Heritage Insurance (HRTG) - 2023 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS Forward-looking statements are subject to risks and uncertainties, including potential losses exceeding reserves, catastrophic weather events, increased reinsurance costs, and regulatory changes - Forward-looking statements are subject to risks and uncertainties, including potential losses exceeding reserves, catastrophic weather events, increased reinsurance costs, and regulatory changes[10][11][13] PART I – FINANCIAL INFORMATION Item 1. Unaudited Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, investments, fair value measurements, leases, debt, and other financial components for the reported interim periods Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific interim dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $2,368,706 | $2,392,600 | $(23,894) | | Total Liabilities | $2,217,320 | $2,261,561 | $(44,241) | | Total Stockholders' Equity | $151,386 | $131,039 | $20,347 | Condensed Consolidated Statements of Operations and Other Comprehensive (Loss) Income This section presents the company's financial performance over interim periods, including revenues, expenses, net income or loss, and other comprehensive income or loss Condensed Consolidated Statements of Operations and Other Comprehensive (Loss) Income (in thousands) | Metric (in thousands) | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------- | :------ | :------ | :------ | :------ | | Gross premiums written | $309,510 | $304,501 | $1,016,378 | $952,981 | | Net premiums earned | $176,641 | $159,693 | $519,473 | $470,894 | | Net investment income | $6,867 | $2,887 | $19,048 | $7,050 | | Total revenues | $186,300 | $165,493 | $548,532 | $487,872 | | Losses and loss adjustment expenses | $131,397 | $155,849 | $335,495 | $397,409 | | Total expenses | $195,735 | $212,801 | $521,486 | $660,141 | | Net (loss) income | $(7,424) | $(48,240) | $14,363 | $(166,864) | | Basic (Loss) Earnings per share | $(0.28) | $(1.83) | $0.55 | $(6.29) | | Diluted (Loss) Earnings per share | $(0.28) | $(1.83) | $0.55 | $(6.29) | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, additional paid-in capital, retained deficit, and accumulated other comprehensive loss Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Dec 31, 2022 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Common stock | $3 | $3 | | Additional paid-in capital | $334,711 | $336,829 | | Accumulated other comprehensive loss | $(53,585) | $(49,719) | | Treasury stock | $(130,900) | $(130,900) | | Retained deficit | $(19,190) | $(4,827) | | Total Stockholders' Equity | $131,039 | $151,386 | - Net income contributed $14.0 million and $7.8 million in Q1 and Q2 2023, respectively, while Q3 2023 saw a net loss of $7.4 million[21] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over interim periods Condensed Consolidated Statements of Cash Flows (9M Ended Sep 30, in thousands) | Cash Flow Activity (9M Ended Sep 30, in thousands) | 2023 | 2022 | | :--------------------------------- | :----- | :----- | | Net cash used in operating activities | $(29,342) | $(15,480) | | Net cash used in investing activities | $(12,391) | $(33,507) | | Net cash used in financing activities | $(7,258) | $(11,952) | | Decrease in cash, cash equivalents, and restricted cash | $(48,991) | $(60,939) | | Cash, cash equivalents, and restricted cash, end of period | $238,581 | $303,813 | - The increase in cash used in operating activities is primarily due to the timing of cash flows associated with claim and reinsurance payments and reimbursements[204] - Investing activities saw a decrease in cash used due to timing of investment maturities and reinvestment into short-term treasury bills, alongside expenditures for a new policy, billing, and claims system[205] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies, investments, debt, and other key financial components NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note describes the basis of financial statement preparation and outlines the company's significant accounting policies - Financial statements are prepared under GAAP for interim information, with normal recurring accruals and elimination of intercompany transactions[31] - No material changes to accounting policies or material impact from new accounting pronouncements are expected[32][33] NOTE 2. INVESTMENTS This note details the company's investment portfolio, including fixed maturities, equity securities, and net investment income Investment Portfolio (in thousands) | Investment Category (in thousands) | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | | :------------------------------- | :---------------------- | :---------------------- | | Fixed maturities, available-for-sale | $651,520 | $635,572 | | Equity securities | $1,739 | $1,514 | | Other investments, net | $11,745 | $16,484 | | Total investments | $665,004 | $653,570 | Net Investment Income (in thousands) | Net Investment Income (in thousands) | 9M 2023 | 9M 2022 | % Change | | :--------------------------------- | :------ | :------ | :------- | | Debt securities | $12,723 | $7,695 | 65.3% | | Equity securities | $170 | $0 | NM | | Cash and cash equivalents | $6,195 | $433 | 1330.5% | | Other investments | $1,525 | $447 | 241.2% | | Net investment income (less expenses) | $19,048 | $7,050 | 170.2% | - Unrealized losses on debt securities are primarily due to increased market interest rates, not credit losses, as bonds are high credit quality (average A+ rating)[40] NOTE 3. FAIR VALUE OF FINANCIAL MEASUREMENTS This note explains the fair value hierarchy and measurements applied to the company's financial instruments - All debt securities available-for-sale are classified as Level 2 in the fair value hierarchy, indicating valuations based on observable inputs other than quoted prices[48][49] - Non-recurring impairments for the nine months ended September 30, 2023, included $1.0 million on equity method investments and $766,600 on intangible assets due to discontinued restoration services[52][53] - In Q2 2022, a $92.0 million goodwill impairment was recorded due to equity market disruptions, elevated loss ratios, and the company's market cap falling below book value[54] NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOME This note presents the components of other comprehensive income or loss, including unrealized gains and losses on investments Other Comprehensive (Loss) Income (in thousands) | Metric (in thousands) | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :------------------------------------------------ | :------ | :------ | :------ | :------ | | Change in net unrealized (losses) gains on investments | $(4,494) | $(17,471) | $4,664 | $(65,403) | | Income tax benefit (expense) related to OCI | $970 | $4,089 | $(1,188) | $15,282 | | Total comprehensive (loss) income | $(10,569) | $(61,619) | $18,229 | $(216,864) | NOTE 5. LEASES This note provides details on the company's operating and finance lease costs, right-of-use assets, and lease liabilities Lease Costs (9M Ended Sep 30, in thousands) | Lease Cost (9M Ended Sep 30, in thousands) | 2023 | 2022 | | :--------------------------------------- | :----- | :----- | | Operating lease cost | $1,183 | $1,055 | | Finance lease cost | $2,592 | $2,682 | | Variable lease cost | $1,175 | $713 | | Short-term lease cost | $113 | $142 | Lease Metrics | Lease Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Operating lease ROU assets | $7,166 | $7,335 | | Operating lease liability | $8,439 | $8,690 | | Finance lease ROU assets | $18,214 | $20,132 | | Finance lease liability | $20,903 | $22,557 | | Weighted-average remaining operating lease term | 5.80 yrs | 6.49 yrs | | Weighted-average remaining finance lease term | 7.41 yrs | 8.13 yrs | NOTE 6. PROPERTY AND EQUIPMENT, NET This note outlines the company's property and equipment, net of accumulated depreciation and amortization, and related capital expenditures Property and Equipment, Net (in thousands) | Property and Equipment (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :----------- | :----------- | | Total, at cost | $48,821 | $40,376 | | Less: accumulated depreciation and amortization | $(16,403) | $(14,647) | | Property and equipment, net | $32,418 | $25,729 | - The company invested $7.1 million in software development for a new policy, billing, and claims system during the nine months ended September 30, 2023, with the claims component becoming operational in June 2023[61] NOTE 7. INTANGIBLE ASSETS This note details the company's intangible assets, including goodwill and other intangibles, and any related impairment losses Intangible Assets, Net (in thousands) | Intangible Assets (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------- | :----------- | :----------- | | Intangibles, net | $44,101 | $49,575 | - A $766,600 impairment loss was recognized on brand and customer relations in Q2 2023 due to the discontinuation of restoration services[64] - In Q2 2022, a $92.0 million goodwill impairment charge was recorded due to market disruptions and elevated loss ratios[66] NOTE 8. EARNINGS (LOSS) PER SHARE This note presents the basic and diluted earnings or loss per share calculations for the reported periods Earnings Per Share | EPS (per share) | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------- | :------ | :------ | :------ | :------ | | Basic EPS | $(0.28) | $(1.83) | $0.55 | $(6.29) | | Diluted EPS | $(0.28) | $(1.83) | $0.55 | $(6.29) | - Convertible notes were considered anti-dilutive and excluded from diluted EPS calculations during periods of net loss[69] NOTE 9. DEFERRED REINSURANCE CEDING COMMISSION This note details the activity and balance of deferred reinsurance ceding commissions Deferred Ceding Commission (in thousands) | Deferred