Debt conversion expense - 1,273 - 1,273 Other operating expenses 7,123 5,243 20,392 14,245 Total expenses 190,256 105,721 450,781 286,900 (Loss) income before income taxes (63,602 ) (6,504 ) (71,161 ) 8,695 Income tax (benefit) expense (12,099 ) (1,636 ) (13,907 ) 2,888 Net (loss) income (51,503 ) (4,868 ) (57,254 ) 5,807 Net loss (income) attributable to noncontrolling interests 544 (1,369 ) (2,783 ) (3,979 ) Net (loss) income after noncontrolling interests$ (50,959 ) $ (6,237 ) $ (60,037 ) $ 1,828 Ratios to Net Premiums Earned: Loss Ratio 130.68 % 66.50 % 83.69 % 59.74 % Expense Ratio 47.18 % 45.69 % 42.35 % 44.56 % Combined Ratio 177.86 % 112.19 % 126.04 % 104.30 % Ratios to Gross Premiums Earned: Loss Ratio 76.93 % 41.83 % 55.25 % 39.11 % Expense Ratio 27.77 % 28.74 % 27.96 % 29.17 % Combined Ratio 104.70 % 70.57 % 83.21 % 68.28 % (Loss) Earnings Per Share Data: Basic$ (5.66 ) $ (0.72 ) $ (6.26 ) $ 0.23 Diluted$ (5.66 ) $ (0.72 ) $ (6.26 ) $ 0.22
Comparison of the Three Months Ended
Ended
Our results of operations for the three months ended
net loss of approximately
approximately
increase in general and administrative personnel expenses, and a
increase in other operating expenses, offset by a
income from our investment portfolio (consisting of net investment income and
net realized and unrealized gains or losses) and a
premiums earned.
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Revenue
Gross Premiums Earned on a consolidated basis for the three months ended
respectively. HCPCI gross premiums earned were
ended
assumed were
to
premiums earned were
period with the increase due to a greater number of policies in force from the
organic growth in TypTap's business and from the business assumed from United
beginning
Premiums Ceded for the three months ended
approximately
37.1%, respectively, of gross premiums earned. The
primarily attributable to higher reinsurance costs for the 2022 contract year
due to an increased overall reinsurance coverage amount as a result of premium
growth and expansion. In addition, ceded premiums were increased by a reversal
of
provisions under multi-year reinsurance contracts due to the effects of
Hurricane Ian.
Our premiums ceded represent costs of reinsurance to cover losses from
catastrophes that exceed the retention levels defined by our catastrophe excess
of loss reinsurance contracts or to assume a proportional share of losses as
defined in a quota share agreement. The rates we pay for reinsurance are based
primarily on policy exposures reflected in gross premiums earned. Reinsurance
costs can be decreased by a reduction in premiums ceded attributable to
retrospective provisions under multi-year reinsurance contracts. For the three
months ended
of Reinsurance Contracts with Retrospective Provisions" under "Critical
Accounting Policies and Estimates."
Net Premiums Written for the three months ended
totaled approximately
written represent the premiums charged on policies issued during a fiscal period
less any applicable reinsurance costs. The decrease in 2022 resulted from an
increase in premiums ceded to reinsurers as described above. We had
approximately 214,000 policies in force at
policies assumed from United) as compared with approximately 156,000 policies in
force at
Net Premiums Earned for the three months ended
approximately
premiums earned less reinsurance costs as described above.
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months endedSeptember 30, 2022 and 2021 (amounts in thousands): Three Months Ended September 30, 2022 2021 Net Premiums Written$ 116,440 $ 118,689 Increase in Unearned Premiums (9,468 ) (24,457 ) Net Premiums Earned$ 106,972 $ 94,232 54
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Net Investment Income for the three months ended
approximately
was primarily attributable to a
investments, a
fixed-maturity securities and a
and cash equivalents. See Net Investment Income (Loss) under Note 4 --
"Investments" to our unaudited consolidated financial statements under Item 1 of
this Quarterly Report on Form 10-Q.
