HCI Group, Inc.: Form 10-Q for the period ended Sep 30, 2024

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 8, 2024. 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 a 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 company with operations in property and casualty insurance, information technology services, insurance management, real estate and reinsurance. We utilize innovative technology to promote efficiency, refine risk assessment and enhance experiences for clients throughout the insurance process. As described in Change in Segment Information under Note 1 -- “Nature of Operations” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q, our recent organizational change has moved two insurance subsidiaries into one single operating segment to enhance operational efficiency and simplify financial reporting. Accordingly, we manage our operations in the following organizational segments, based on managerial emphasis and evaluation of financial and operating performances:

a) Insurance Operations

• Property and casualty insurance
• Reinsurance and other auxiliary operations

b) TypTap Group

• Insurance management services
• Information technology
• Reinsurance brokerage services

c) Reciprocal Exchange Operations d) Real Estate Operations e) Other Operations

• Holding company operations

For the three months ended September 30, 2024 and 2023, revenues from insurance operations before intracompany elimination represented 82.7% and 87.6%, respectively, and revenues from TypTap Group represented 11.0% and 11.0%, respectively, of total revenues of all operating segments. For the nine months ended September 30, 2024 and 2023, revenues from insurance operations before intracompany elimination represented 84.5% and 86.9%, respectively, and revenues from TypTap Group represented 10.8% and 11.6%, respectively, of total revenues of all operating segments. At September 30, 2024 and December 31, 2023, insurance operations’ total assets represented 84.2% and 87.0%, respectively, and TypTap Group’s total assets represented 2.9% and 1.9%, respectively, of the combined assets of all operating segments. See Note 14 -- “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Insurance Operations

Property and Casualty Insurance

We currently have two insurance subsidiaries: Homeowners Choice Property & Casualty Insurance Company, Inc. (“HCPCI”) and TypTap Insurance Company (“TypTap”). We provide various forms of residential insurance products such as homeowners insurance, fire insurance, and wind-only insurance. We are authorized to write residential property and casualty insurance in the states of Alaska, Arizona, Arkansas, California, Connecticut, Florida, Georgia, Kansas, Kentucky, Maryland, Massachusetts, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, and Washington. Currently, our primary market is Florida. We utilize internally developed software technologies to drive efficiency in claim processing and claims settlements, identify profitable underwriting opportunities, generate savings and streamline operations across its insurance operations.

Reinsurance and other auxiliary operations

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd (“Claddaugh”). We selectively retain risk in Claddaugh, reducing the cost of third-party reinsurance. Claddaugh fully collateralizes its exposure to HCPCI, TypTap, and CORE 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 2024-2025 treaty year. Currently, Claddaugh does not provide reinsurance to non-affiliates. Other auxiliary operations also include claim adjusting and processing services.

TypTap Group

TypTap Insurance Group, Inc. (“TTIG”), our majority-owned subsidiary, currently has four subsidiaries: TypTap Management Company (“TTM”), Exzeo USA, Inc., Dark Horse Re, LLC (“Dark Horse”), and Cypress Tech Development Company which also owns Exzeo Software Private Limited, a subsidiary domiciled in India. TTM is responsible for managing activities such as claims processing, policyholder service/support, marketing, premium payment collection, underwriting and insurance application processing. TTM uses internally developed software technologies to drive efficiency in claim processing and claims settlements, identify profitable underwriting opportunities, generate savings and streamline operations. In addition, software is also used to analyze potential and current properties based on statistical models for catastrophic events, allowing us to pursue the optimal candidates for insurance coverage.

Insurance Management Services

TTIG’s insurance management services focus on optimizing the insurer client's operational efficiency, risk management, and regulatory compliance. These services include assisting with reinsurance arrangements, managing claims processes, and overseeing underwriting practices to ensure profitability and risk control. Additionally, they involve analyzing claims data and market trends to improve pricing models, advising on insurance policy design, and ensuring adherence to regulatory requirements.