Ceding Commission (in thousands) | 9M 2023 | 9M 2022 | | :-------------------------------------- | :------ | :------ | | Beginning balance | $42,758 | $40,405 | | Ceding commission deferred | $42,866 | $46,110 | | Less: ceding commission earned | $(49,591) | $(46,426) | | Ending balance | $36,033 | $40,089 | NOTE 10. DEFERRED POLICY ACQUISITION COSTS This note outlines the deferred policy acquisition costs, including deferrals, amortization, and ending balances Deferred Policy Acquisition Costs Activity (in thousands) | DPAC Activity (in thousands) | 9M 2023 | 9M 2022 | | :--------------------------- | :------ | :------ | | Beginning Balance | $99,617 | $93,881 | | Policy acquisition costs deferred | $149,536 | $139,028 | | Amortization | $(145,054) | $(132,260) | | Ending Balance | $104,098 | $100,649 | NOTE 11. INCOME TAXES This note provides information on the company's income tax provision, effective tax rate, and deferred tax assets and liabilities Income Tax (in thousands) | Income Tax (in thousands) | 9M 2023 | 9M 2022 | | :------------------------ | :------ | :------ | | Income tax provision (benefit) | $4,472 | $(11,155) | | Effective tax rate | 23.7% | 6.3% | - The effective tax rate for 9M 2023 benefited from a reduction in the valuation allowance related to Osprey Re, while 9M 2022 was impacted by a non-deductible goodwill impairment and an increase in the valuation allowance[77][194] Deferred Tax Assets/Liabilities (in thousands) | Deferred Tax Assets/Liabilities (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------------------- | :----------- | :----------- | | Total deferred tax asset | $55,465 | $62,367 | | Valuation allowance | $(1,870) | $(6,376) | | Total deferred tax liabilities | $37,503 | $39,150 | | Net deferred tax assets | $16,092 | $16,841 | NOTE 12. REINSURANCE This note describes the company's reinsurance programs, including ceded premiums and the impact on net premiums earned - The company purchases significant reinsurance from FHCF, private reinsurers (A- or higher rated or fully collateralized), and its captive Osprey Re to limit exposure to individual risks and catastrophic events[81][85] - The 2023-2024 catastrophe excess of loss program provides first event coverage up to $1.1 billion for Heritage P&C, $1.3 billion for NBIC, and $870.0 million for Zephyr[86] Reinsurance Effect (in thousands) | Reinsurance Effect (in thousands) | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Gross premiums written | $309,510 | $304,501 | $1,016,378 | $952,981 | | Ceded premiums | $(160,335) | $(148,266) | $(464,539) | $(420,645) | | Net premiums earned | $176,641 | $159,693 | $519,473 | $470,894 | | Ceded premium ratio (Q3) | 47.6% | 48.1% | N/A | N/A | | Ceded premium ratio (9M) | N/A | N/A | 47.2% | 47.2% | NOTE 13. RESERVE FOR UNPAID LOSSES This note details the company's reserves for unpaid losses and loss adjustment expenses, both gross and net of reinsurance Unpaid Losses (in thousands) | Unpaid Losses (in thousands) | Sep 30, 2023 | Sep 30, 2022 | | :--------------------------- | :----------- | :----------- | | Balance, end of period | $971,321 | $1,209,352 | | Net balance, end of period (net of reinsurance) | $448,955 | $379,517 | - Net favorable prior year loss development of $3.4 million for 9M 2023, compared to $1.5 million unfavorable development for 9M 2022[100] - The commutation process for the 2017 FHCF reinsurance agreement related to Hurricane Irma was finalized in Q3 2023, settling all outstanding losses[101][149] NOTE 14. LONG-TERM DEBT This note provides information on the company's long-term debt, including convertible debt, mortgage loans, and credit facilities Long-Term Debt (in thousands) | Long-Term Debt (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | Convertible debt | $885 | $885 | | Mortgage loan | $11,085 | $11,199 | | Term loan facility | $82,000 | $89,125 | | Revolving credit facility | $10,000 | $10,000 | | FHLB loan agreement | $19,200 | $19,200 | | Total principal amount | $123,170 | $130,409 | - The FHLB loan agreement was restructured on September 29, 2023, extending the maturity date to March 28, 2025, and increasing the fixed interest rate to 5.109%[112] - The effective interest rates for the Term Loan Facility and Revolving Credit Facility were 8.184% and 8.170%, respectively, at September 30, 2023, driven by higher variable interest rates[110][169][193] NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES This note details the components of accounts payable and other liabilities, including deferred ceding commissions and commission payables Other Liabilities (in thousands) | Other Liabilities (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------- | :----------- | :----------- | | Deferred ceding commission | $36,033 | $42,758 | | Claims checks in excess of bank balance | $12,820 | $0 | | Accounts payable and other payables | $14,151 | $17,660 | | Commission payables | $14,879 | $17,558 | | Total other liabilities | $80,739 | $80,010 | NOTE 16. STATUTORY ACCOUNTING AND REGULATIONS This note discusses the statutory accounting requirements and regulatory compliance for the company's insurance subsidiaries - Insurance subsidiaries are regulated by state and national laws, requiring minimum statutory surplus and risk-based capital[116] Statutory Surplus (in millions) | Statutory Surplus (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------ | :----------- | :----------- | | Combined statutory surplus (Heritage P&C, Zephyr, NBIC) | $220.7 | $276.3 | - All insurance subsidiaries were in compliance with financial and regulatory requirements in their respective states as of September 30, 2023[119] NOTE 17. COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including legal actions and claims-related accruals - The company accrues for claims-related legal actions when an unfavorable outcome is probable and estimable, with estimates revised based on various factors including historical loss experience and legal developments[120] NOTE 18. RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, such as agency commissions paid Agency Commission Paid to Comegys (in thousands) | Agency Commission Paid to Comegys (in thousands) | 9M 2023 | 9M 2022 | | :----------------------------------------------- | :------ | :------ | | Agency commission | $185.4 | $549.99 | NOTE 19. EMPLOYEE BENEFIT PLANS This note provides information on the company's employee benefit plans, including 401(k) contributions and medical premium costs Employee Benefit Costs (in thousands) | Employee Benefit Costs (in thousands) | 9M 2023 | 9M 2022 | | :------------------------------------ | :------ | :------ | | 401(k) contributions | $1,000 | $1,000 | | Medical premium costs | $3,900 | $3,400 | NOTE 20. EQUITY This note details the company's equity structure, including common stock, treasury stock, and additional paid-in capital Equity Metrics | Equity Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Common stock outstanding | 26,796,586 | 25,539,433 | | Treasury stock | 12,231,674 | 12,231,674 | | Additional paid-in capital | $336.8 million | $334.7 million | - A new share repurchase program for up to $10.0 million was established in December 2022, with the full amount available as of September 30, 2023[128][129] NOTE 21. STOCK-BASED COMPENSATION This note describes the company's stock-based compensation plans and related expenses - The 2023 Omnibus Incentive Plan authorized 2,125,000 shares for future grants, with 887,165 shares remaining available as of September 30, 2023[131][132] Stock-Based Compensation (in thousands) | Stock-Based Compensation (in thousands) | 9M 2023 | 9M 2022 | | :-------------------------------------- | :------ | :------ | | Compensation expense recognized | $2,100 | $1,500 | - Unrecognized compensation expense for non-vested restricted stock totaled approximately $2.2 million for time-based and $3.3 million for performance-based awards as of September 30, 2023[138] NOTE 22. SUBSEQUENT EVENTS This note discloses any significant events that occurred after the balance sheet date but before the financial statements were issued - No material subsequent events were identified that require adjustment or disclosure in the financial statements[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting key performance indicators, economic and market factors, strategic initiatives, and liquidity. It details the significant improvement in net income and combined ratio for both the three and nine months ended September 30, 2023, driven by increased premiums, investment income, and lower losses, alongside ongoing exposure management and capital allocation strategies Overview This section provides a high-level description of the company's business as a super-regional property and casualty insurance holding company - The company is a super-regional property and casualty insurance holding company offering personal and commercial residential insurance across a multi-state footprint[142] - It operates as a vertically integrated insurer, managing risk, underwriting, claims, actuarial rate making, customer service, and distribution[142] Recent Developments This section discusses recent economic, market, and strategic developments impacting the company's operations and financial performance Economic and Market Factors This section analyzes the impact of economic and market factors, such as inflation and reinsurance costs, on the company's business - Inflationary pressures are increasing material and labor costs for claims, and catastrophe reinsurance costs are expected to continue rising[143] Policies-in-force, Premiums-in-force, and Total Insured Value | Metric | Q3 2023 | Q3 2022 | % Change | | :------------------ | :------ | :------ | :------- | | Florida Policies-in-force | 158,914 | 188,383 | (15.6)% | | Other States Policies-in-force | 308,683 | 352,989 | (12.6)% | | Total Policies-in-force | 467,597 | 541,372 | (13.6)% | | Florida Premiums-in-force | $681,067,580 | $569,589,537 | 19.6% | | Other States Premiums-in-force | $665,351,760 | $672,812,875 | (1.1)% | | Total Premiums-in-force | $1,346,419,340 | $1,242,402,412 | 8.4% | | Florida Total Insured Value (TIV) | $104,654,005,306 | $102,784,056,201 | 1.8% | | Other States TIV | $290,916,611,744 | $304,657,398,158 | (4.5)% | | Total TIV | $395,570,617,050 | $407,441,454,359 | (2.9)% | Strategic Profitability Initiatives This section highlights the company's strategic actions to enhance profitability, including premium adjustments and exposure management - Average premium per policy increased by 25.5% YoY and 5.1% QoQ due to significant rating actions[150] - Premiums-in-force increased 8.4% YoY to $1.3 billion, while policy count decreased 13.6% due to exposure management in personal residential business and selective growth in commercial residential business[150] - Florida commercial residential premiums-in-force grew by 75.3% YoY, and TIV outside of Florida represented 73.5% of the total portfolio, indicating diversification efforts[150] Reinsurance Commutation This section details the finalization of the 2017 reinsurance agreement commutation related to Hurricane Irma losses - The 2017 reinsurance agreement with the FHCF for Hurricane Irma losses was commuted and finalized in Q3 2023, resulting in a final payment to settle all outstanding claims[149] Overview of 2023 Financial Results This section provides a summary of the company's overall financial performance for 2023, highlighting key improvements in net loss and combined ratio Key Financial Metrics | Metric | Q3 2023 | Q3 2022 | Change | | :-------------------------- | :------ | :------ | :------- | | Net loss (in millions) | $(7.4) | $(48.2) | $40.8 improvement | | Diluted EPS | $(0.28) | $(1.83) | $1.55 improvement | | Gross premiums written (in millions) | $309.5 | $304.5 | 1.6% increase | | Net premiums earned (in millions) | $176.7 | $159.7 | 10.6% increase | | Losses & LAE (in millions) | $131.4 | $155.8 | 15.7% decrease | | Net combined ratio | 110.8% | 133.3% | 22.5 pts improvement | | Effective tax rate | 38.3% | 2.2% | 36.1 pts increase | - The improved net loss and combined ratio were driven by higher net premiums earned, increased net investment income, and lower net losses incurred, partly offset by higher operating expenses[153] - The effective tax rate benefited from a reduction in the valuation allowance related to Osprey Re[153] Results of Operations This section presents a detailed comparison of the company's operational results for the three and nine months ended September 30, 2023 and 2022 Comparison of the Three Months Ended September 30, 2023 and 2022 This section compares the company's financial performance for the third quarter of 2023 against the same period in 2022, detailing revenue, expenses, and net loss Financial Performance (Q3, in thousands) | Metric (in thousands) | Q3 2023 | Q3 2022 | $ Change | % Change | | :-------------------- | :------ | :------ | :------- | :------- | | Total revenue | $186,300 | $165,493 | $20,807 | 12.6% | | Gross premiums written | $309,510 | $304,501 | $5,009 | 1.6% | | Net premiums earned | $176,641 | $159,693 | $16,948 | 10.6% | | Net investment income | $6,867 | $2,887 | $3,980 | 137.9% | | Losses and loss adjustment expenses | $131,397 | $155,849 | $(24,452) | (15.7)% | | Policy acquisition costs | $42,427 | $39,194 | $3,233 | 8.2% | | General and administrative expenses | $21,911 | $17,758 | $4,152 | 23.4% | | Net loss | $(7,424) | $(48,240) | $40,816 | (84.6)% | | Net combined ratio | 110.8% | 133.3% | (22.5) pts | (16.9)% | - Net current accident year weather losses decreased to $51.6 million from $63.8 million, with catastrophe losses remaining flat at $40.1 million[164] - General and administrative expenses increased due to software costs for a new claims system and human capital costs[166] Comparison of the Nine Months Ended September 30, 2023 and 2022 This section compares the company's financial performance for the nine months ended September 30, 2023, against the same period in 2022, detailing revenue, expenses, and net income Financial Performance (9M, in thousands) | Metric (in thousands) | 9M 2023 | 9M 2022 | $ Change | % Change | | :-------------------- | :------ | :------ | :------- | :------- | | Total revenue | $548,532 | $487,872 | $60,661 | 12.4% | | Gross premiums written | $1,016,378 | $952,981 | $63,397 | 6.7% | | Net premiums earned | $519,473 | $470,894 | $48,579 | 10.3% | | Net investment income | $19,048 | $7,050 | $11,998 | 170.2% | | Losses and loss adjustment expenses | $335,495 | $397,409 | $(61,913) | (15.6)% | | Policy acquisition costs | $124,202 | $115,826 | $8,377 | 7.2% | | General