Net Realized Investment Losses for the three months ended
were approximately
for the three months ended
primarily attributable to net realized losses of approximately
selling equity securities during the three months ended
opposed to net realized gains of approximately
securities during the corresponding period in 2021.
Net Unrealized Investment Losses for the three months ended
and 2021 were approximately
was primarily attributable to an overall improvement in the equity market
compared with the three months ended
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
2021, respectively. HCPCI losses and loss adjustment expenses were
for the three months ended
three months ended
to
expenses for TypTap were
period. The increase was attributable to
Hurricane Ian,
in force,
any subsequent renewal or replacement of United policies, and
prior period loss development. See "Reserves for Losses and Loss Adjustment
Expenses" under "Critical Accounting Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the three months ended
consolidated basis, respectively, and primarily reflect the amortization of
deferred acquisition costs such as commissions payable to agents for production
and renewal of policies, catastrophe allowance payable to United, and premium
taxes. Policy acquisition expenses for HCPCI insurance operations were
to amortization of decreased costs associated with the policies assumed from
United or any subsequent renewal or replacement of United policies. An increase
in policy acquisition costs primarily results from premium growth.
policy acquisition expenses were
comparative period, with the increase attributable to amortization of increased
commission costs related to the growth of TypTap's policies in force over the
past 12 months.
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General and Administrative Personnel Expenses for the three months ended
respectively. Our general and administrative personnel expenses include
salaries, wages, payroll taxes, stock-based compensation expenses, and employee
benefit costs. Factors such as merit increases, changes in headcount, and
periodic restricted stock grants, among others, cause fluctuations in this
expense. In addition, our personnel expenses are decreased by the capitalization
of payroll costs related to a project to develop software for internal use and
the payroll costs associated with the processing and settlement of certain
catastrophe claims which are recoverable from reinsurers under reinsurance
contracts. The period-over-period increase of
attributable to an increase in the headcount of temporary and full-time
employees, merit increases for non-executive employees effective in late
Interest Expense for the three months ended
approximately
resulted from interest expense related to our 4.75% convertible senior notes
issued in
during the second half of 2021.
Income Tax Benefits for the three months ended
approximately
foreign income taxes resulting in effective tax rates of 19.0% and 25.2%,
respectively. The decrease in the effective tax rate was primarily attributable
to a valuation allowance established during the third quarter of 2022 and an
increase in non-deductible compensation expense related to certain executive
compensation, offset by the increased
Ratios:
The loss ratio applicable to the three months ended
and loss adjustment expenses incurred related to net premiums earned) was 130.7%
compared with 66.5% for the three months ended
was primarily due to the increase in losses and loss adjustment expenses due to
Hurricane Ian, offset in part by the increase in net premiums earned.
The expense ratio applicable to the three months ended
(defined as total expenses excluding losses and loss adjustment expenses related
to net premiums earned) was 47.2% compared with 45.7% for the three months ended
to the increase in general and administrative personnel and other operating
expenses, offset in part by the decrease in debt conversion expense.
The combined ratio (total of all expenses in relation to net premiums earned) is
the measure of overall underwriting profitability before other income. Our
combined ratio for the three months ended
with 112.2% for the three months ended
was attributable to the factors described above.
Due to the impact our reinsurance costs have on net premiums earned from period
to period, our management believes the combined ratio measured to gross premiums
earned is more relevant in assessing overall performance. The combined ratio to
gross premiums earned for the three months ended
compared with 70.6% for the three months ended
in 2022 was primarily attributable to the increase in losses and loss adjustment
expenses due to Hurricane Ian, offset by the increase in gross premiums earned.