Information Technology

Our information technology operations include a team of experienced software developers with extensive knowledge in designing and creating web-based applications. The operations, which are located in Tampa, Florida and Noida, India, are focused on developing cloud-based, innovative products and services that support in-house insurance operations as well as our third-party relationships with our insurer clients, agency partners and claim vendors. These products include SAMSTM, HarmonyTM, AtlasViewer® and ClaimColonyTM.

Reinsurance Brokerage Services

Through our recently formed subsidiary Dark Horse, we provide expert reinsurance brokerage services to help insurance companies manage risk by acting as an intermediary between the insurer client and reinsurers. We design tailored reinsurance solutions by assessing our insurer client’s risk portfolio.

Reciprocal Exchange Operations

This segment encompasses the reciprocal exchange operations under our management. Condo Owners Reciprocal Exchange (“CORE”), organized in November 2023 to offer commercial residential multiple peril and wind insurance products, is owned by its policyholders, referred to as subscribers, who gain ownership by buying an insurance policy. The subscribers then assume one another’s risks by exchanging insurance contracts, so they are both the insurers and the insureds. The daily operations of CORE are directly or indirectly conducted by Core Risk Managers, LLC (“CRM”), an AIF company. Such daily operations include general administration, marketing, underwriting, accounting, policy administration, claim adjusting, and information technology. CRM is permitted to outsource any of these services to other HCI subsidiaries. See Note 13 -- “Variable Interest Entity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Real Estate Operations

Our real estate operations consist of multiple properties we own and operate for investment purposes and also properties we own and use for our own operations. Properties used in operations consist of two Tampa office buildings and an insurance operations site in Ocala, Florida. Our investment properties include retail shopping centers, two marinas, undeveloped land in Tampa and land under development in Haines City, 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 September 26, 2024, Hurricane Helene made landfall in the Big Bend area of Florida as a powerful Category 4 storm. The storm continued inland impacting Georgia, South Carolina, and North Carolina, among other states. We estimated our consolidated gross losses, including loss adjustment expenses, at $61,000,000. After anticipated reinsurance recoveries, net losses are estimated to be $40,000,000. Due to Hurricane Helene, the balance of previously accrued benefits under the multi-year reinsurance contract with retrospective provisions was decreased by $12,369,000 during the third quarter of 2024. In addition, certain of our real estate properties held for operational and investment purposes sustained minor damage from the effects of Hurricane Helene. We maintain property insurance through third parties and expect losses from the storm to be limited to policy deductibles.

On October 10, 2024, Hurricane Milton made landfall in Florida near Siesta Key in Sarasota County as a Category 3 storm and continued across central Florida. The net loss estimate on a consolidated pre-tax basis, including loss adjustment expenses and expected reinsurance recoveries, is approximately $78,000,000. In addition, the entire balance of accrued benefits under the multi-year reinsurance contract with retrospective provisions, amounting to $50,568,000 at September 30, 2024, will be reversed with no further benefits to be accrued under the contract. The reversal will increase ceded premiums in the fourth quarter of 2024 by $50,568,000. Total impact to operating results of the fourth quarter of 2024 will be approximately $128,568,000.

On October 22, 2024, our insurance subsidiaries assumed approximately 42,000 policies from Citizens, representing approximately $200 million in annualized premiums written.

On October 23, 2024, we granted 58,300 restricted shares of common stock to our employees. The shares will vest equally over a service period of four years from the grant date. The grant date fair value per share was $113.40.

On October 24, 2024, our Board of Directors declared a quarterly dividend of $0.40 per common share. The dividends are payable on December 20, 2024 to stockholders of record on November 15, 2024.

