ITEM 2 – 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 Securities and Exchange Commission (“SEC”) on March 10, 2022. Unless 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 HCI Group, Inc., a Florida corporation incorporated in 2006, and its subsidiaries. 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 the novel coronavirus (“COVID-19”) pandemic; and other risks and uncertainties detailed herein and from time to time in our SEC reports.
OVERVIEW – General
HCI Group, Inc. is a Florida-based InsurTech company with operations in property 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
▪Property and casualty insurance
▪Holding company operations
For the three months ended March 31, 2022 and 2021, revenues from HCPCI insurance operations before intracompany elimination represented 69.8% and 77.7%, respectively, and revenues from TypTap Group represented 28.3% and 17.2%, respectively, of total revenues of all operating segments. At March 31, 2022 and December 31, 2021, HCPCI insurance operations’ total assets represented 55.6% and 58.7%, respectively, and
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TypTap Group’s total assets represented 32.3% and 29.3%, respectively, of the combined 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
Property and Casualty Insurance
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 Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina and Texas. Currently, Florida is HCPCI’s primary market.
In 2021, HCPCI began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. HCPCI began renewing and/or replacing United policies in two states in December 2021 and a third state in January 2022.
In February 2022, HCPCI entered into another reinsurance agreement with United where HCPCI provides 85% quota share reinsurance on all of United’s personal lines insurance business in the states of Georgia, North Carolina, and South Carolina (collectively “Southeast Region”) from December 31, 2021 through May 31, 2022. Under this agreement, HCPCI paid United a catastrophe allowance of 9% of premium and a provisional ceding commission of 25% of premium. That percentage could increase up to 32% depending on the direct loss ratio results from the reinsured business.
Reinsurance and other auxiliary operations
We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd. We selectively retain risk in Claddaugh, 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. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services.
TypTap Group
Property and Casualty Insurance
TypTap Insurance Group, Inc. (“TTIG”), our majority-owned subsidiary, currently has four subsidiaries: TypTap Insurance Company (“TypTap”), TypTap Management Company, Exzeo USA, Inc., and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India. TTIG is primarily engaged in the property and casualty insurance business and is currently using in-house 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 January 2018 to 68,748 at March 31, 2022. TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently. As of April 20, 2022, TypTap has been approved to offer homeowners coverage in 18 states outside of Florida. TypTap is currently operating in twelve 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.
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In 2021, TypTap began providing quota share reinsurance on all in-force, new and renewal policies issued by United in the Northeast Region. TypTap began renewing and/or replacing United policies in two states in December 2021 and a third state in January 2022.
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 Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products and 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 Tampa office building and an insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, one office building, two marinas, and undeveloped land near TTIG’s headquarters in Tampa, Florida.
Other Operations
Holding company operations
Activities of our holding company, HCI Group, Inc., plus other companies that do not meet the quantitative and qualitative thresholds for a reportable segment comprise the operations of this segment.
Recent Events
On April 26, 2022, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on June 17, 2022 to stockholders of record on May 17, 2022.