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Comparison of the Nine Months Ended
Our results of operations for the nine months ended
net loss of approximately
income of approximately
nine months ended
primarily due to a
a
offset by an increase in net premiums earned of
increase in income from our investment portfolio (consisting of net investment
income and net realized and unrealized gains/losses), and an
in interest expense.
Revenue
Gross Premiums Earned on a consolidated basis for the nine months ended
respectively. HCPCI gross premiums earned were
ended
assumed were
to
premiums earned were
period with the increase due to a greater number of policies in force from the
organic growth in TypTap's business and from the business assumed from United
beginning
Premiums Ceded for the nine months ended
approximately
and 34.5%, respectively, of gross premiums earned. The
primarily attributable to higher reinsurance costs for the 2022 contract year
due to an increased overall reinsurance coverage amount as a result of premium
growth and expansion. In addition, ceded premiums were increased by a reversal
of
provisions under multi-year reinsurance contracts due to the effects of
Hurricane Ian.
For the nine months ended
of
of
of Reinsurance Contracts with Retrospective Provisions" under "Critical
Accounting Policies and Estimates."
Net Premiums Written for the nine months ended
totaled approximately
earlier.
Net Premiums Earned for the nine months ended
approximately
premiums earned less reinsurance costs as described above.
The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the nine months endedSeptember 30, 2022 and 2021 (amounts in thousands): Nine Months Ended September 30, 2022 2021 Net Premiums Written$ 370,519 $ 339,980 Increase in Unearned Premiums (12,865 ) (64,901 ) Net Premiums Earned$ 357,654 $ 275,079 57
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Net Investment Income for the nine months ended
approximately
was primarily attributable to a
investments, a
fixed-maturity securities and a
and cash equivalents. See Net Investment Income (Loss) under Note 4 --
"Investments" to our unaudited consolidated financial statements under Item 1 of
this Quarterly Report on Form 10-Q.
Net Unrealized Investment Losses for the nine months ended
and 2021 were approximately
was primarily attributable to an overall deterioration in the equity market
compared with the nine months ended
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately
2021, respectively. HCPCI losses and loss adjustment expenses were
for the nine months ended
nine months ended
losses attributable to the United policies due to an increase in the number of
policies assumed from United or any subsequent renewal or replacement of United
policies. Losses and loss adjustment expenses for TypTap were
versus
attributable to
of losses due to the greater number of TypTap policies in force,
additional losses from policies assumed from United or any subsequent renewal or
replacement of United policies, and
"Reserves for Losses and Loss Adjustment Expenses" under "Critical Accounting
Policies and Estimates."
Policy Acquisition and Other Underwriting Expenses for the nine months ended
consolidated basis, respectively. Policy acquisition expenses for HCPCI
insurance operations were
2022
increase was due to amortization of increased costs associated with the policies
assumed from United or any subsequent renewal or replacement of United policies.
the same comparative period, with the increase attributable to amortization of
increased commission costs related to the growth of TypTap's policies in force
over the past 12 months and the policies assumed from United or any subsequent
renewal or replacement of United policies.
General and Administrative Personnel Expenses for the nine months ended
respectively. The period-over-period increase of
attributable to an increase in the headcount of temporary and full-time
employees, merit increases for non-executive employees effective in late
Interest Expense for the nine months ended
approximately
resulted from conversions of our 4.25% convertible senior notes during the
second half of 2021, offset by interest expense related to our 4.75% convertible
senior notes issued in
Income Tax Benefit for the nine months ended
approximately
in an effective tax rate of 19.5% for 2022. This compared with approximately
resulting in an effective tax rate of 33.2% for 2021. The decrease in the
effective tax rate was primarily attributable to a valuation
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allowance established during the third quarter of 2022 and the recognition of
tax benefits attributable to restricted stock that vested in February and May of
2022.
Ratios:
The loss ratio applicable to the nine months ended
and loss adjustment expenses incurred related to net premiums earned) was 83.7%
compared with 59.7% for the nine months ended
was primarily due to the increase in losses and loss adjustment expenses as
further described above, offset in part by the increase in net premiums earned.