On November 8, 2024, Tailrow Funding, LLC, a wholly owned subsidiary of HCI, acquired a $25,000,000 surplus note issued by Tailrow Insurance Exchange, a Florida-domiciled reciprocal insurance exchange awaiting approval to offer residential insurance coverage.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and nine months ended September 30, 2024 and 2023 (dollar amounts in thousands, except per share amounts):

Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023

Our results of operations for the three months ended September 30, 2024 reflect net income of approximately $9,392,000 or $0.52 diluted earnings per share, compared with net income of approximately $15,669,000 or $1.34 diluted earnings per share, for the three months ended September 30, 2023. The quarter-over-quarter decrease was primarily due to a $39,010,000 increase in losses and loss adjustment expenses, a $5,311,000 increase in general and administrative personnel expenses, and a $4,766,000 increase in policy acquisition, underwriting, and other operating expenses, offset by a $33,668,000 increase in net premiums earned and a $9,081,000 net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses).

Revenue

Gross Premiums Earned on a consolidated basis for the three months ended September 30, 2024 and 2023 were approximately $265,518,000 and $188,308,000, respectively. The $77,210,000 increase was primarily attributable to the policies assumed from Citizens and premium rate increases. HCPCI gross premiums earned were $139,822,000 for the three months ended September 30, 2024 compared with $102,075,000 for the three months ended September 30, 2023. TypTap gross premiums earned were $108,266,000 for the three months ended September 30, 2024 compared with $86,233,000 for the same comparative period in 2023. Gross premiums earned from reciprocal exchange operations were $17,430,000 for the three months ended September 30, 2024 as opposed to $0 for the three months ended September 30, 2023.

Premiums Ceded for the three months ended September 30, 2024 and 2023 were approximately $109,694,000 and $66,152,000, respectively, representing 41.3% and 35.1%, respectively, of gross premiums earned. The $43,542,000 increase was primarily attributable to increased reinsurance coverage due to growth in the number of policies in force and total insured value, together with the reversal of $12,369,000 of previously accrued benefits related to retrospective provisions due to the effects of Hurricane Helene. See Note 11 -- “Reinsurance” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information on the benefit adjustment.

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 reinsurance contracts. For the three months ended September 30, 2024, premiums ceded included an increase of $7,707,000 related to retrospective provisions as opposed to a decrease of $6,993,000 for the three months ended September 30, 2023. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended September 30, 2024 and 2023 totaled approximately $160,685,000 and $132,113,000, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs. The increase in 2024 primarily resulted from an increase in premiums written resulting from increased policies in force, offset by increased premiums ceded to reinsurers as described above. We had approximately 235,000 policies in force at September 30, 2024 as compared with approximately 194,000 policies in force at September 30, 2023.

Net Premiums Earned for the three months ended September 30, 2024 and 2023 were approximately $155,824,000 and $122,156,000, 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 September 30, 2024 and 2023 (amounts in thousands):

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Net Investment Income for the three months ended September 30, 2024 and 2023 was approximately $13,714,000 and $9,384,000, respectively. The $4,330,000 increase was primarily attributable to a $4,405,000 increase in interest income from cash, cash equivalents and available-for-sale fixed-maturity securities. See Net Investment Income under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Realized Investment Gains for the three months ended September 30, 2024 were approximately $2,846,000 as opposed to net realized investment losses of approximately $207,000 for the three months ended September 30, 2023. The increase was primarily attributable to net realized gains of approximately $2,843,000 from sales of fixed-maturity and equity securities during the three months ended September 30, 2024 as opposed to net realized losses of approximately $207,000 from sales of these securities during the corresponding period in 2023.