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (dollar amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Revenue |
|
|
|
|
|
|
Gross premiums earned |
|
$ |
178,925 |
|
|
$ |
130,942 |
|
Premiums ceded |
|
|
(53,162 |
) |
|
|
(43,099 |
) |
Net premiums earned |
|
|
125,763 |
|
|
|
87,843 |
|
Net investment income |
|
|
2,868 |
|
|
|
4,594 |
|
Net realized investment (losses) gains |
|
|
(314 |
) |
|
|
1,113 |
|
Net unrealized investment losses |
|
|
(3,576 |
) |
|
|
(269 |
) |
Policy fee income |
|
|
1,057 |
|
|
|
970 |
|
Other income |
|
|
1,242 |
|
|
|
623 |
|
Total revenue |
|
|
127,040 |
|
|
|
94,874 |
|
Expenses |
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
72,704 |
|
|
|
45,751 |
|
Policy acquisition and other underwriting expenses |
|
|
29,408 |
|
|
|
23,065 |
|
General and administrative personnel expenses |
|
|
14,034 |
|
|
|
9,650 |
|
Interest expense |
|
|
601 |
|
|
|
2,079 |
|
Other operating expenses |
|
|
6,292 |
|
|
|
4,227 |
|
Total expenses |
|
|
123,039 |
|
|
|
84,772 |
|
Income before income taxes |
|
|
4,001 |
|
|
|
10,102 |
|
Income tax expense |
|
|
1,210 |
|
|
|
3,257 |
|
Net income |
|
|
2,791 |
|
|
|
6,845 |
|
Net income attributable to noncontrolling interests |
|
|
(1,888 |
) |
|
|
(697 |
) |
Net income after noncontrolling interests |
|
$ |
903 |
|
|
$ |
6,148 |
|
Ratios to Net Premiums Earned: |
|
|
|
|
|
|
Loss Ratio |
|
|
57.81 |
% |
|
|
52.08 |
% |
Expense Ratio |
|
|
40.02 |
% |
|
|
44.91 |
% |
Combined Ratio |
|
|
97.83 |
% |
|
|
96.99 |
% |
Ratios to Gross Premiums Earned: |
|
|
|
|
|
|
Loss Ratio |
|
|
40.63 |
% |
|
|
34.94 |
% |
Expense Ratio |
|
|
28.14 |
% |
|
|
30.13 |
% |
Combined Ratio |
|
|
68.77 |
% |
|
|
65.07 |
% |
Earnings Per Share Data: |
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
0.82 |
|
Diluted |
|
$ |
0.09 |
|
|
$ |
0.75 |
|
Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021
Our results of operations for the three months ended March 31, 2022 reflect net income of approximately $2,791,000 or $0.09 diluted earnings per share, compared with approximately $6,845,000 or $0.75 diluted earnings per share, for the three months ended March 31, 2021. The quarter-over-quarter decrease was primarily due to a $26,953,000 increase in losses and loss adjustment expenses, a net decrease in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses) of $6,460,000, a $6,449,000 increase in personnel and other operating expenses, and a $6,343,000 increase in policy acquisition and other underwriting expenses, offset by an increase in net premiums earned of $37,920,000 and a $1,478,000 decrease in interest expense.
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Revenue
Gross Premiums Earned on a consolidated basis for the three months ended March 31, 2022 and 2021 were approximately $178,925,000 and $130,942,000, respectively. HCPCI gross premiums earned were $118,303,000 for the three months ended March 31, 2022 compared to $102,131,000 for the three months ended March 31, 2021. Gross premiums earned from the United insurance policies assumed were $30,079,000 for the three months ended March 31, 2022 compared to $20,650,000 for the three months ended March 31, 2021. TypTap’s gross premiums earned were $60,622,000 versus $28,811,000 for the same comparative 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 June 1, 2021.
Premiums Ceded for the three months ended March 31, 2022 and 2021 were approximately $53,162,000 and $43,099,000, respectively, representing 29.7% and 32.9%, respectively, of gross premiums earned. The $10,063,000 increase was primarily attributable to higher reinsurance costs effective June 1, 2021 due to an increased overall reinsurance coverage amount as a result of premium growth and expansion.
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 March 31, 2022, premiums ceded included a decrease of $1,484,000 related to retrospective provisions compared with a decrease of $4,680,000 for the three months ended March 31, 2021. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”
Net Premiums Written for the three months ended March 31, 2022 and 2021 totaled approximately $124,132,000 and $82,749,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2022 resulted from an increase in gross premiums written from the United insurance policies assumed and the growth of TypTap business. We had approximately 211,800 policies in force at March 31, 2022 (excluding policies assumed from United) as compared with approximately 154,000 policies in force at March 31, 2021.
Net Premiums Earned for the three months ended March 31, 2022 and 2021 were approximately $125,763,000 and $87,843,000, respectively, and reflect the gross 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 ended March 31, 2022 and 2021 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Net Premiums Written |
|
$ |
124,132 |
|
|
$ |
82,749 |
|
Decrease in Unearned Premiums |
|
|
1,631 |
|
|
|
5,094 |
|
Net Premiums Earned |
|
$ |
125,763 |
|
|
$ |
87,843 |
|
Net Investment Income for the three months ended March 31, 2022 and 2021 was approximately $2,868,000 and $4,594,000, respectively. The $1,726,000 decrease was primarily attributable to a $2,650,000 decrease in income from real estate investments, offset by a $993,000 increase in income from limited partnership investments. 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.