The expense ratio applicable to the nine months ended
42.3% compared with 44.6% for the nine months ended
decrease in our expense ratio was primarily attributable to the increase in net
premiums earned and the decrease in debt conversion expense, offset in part by
the increase in policy acquisition, underwriting and personnel expenses.
The combined ratio is the measure of overall underwriting profitability before
other income. Our combined ratio for the nine months ended
was 126.0% compared with 104.3% for the nine months ended
The increase in 2022 was attributable to the factors described above.
Due to the impact our reinsurance costs have on net premiums earned from period
to period, our management believes the combined ratio measured to gross premiums
earned is more relevant in assessing overall performance. The combined ratio to
gross premiums earned for the nine months ended
compared with 68.3% for the nine months ended
in 2022 was primarily attributable to the increase in losses and loss adjustment
expenses, offset by the increase in gross premiums earned.
Seasonality of Our Business
Our insurance business is seasonal as hurricanes and tropical storms affecting
during the period from
storms in the northeast usually occur during the period
March 31st
effective
whether due to changes in reinsurance rates, coverage levels or changes in the
total insured value of our policy base, will occur and be reflected in our
financial results beginning
LIQUIDITY AND CAPITAL RESOURCES
Throughout our history, our liquidity requirements have been met through
issuances of our common and preferred stock, debt offerings and funds from
operations. We expect our future liquidity requirements will be met by funds
from operations, primarily the cash received by our insurance subsidiaries from
premiums written and investment income. We may consider raising additional
capital through debt and equity offerings to support our growth and future
investment opportunities.
Our insurance subsidiaries require liquidity and adequate capital to meet
ongoing obligations to policyholders and claimants and to fund operating
expenses. In addition, we attempt to maintain adequate levels of liquidity and
surplus to manage any differences between the duration of our liabilities and
invested assets. In the insurance industry, cash collected for premiums from
policies written is invested, interest and dividends are earned thereon, and
losses and loss adjustment expenses are paid out over a period of years. This
period of time varies by the circumstances surrounding each claim. With the
exception of litigated claims, substantially all of our losses and loss
adjustment expenses are fully settled and paid within 100 days of the claim
receipt date.
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Additional cash outflow occurs through payments of underwriting costs such as
commissions, taxes, payroll, and general overhead expenses.
We believe that we maintain sufficient liquidity to pay claims and expenses, as
well as to satisfy commitments in the event of unforeseen events such as
reinsurer insolvencies, inadequate premium rates, or reserve deficiencies. We
maintain a comprehensive reinsurance program at levels management considers
adequate to diversify risk and safeguard our financial position.
In the future, we anticipate our primary use of funds will be to pay claims,
reinsurance premiums, interest, and dividends and to fund operating expenses and
real estate acquisitions.
Revolving Credit Facility, Convertible Senior Notes, Promissory Notes, and
Finance Leases
The following table summarizes the principal and interest payment obligations of
our indebtedness at
Maturity Date Payment Due Date
4.75% Convertible Senior June 2042 June 1 and December 1**
Notes*
4.25% Convertible Senior March 2037 March 1 and September 1
Notes
3.75% Callable Through September 2036 1st day of each month
Promissory Note
4.55% Promissory Note Through August 2036 1st day of each month
3.90% Promissory Note Through April 2032 1st day of each month
Finance leases Through October 2024 Various
Revolving credit Through December 2023 January 1, April 1, July 1, October 1
facility
* At the option of the noteholders, we may be required to repurchase for cash
all or any portion of the notes on
2037.
** The cash interest is payable semiannually in arrears on
of each year, beginning on
See Note 10 -- "Long-Term Debt" to our unaudited consolidated financial
statements under Item 1 of this Quarterly Report on Form 10-Q.