Net Unrealized Investment Income for the three months ended September 30, 2024 was approximately $657,000 as opposed to net unrealized investment losses of approximately $1,041,000 for the three months ended September 30, 2023. The increase was primarily attributable to an overall improvement in the equity market compared with the three months ended September 30, 2023.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $105,736,000 and $66,726,000 for the three months ended September 30, 2024 and 2023, respectively. The increase is due to net losses of $40,000,000 from Hurricane Helene, $6,500,000 from Hurricane Debby, and losses attributable to a greater number of policies in force. The increase was offset by favorable prior period development in 2024 of $4,774,000 as opposed to $8,105,000 in upward adjustments to prior period loss reserves in 2023. In addition, the third quarter of 2023 included $6,500,000 of losses from Hurricane Idalia. 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 September 30, 2024 and 2023 were approximately $26,104,000 and $22,768,000 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 and premium taxes. The increase in amortized costs was primarily due to increased premiums in force from the insurance and reciprocal exchange operations.

General and Administrative Personnel Expenses for the three months ended September 30, 2024 and 2023 were approximately $19,175,000 and $13,864,000, 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 projects to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts. The quarter-over-quarter increase of $5,311,000 was primarily attributable to a decrease in recovered payroll costs, an increase in stock-based compensation expense, an increase in employee incentive bonuses, and an increase in employee health benefits, offset by an increase in capitalized payroll costs.

Interest Expense for the three months ended September 30, 2024 and 2023 was approximately $3,421,000 and $2,827,000, respectively. The increase was primarily attributable to interest expense related to the revolving credit facility, partially offset by decreased interest expense resulting from the conversion and redemption of the 4.25% Convertible Senior Notes in March 2024.

Income Tax Expense for the three months ended September 30, 2024 and 2023 was approximately $4,688,000 and $4,419,000, respectively, for state, federal, and foreign income taxes, resulting in effective tax rates of 33.3% and 22.0%, respectively. The increase in the effective tax rate was primarily attributable to a lower prior year effective tax rate resulting from the release of valuation allowance during 2023 and a higher effective tax rate resulting from certain non-deductible compensation expense for the third quarter of 2024.

Ratios:

The loss ratio applicable to the three months ended September 30, 2024 (losses and loss adjustment expenses incurred related to net premiums earned) was 67.9% compared with 54.6% for the three months ended September 30, 2023. The increase was primarily attributable to the increase in losses and loss adjustment expenses due to Hurricane Helene and Hurricane Debby.

The expense ratio applicable to the three months ended September 30, 2024 (defined as total expenses excluding losses and loss adjustment expenses and interest expense related to net premiums earned) was 33.4% compared with 34.4% for the three months ended September 30, 2023. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned.

The combined ratio (total of all expenses excluding interest expense in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the three months ended September 30, 2024 was 101.3% compared with 89.0% for the three months ended September 30, 2023. The increase in 2024 was attributable to the factors described above.

Comparison of the Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023

Our results of operations for the nine months ended September 30, 2024 reflect net income of approximately $123,447,000 or $8.59 diluted earnings per share, compared with net income of approximately $48,344,000 or $4.16 diluted earnings per share, for the nine months ended September 30, 2023. The period-over-period increase was primarily due to a $183,939,000 increase in net premiums earned and a $16,853,000 net increase in income from our investment portfolio (consisting of net investment income and net realized and unrealized gains or losses), offset by a $74,801,000 increase in losses and loss adjustment expenses, a $11,282,000 increase in general and administrative personnel expenses, and a $8,320,000 increase in policy acquisition, underwriting, and other operating expenses.

Revenue

Gross Premiums Earned on a consolidated basis for the nine months ended September 30, 2024 and 2023 were approximately $785,723,000 and $550,322,000, respectively. The $235,401,000 increase was primarily attributable to the policies assumed from Citizens and premium rate increases. Gross premiums earned from insurance policies assumed were $164,381,000 for the nine months ended September 30, 2024 compared with $7,163,000 for the nine months ended September 30, 2023. HCPCI gross premiums earned were $432,795,000 for the nine months ended September 30, 2024 compared with $291,406,000 for the nine months ended September 30, 2023. TypTap’s gross premiums earned were $319,069,000 compared with $258,916,000 for the same comparative period in 2023. Gross premiums earned from reciprocal exchange operations were $33,859,000 for the nine months ended September 30, 2024 as opposed to $0 for the nine months ended September 30, 2023.