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Net Realized Investment Losses for the three months ended March 31, 2022 were approximately $314,000 versus $1,113,000 of net realized investment gains for the three months ended March 31, 2021. The $1,427,000 decrease was primarily attributable to net gains from selling equity securities and other investments during 2021.
Net Unrealized Investment Losses for the three months ended March 31, 2022 and 2021 were approximately $3,576,000 and $269,000, respectively. The net unrealized investment loss for the three months ended March 31, 2022 was primarily attributable to an overall decline in the equity market compared with the three months ended March 31, 2021.
Expenses
Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $72,704,000 and $45,751,000 for the three months ended March 31, 2022 and 2021, respectively. HCPCI losses and loss adjustment expenses were $43,995,000 for the three months ended March 31, 2022 compared to $33,439,000 for the three months ended March 31, 2021. The increase was primarily attributable to $4,197,000 of losses associated with growth in HCPCI’s Florida portfolio, a $6,070,000 net increase in losses attributable to the United policies assumed due to an increase in the number of policies assumed from United and weather-related losses incurred during the first quarter of 2022. Losses and loss adjustment expenses for TypTap were $28,988,000 versus $12,312,000 for the same comparative period. The increase was attributable to the greater number of TypTap policies in force. 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 March 31, 2022 and 2021 were approximately $29,408,000 and $23,065,000 on a 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 $19,765,000 for the three months ended March 31, 2022 compared to $17,571,000 for the three months ended March 31, 2021. The increase was due to amortization of increased costs associated with the increase in the number of policies assumed from United. TypTap Group policy acquisition expenses were $9,705,000 versus $5,678,000 for 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.
General and Administrative Personnel Expenses for the three months ended March 31, 2022 and 2021 were approximately $14,034,000 and $9,650,000, 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 $4,384,000 was primarily attributable to increased stock-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2022.
Interest Expense for the three months ended March 31, 2022 and 2021 was approximately $601,000 and $2,079,000, respectively. The decrease primarily resulted from conversions of our 4.25% convertible senior notes during the second half of 2021.
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Income Tax Expense for the three months ended March 31, 2022 and 2021 was approximately $1,210,000 and $3,257,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 30.2% for 2022 and 32.2% for 2021. The decrease in the effective tax rate was primarily due to the recognition of tax benefits attributable to restricted stock that vested in February 2022, offset by the increased Florida corporate tax rate effective January 1, 2022.
Ratios:
The loss ratio applicable to the three months ended March 31, 2022 (losses and loss adjustment expenses incurred related to net premiums earned) was 57.8% compared with 52.1% for the three months ended March 31, 2021. The increase 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 three months ended March 31, 2022 (defined as total expenses excluding losses and loss adjustment expenses related to net premiums earned) was 40.0% compared with 44.9% for the three months ended March 31, 2021. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in interest expense, offset by the increase in policy acquisition, underwriting and personnel expenses.
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 March 31, 2022 was 97.8% compared with 97.0% for the three months ended March 31, 2021. The slight 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 three months ended March 31, 2022 was 68.8% compared with 65.1% for the three months ended March 31, 2021. The increase 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 Florida, our primary market, and other southeastern states typically occur during the period from June 1st through November 30th of each year. Winter storms in the northeast usually occur during the period between December 1st and March 31st of each year. Also, with our reinsurance treaty year typically effective June 1st of each year, any variation in the cost of our reinsurance, 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 June 1st of each year.
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
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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. 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 March 31, 2022:
|
|
|
|
Maturity Date |
Payment Due Date |
4.25% Convertible Senior Notes |
March 2037 |
March 1 and September 1 |
3.75% Callable Promissory Note |
Through September 2036 |
1st day of each month |
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 facility |
Through December 2023 |
January 1, April 1, July 1, October 1 |
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 March 2022, the Board approved a plan to repurchase up to $20,000,000 of 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. See Note 18 -- “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. Four 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 two of the remaining funds have expired, the general partners may request additional funds under certain circumstances. At March 31, 2022, there was an aggregate unfunded capital balance of $7,750,000. See Limited Partnership 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.