Share Repurchase Plan
In
common shares during 2022 under which we may purchase shares of common stock in
open market purchases, block transactions and privately negotiated transactions
in accordance with applicable federal securities laws. At
there was approximately
"Equity" to our unaudited consolidated financial statements under Item 1 of this
Quarterly Report on Form 10-Q for more information.
Limited Partnership Investments
Our limited partnership investments consist of six private equity funds managed
by their general partners. Two of these funds have unexpired capital commitments
which are callable at the discretion of the fund's general partner for funding
new investments or expenses of the fund. Although capital commitments for four
of the remaining funds have expired, the general partners may request additional
funds under certain circumstances. At
unfunded capital balance of
under Note 4 -- "Investments" to our unaudited consolidated financial statements
under Item 1 of this Quarterly Report on Form 10-Q for additional information.
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Real estate has long been a significant component of our overall investment
portfolio. It diversifies our portfolio and helps offset the volatility of other
higher-risk investments. Thus, we may consider increasing our real estate
investment portfolio should an opportunity arise.
We currently have a 90% equity interest in
liability company for which we are not the primary beneficiary. In
FMKT Mel JV sold its last outparcel and recognized a net gain of
Mel JV distributed its earnings during the third quarter of 2022 and is expected
to be liquidated by
Sources and Uses of Cash
Cash Flows for the Nine Months Ended
Net cash used in operating activities for the nine months ended
2022
for operating expenses, losses and loss adjustment expenses and interest
payments less cash received from net premiums written and reinsurance recoveries
(of approximately
securities of
offset by the proceeds from calls, repayments and maturities of fixed-maturity
securities of
securities of
relinquished through eminent domain, and distributions received from limited
partnership investments of
totaled
4.75% Convertible Senior Notes of
repurchases, net repayment of our revolving credit facility of
Cash Flows for the Nine Months Ended
Net cash provided by operating activities for the nine months ended
30, 2021
received from net premiums written, reinsurance recoveries (of approximately
adjustment expenses and interest payments. Net cash provided by investing
activities of
fixed-maturity and equity securities of
repayments and maturities of fixed-maturity securities of
distributions received from limited partnership investments of
offset by the purchases of fixed-maturity and equity securities of
and the purchases of property and equipment of
financing activities totaled
net cash dividend payments, net repayment of our revolving credit facility of
Investments
The main objective of our investment policy is to maximize our after-tax
investment income with a reasonable level of risk given the current financial
market. Our excess cash is invested primarily in money market accounts,
certificates of deposit, and fixed-maturity and equity securities.
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At
investments, which are carried at fair value. Changes in the general interest
rate environment affect the returns available on new fixed-maturity investments.
While a rising interest rate environment enhances the returns available on new
investments, it reduces the market value of existing fixed-maturity investments
and thus the availability of gains on disposition. A decline in interest rates
reduces the returns available on new fixed-maturity investments but increases
the market value of existing fixed-maturity investments, creating the
opportunity for realized investment gains on disposition.
In the future, we may alter our investment policy as to investments in federal,
state and municipal obligations, preferred and common equity securities and real
estate mortgages, as permitted by applicable law, including insurance
regulations.
OFF-BALANCE SHEET ARRANGEMENTS
As of
partnerships in which we hold interests. Such commitments are not recognized in
the financial statements but are required to be disclosed in the notes to the
financial statements. See Note 20 -- "Commitments and Contingencies" to our
unaudited consolidated financial statements under Item 1 of this Quarterly
Report on Form 10-Q for additional information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in
GAAP"). The preparation of these consolidated financial statements requires us
to make estimates and judgments to develop amounts reflected and disclosed in
our financial statements. Material estimates that are particularly susceptible
to significant change in the near term are related to our losses and loss
adjustment expenses, which include amounts estimated for claims incurred but not
yet reported. We base our estimates on various assumptions and actuarial data we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates.