Premiums Ceded for the nine months ended September 30, 2024 and 2023 were approximately $254,513,000 and $203,051,000, respectively, representing 32.4% and 36.9%, respectively, of gross premiums earned. The $51,462,000 increase was primarily attributable to increased reinsurance coverage due to growth in the number of policies in force and total insured value and the reversal of previously accrued benefits as described earlier.

For the nine months ended September 30, 2024, premiums ceded included a decrease of $6,279,000 related to retrospective provisions compared with a decrease of $20,979,000 for the nine months ended September 30, 2023. See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the nine months ended September 30, 2024 and 2023 totaled approximately $577,754,000 and $375,051,000, respectively. The increase in 2024 primarily resulted from the factors described earlier.

Net Premiums Earned for the nine months ended September 30, 2024 and 2023 were approximately $531,210,000 and $347,271,000, 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 nine months ended September 30, 2024 and 2023 (amounts in thousands):

Net Investment Income for the nine months ended September 30, 2024 and 2023 was approximately $44,662,000 and $35,893,000, respectively. The $8,769,000 increase was attributable to a $13,276,000 increase in interest income from cash, cash equivalents, and available-for-sale fixed-maturity securities, offset by a $4,518,000 decrease in income from real estate investments. See Net Investment Income under Note 4 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

Net Realized Investment Gains for the nine months ended September 30, 2024 were approximately $3,058,000 as opposed to net realized investment losses of approximately $1,586,000 for the nine months ended September 30, 2023. The increase was primarily attributable to net realized gains of approximately $3,055,000 from sales of fixed-maturity and equity securities during the nine months ended September 30, 2024 as opposed to net realized losses of approximately $1,539,000 from sales of these securities during the corresponding period in 2023.

Net Unrealized Investment Gains for the nine months ended September 30, 2024 and 2023 were approximately $3,825,000 and $385,000, respectively. The increase was primarily attributable to an overall improvement in the equity market compared with the nine months ended September 30, 2023.

Expenses

Our consolidated Losses and Loss Adjustment Expenses amounted to approximately $263,982,000 and $189,181,000 for the nine months ended September 30, 2024 and 2023, respectively. The increase is due to net losses of $40,000,000 from Hurricane Helene, $6,500,000 from Hurricane Debby, and losses attributable to a greater number of policies in force. The increase was offset by less prior period development in 2024 compared to 2023 by $12,850,000. In addition, the nine months ended September 30, 2023 included $6,500,000 of losses from Hurricane Idalia. See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2024 and 2023 were approximately $71,695,000 and $68,106,000 on a consolidated basis, respectively. The increase in amortized costs was primarily due to increased premiums in force and higher amortized costs attributable to the accelerated transition of United policies during 2023, offset by lower policy acquisition costs in Florida resulting from lower commissions.

General and Administrative Personnel Expenses for the nine months ended September 30, 2024 and 2023 were approximately $52,920,000 and $41,638,000, respectively. The period-over-period increase of $11,282,000 was primarily attributable to lower payroll costs recoverable from reinsurers, an increase in employee incentive bonuses, an increase in stock-based compensation expense, and an increase in employee health benefits.

Interest Expense for the nine months ended September 30, 2024 and 2023 was approximately $10,022,000 and $8,295,000, respectively. The increase was primarily attributable to an increase in interest expense related to the revolving credit facility, partially offset by decreased interest expense resulting from the conversion and redemption of the 4.25% Convertible Senior Notes in March 2024.

Income Tax Expense for the nine months ended September 30, 2024 and 2023 was approximately $44,089,000 and $15,146,000, respectively, for state, federal, and foreign income taxes, resulting in effective tax rates of 26.3% and 23.9%, respectively. The increase in the effective tax rate was primarily attributable to a lower prior year effective tax rate resulting from the release of valuation allowance during 2023 and a higher effective tax rate resulting from certain non-deductible compensation expense for the third quarter of 2024.