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Real Estate Investment
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 FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary. FMKT Mel JV’s real estate portfolio consists of an outparcel for ground lease or sale. We have the option to take full ownership of this outparcel by acquiring the remaining 10% interest. Alternatively, we may sell this outparcel and allocate the profits from the sale before liquidating FMKT Mel JV.
Sources and Uses of Cash
Cash Flows for the Three Months Ended March 31, 2022
Net cash provided by operating activities for the three months ended March 31, 2022 was approximately $57,349,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $7,936,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $109,899,000 was primarily due to the purchases of fixed-maturity and equity securities of $134,043,000, the purchase of intangible assets from United of $3,800,000, and the purchases of property and equipment of $1,861,000, offset by the proceeds from sales of fixed-maturity and equity securities of $27,427,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $1,250,000, and distributions received from limited partnership investments of $785,000. Net cash used in financing activities totaled $7,328,000, which was primarily due to $4,046,000 of net cash dividend payments, cash dividends paid to redeemable noncontrolling interest of $2,508,000, $398,000 of share repurchases, and repayments of long-term debt of $249,000.
Cash Flows for the Three Months Ended March 31, 2021
Net cash provided by operating activities for the three months ended March 31, 2021 was approximately $36,140,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $13,543,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $19,141,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $34,378,000, the proceeds from calls, repayments and maturities of fixed-maturity securities of $12,486,000, and distributions received from limited partnership investments of $1,546,000, offset by the purchases of fixed-maturity and equity securities of $28,391,000, and the purchases of property and equipment of $697,000. Net cash provided by financing activities totaled $66,784,000, which consisted of net proceeds of $93,738,000 from Centerbridge for investment in TTIG, offset by $2,793,000 of net cash dividend payments, and net repayment of our revolving credit facility of $23,750,000.
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.
At March 31, 2022, we had $191,888,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the
47
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 March 31, 2022, we had unexpired capital commitments for limited 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 the United States of America (“U.S. 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 March 31, 2022, $172,959,000 of the total $234,792,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $61,833,000 relates to known cases which have 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 March 31, 2022, $49,063,000 of the $61,833,000 in reserves for known cases relates to claims incurred during prior years.
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Our Reserves decreased from $237,165,000 at December 31, 2021 to $234,792,000 at March 31, 2022. The $2,373,000 decrease is comprised of reductions in our Reserves of $9,193,000 specific to Hurricane Irma, Hurricane Michael, Hurricane Sally and Tropical Storm Eta, and reductions in our non-catastrophe Reserves of $33,673,000 for 2021 and $10,787,000 for 2020 and prior loss years, offset by $51,280,000 in reserves established for the 2022 loss year. The Reserves 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 March 31, 2022. The decrease of $53,653,000 specific to our 2021 and prior loss-year reserves is due to settlement of claims related to those loss years.
Based on all information known to us, we consider our Reserves at March 31, 2022 to be adequate to cover our claims for losses that have occurred as of that 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
Two of our reinsurance contracts include retrospective provisions that adjust premiums in the event losses are minimal or zero. In accordance with accounting principles generally accepted in the United States of America, we will recognize an asset in the period in which the absence of loss experience obligates the reinsurer to pay cash or other consideration under the contract. In the event that a loss arises, we will derecognize such asset in the period in which a loss arises. Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.
For the three months ended March 31, 2022 and 2021, we accrued benefits of $1,484,000 and $4,680,000, respectively. The accrual of benefits was recognized as a reduction in ceded premiums.
As of March 31, 2022, we had $4,548,000 of accrued benefits, the amount 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 the reinsurer’s financial position and the reinsurer’s demonstrated ability to comply with contract terms.
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 SEC on March 10, 2022. For the three months ended March 31, 2022, there have been no other material 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 three months ended March 31, 2022, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that are of significance, or potential significance, to the Company.
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