We believe our accounting policies specific to losses and loss adjustment
expenses, reinsurance recoverable, reinsurance with retrospective provisions,
deferred income taxes, stock-based compensation expense, limited partnership
investments, acquired intangible assets, warrants, and redeemable noncontrolling
interest involve our most significant judgments and estimates material to our
consolidated financial statements.
Reserves for Losses and Loss Adjustment Expenses
Our liability for losses and loss adjustment expense ("Reserves") is specific to
property insurance, which is our insurance subsidiaries' only line of business.
The Reserves include both case reserves on reported claims and our reserves for
incurred but not reported ("IBNR") losses. At each period end date, the balance
of our Reserves is based on our best estimate of the ultimate cost of each claim
for those known cases and the IBNR loss reserves are estimated based primarily
on our historical experience. Changes in the estimated liability are charged or
credited to operations as the losses and loss adjustment expenses are adjusted.
The IBNR represents our estimate of the ultimate cost of all claims that have
occurred but have not been reported to us, and in some cases may not yet be
known to the insured, and future development of reported claims. Estimating the
IBNR component of our Reserves involves considerable judgment on the part of
management. At
have reserved for losses and loss adjustment expenses is attributable to our
estimate of IBNR. The remaining
been reported but not yet fully settled in which case we have established a
reserve based on currently available information and our best estimate of the
cost to settle each claim. At
in reserves for known cases relates to claims incurred during prior years.
62
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Our Reserves increased from
at
in reserves established for the 2022 loss year, offset by reductions in our
Reserves of
Sally and Tropical Storm Eta, and reductions in our non-catastrophe Reserves of
established for 2022 claims is primarily driven by an allowance for those claims
that have been incurred but not reported to the company as of
2022
reserves is due to settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at
2022
date including losses yet to be reported to us. However, these estimates are
continually reviewed by management as they are subject to significant
variability and may be impacted by trends in claim severity and frequency or
unusual exposures that have not yet been identified. As part of the process, we
review historical data and consider various factors, including known and
anticipated regulatory and legal developments, changes in social attitudes,
inflation and economic conditions. As experience develops and other data becomes
available, these estimates are revised, as required, resulting in increases or
decreases to the existing unpaid losses and loss adjustment expenses.
Adjustments are reflected in the results of operations in the period in which
they are made, and the liabilities may deviate substantially from prior
estimates.
Economic Impact of Reinsurance Contracts with Retrospective Provisions
From time to time, our reinsurance contracts may include retrospective
provisions that adjust premiums in the event losses are minimal or zero. In
accordance with accounting principles generally accepted in
America
experience obligates the reinsurer to pay cash or other consideration under the
contract. In the event that a loss arises, we will derecognize such asset in the
period in which a loss arises. Such adjustments to the asset, which accrue
throughout the contract term, will negatively impact our operating results when
a catastrophic loss event occurs during the contract term.
Due to Hurricane Ian, the balance of previously accrued benefits under one
multi-year reinsurance contract with retrospective provisions was decreased by
respectively. For the nine months ended
benefits of
was recognized as a reduction in ceded premiums.
As of
that would be charged to earnings in the event we experience a catastrophic loss
that exceeds the coverage limit provided under such agreement.
We believe the credit risk associated with the collectability of accrued
benefits is minimal based on available information about each reinsurer's
financial position and each reinsurer's demonstrated ability to comply with
contract terms. In
previous two multi-year reinsurance contracts which were commuted in
The above and other accounting estimates and their related risks that we
consider to be our critical accounting estimates are more fully described in our
Annual Report on Form 10-K, which we filed with the
the nine months ended
changes with respect to any of our critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements or changes in recent
accounting pronouncements during the nine months ended
compared to those described in our Annual Report on Form
63
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10-K for the fiscal year ended
potential significance, to the Company.
64
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CONIFER HOLDINGS, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FG Financial Group, Inc. Reports Third Quarter Financial Results
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