Ratios:

The loss ratio applicable to the nine months ended September 30, 2024 (losses and loss adjustment expenses incurred related to net premiums earned) was 49.7% compared with 54.5% for the nine months ended September 30, 2023. The decrease was primarily attributable to the increase in net premiums earned, offset in part by the increase in losses and loss adjustment expenses.

The expense ratio applicable to the nine months ended September 30, 2024 (defined as total expenses excluding losses and loss adjustment expenses and interest expense related to net premiums earned) was 27.6% compared with 36.6% for the nine months ended September 30, 2023. The decrease in our expense ratio was primarily attributable to the increase in net premiums earned, offset by the increase in general and administrative personnel expenses and the increase in other operating expenses.

The combined ratio (total of all expenses excluding interest expense in relation to net premiums earned) is the measure of overall underwriting profitability before other income. Our combined ratio for the nine months ended September 30, 2024 was 77.3% compared with 91.1% for the nine months ended September 30, 2023. The decrease in 2024 was attributable to the factors described above.

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 on 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 on 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/or 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 approximately 90 days of the claim receipt date. Additional cash outflow occurs through payments of underwriting costs such as commissions, taxes, payroll, and general overhead expenses.

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 September 30, 2024:

* At the option of the noteholders, we may be required to repurchase for cash all or any portion of the notes on June 1, 2027, June 1, 2032 or June 1, 2037.

See Note 10 -- “Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

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 the four remaining funds have expired, the general partners may request additional funds under certain circumstances. At September 30, 2024, there was an aggregate unfunded capital balance of $3,255,000. 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.

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

Sources and Uses of Cash

Cash Flows for the Nine Months Ended September 30, 2024

Net cash provided by operating activities for the nine months ended September 30, 2024 was approximately $257,129,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $73,927,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash used in investing activities of $205,062,000 was primarily due to the purchases of fixed-maturity and equity securities of $728,775,000, the purchases of real estate investments of $14,181,000, the purchases of property and equipment of $2,991,000, and additional investments in limited partnership interests of $1,204,000, offset by the proceeds from calls, repayments and maturities of fixed-maturity securities of $410,207,000, the proceeds from sales of fixed-maturity and equity securities of $129,112,000, and distributions received from limited partnership investments of $2,760,000. Net cash used in financing activities totaled $69,701,000, which was primarily due to the redemption of redeemable noncontrolling interests of $100,000,000, $12,354,000 of cash dividend payments, cash dividends paid to redeemable noncontrolling interests of $2,923,000, $1,037,000 of share repurchases, purchases of noncontrolling interests of $480,000, redemption of promissory notes of $466,000, and repayments of long-term debt of $387,000, offset by net borrowing under the line of credit agreement of $46,000,000 and net contribution from noncontrolling interests of $2,045,000.

Cash Flows for the Nine Months Ended September 30, 2023

Net cash provided by operating activities for the nine months ended September 30, 2023 was approximately $77,321,000, which consisted primarily of cash received from net premiums written, and reinsurance recoveries of approximately $206,901,000 less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments. Net cash provided by investing activities of $25,714,000 was primarily due to the proceeds from calls, repayments and maturities of fixed-maturity securities of $263,654,000, the proceeds from sales of fixed-maturity and equity securities of $27,794,000, the proceeds from sales of real estate investments of $21,746,000, and distributions received from limited partnership investments of $3,088,000, offset by the purchases of fixed-maturity and equity securities of $280,493,000, the purchases of property and equipment of $5,184,000, the purchases of real estate investments of $2,296,000, and the purchase of intangible assets of $1,810,000. Net cash used in financing activities totaled $13,752,000, which was primarily due to $10,295,000 of cash dividend payments, the redemption of long-term debt of $6,895,000, cash dividends paid to redeemable noncontrolling interest of $6,762,000, $784,000 of share repurchases, and repayments of long-term debt of $437,000, offset by the proceeds from issuance of long-term debt of $12,000,000.

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 September 30, 2024, we had $724,564,000 of fixed-maturity and equity investments, which are carried at fair value. Changes in the general interest rate environment affect the returns available on new fixed-maturity investments. While a rising interest rate environment enhances the returns available on new investments, it reduces the market value of existing fixed-maturity investments and thus the availability of gains on disposition. A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

In the future, we may alter our investment policy with regard 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 September 30, 2024, we had unexpired capital commitments for limited partnerships in which we hold interests. Such commitments are not recognized in the consolidated financial statements but are required to be disclosed in the notes to the consolidated financial statements. See Note 21 -- “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 consolidated 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 September 30, 2024, $531,072,000 of the total $612,354,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR. The remaining $81,282,000 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 September 30, 2024, $56,208,000 of the $81,282,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $585,073,000 at December 31, 2023 to $612,354,000 at September 30, 2024. The $27,281,000 increase is comprised of $198,436,000 in reserves established for 2024 loss year, including $61,000,000 specific to Hurricane Helene, offset by reductions in our catastrophe Reserves of $79,615,000 primarily specific to Hurricane Ian and Hurricane Irma, and reductions in our non-catastrophe Reserves of $52,597,000 for 2023 and $38,943,000 for 2022 and prior loss years. The Reserves established for 2024 claims are primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2024. The decrease of $171,155,000 specific to our 2023 and prior loss-years reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at September 30, 2024 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

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 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.

Due to Hurricane Helene, the balance of previously accrued benefits under the multi-year reinsurance contract with retrospective provisions was decreased by $12,369,000 during the third quarter of 2024. For the three months ended September 30, 2024, we derecognized $7,707,000 of accrued benefits. For the nine months ended September 30, 2024, we accrued benefits of $6,279,000. For the three and nine months ended September 30, 2023, we accrued benefits of $6,993,000 and $20,979,000, respectively. The accrual of benefits was recognized as a reduction in ceded premiums.

As of September 30, 2024, we had $50,568,000 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 agreements.

We believe the credit risk associated with the collectability of these 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. See Note 23 -- “Subsequent Events” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

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 8, 2024. For the nine months ended September 30, 2024, there have been no other material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

None.

Our investment portfolio at September 30, 2024 included fixed-maturity and equity securities, the purposes of which are not for speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our Board of Directors. From time to time, our investment committee may decide to invest in low-risk assets such as U.S. government bonds.

Our investment portfolio is exposed to interest rate risk, credit risk and equity price risk. Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolio.

We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. In addition, we recognize any unrealized gains or losses related to our equity securities in our statement of income. As a result, our results of operations can be materially affected by the volatility in the equity market.

Interest Rate Risk

Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at September 30, 2024 (dollar amounts in thousands):

Credit Risk

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity securities. We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality. While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.

The following table presents the composition of our fixed-maturity securities, by rating, at September 30, 2024 (dollar amounts in thousands):

Equity Price Risk

Our equity investment portfolio at September 30, 2024 included common stocks, perpetual preferred stocks, mutual funds and exchange-traded funds. We may incur potential losses due to adverse changes in equity security prices. We manage the risk primarily through industry and issuer diversification and asset mix.

The following table illustrates the composition of our equity securities at September 30, 2024 (dollar amounts in thousands):

(1) Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At September 30, 2024, we did not have any material exposure to foreign currency related risk.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, our chief executive officer and our chief financial officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, implementation of possible controls and procedures depends on management’s judgment in evaluating their benefits relative to costs.

There have been no material changes in the risk factors previously disclosed in the section entitled “Risk Factors” in our Form 10-K, which was filed with the SEC on March 8, 2024.