and administrative expenses | $61,022 | $54,947 | $6,075 | 11.1% | | Goodwill and intangible asset impairment | $767 | $91,959 | $(91,193) | (99.2)% | | Net income (loss) | $14,363 | $(166,864) | $181,227 | (108.6)% | | Net combined ratio | 100.2% | 120.7% | (20.5) pts | (17.0)% | - Net current accident year weather losses decreased 40.7% to $98.2 million, with catastrophe losses down 61.4% to $45.1 million[187] - The significant improvement in net income was also due to the absence of the $92.0 million goodwill impairment charge recorded in the prior year period[192] Liquidity and Capital Resources This section discusses the company's sources and uses of cash, capital structure, and ability to meet its financial obligations Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities for the reported periods Cash Flow Activity (9M Ended Sep 30, in thousands) | Cash Flow Activity (9M Ended Sep 30, in thousands) | 2023 | 2022 | Change | | :--------------------------------- | :----- | :----- | :----- | | Net cash used in operating activities | $(29,342) | $(15,480) | $(13,863) | | Net cash used in investing activities | $(12,391) | $(33,507) | $21,116 | | Net cash used in financing activities | $(7,258) | $(11,952) | $4,694 | - Operating cash flow was negatively impacted by the timing of claim and reinsurance payments and reimbursements[204] - Investing cash flow improved due to timing of investment maturities and reinvestment into short-term treasury bills, alongside ongoing investment in a new claims system[205] Credit Facilities This section details the company's credit facilities, including outstanding amounts, interest rates, and covenants - The company maintains a $100 million Term Loan Facility and a $50 million Revolving Credit Facility[208] Credit Facility Status (Sep 30, 2023) | Credit Facility Status (Sep 30, 2023) | Amount (in millions) | Effective Interest Rate | | :------------------------------------ | :------------------- | :---------------------- | | Term Loan Facility outstanding | $82.0 | 8.184% | | Revolving Credit Facility drawn | $10.0 | 8.170% | | Revolving Credit Facility unused letters of credit | $39.3 | N/A | - The Credit Facilities are secured by substantially all assets of the company and its guarantors (excluding regulated insurance subsidiaries) and include covenants such as maximum consolidated leverage ratio and minimum consolidated fixed charge coverage ratio[216][217] Convertible Notes This section provides information on the company's convertible senior notes, including principal amount, conversion rights, and put options - The company has $136.8 million of 5.875% Convertible Senior Notes due 2037, with $885,000 principal amount outstanding (net of subsidiary holdings) as of September 30, 2023[102][219][230] - Holders have conversion rights based on stock price or corporate events and optional put rights on specific dates (e.g., August 1, 2022, 2027, 2032)[223][228] - In August 2022, $10.9 million of Convertible Notes were repurchased via a put right, funded by a draw from the Revolving Credit Facility[231] FHLB Loan Agreements This section describes the FHLB loan agreement, including its principal amount, collateral, and restructured terms - A subsidiary has a $19.2 million cash loan from FHLB Atlanta, collateralized by $25.3 million in fixed maturity securities[112][232] - The FHLB loan was restructured on September 20, 2023, extending its maturity to March 28, 2025, and setting a fixed interest rate of 5.109%[112][232] Critical Accounting Policies and Estimates This section discusses the significant accounting policies and estimates that require management's judgment and can materially affect financial results - Financial statements involve subjective and complex estimates about future events, and actual results may differ[233] - No material changes to critical accounting policies and estimates have occurred since the 2022 Form 10-K[233] Recent Accounting Pronouncements This section addresses the expected impact of recently issued accounting pronouncements on the company's financial statements - No material effect from recently issued accounting pronouncements is expected on the condensed consolidated financial statements[234] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's financial instruments are exposed to interest rate and credit risks. Interest rate risk is reflected in a portfolio duration of 2.605 years, while credit risk is mitigated by maintaining a high credit quality (A+ average rating) fixed maturity securities portfolio. No material impact on market risk sensitive instruments has been observed compared to the prior annual report - The duration of the fixed rate debt securities portfolio, subject to interest rate risk, was 2.605 years at September 30, 2023[235] - Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio, with an estimated weighted-average credit quality rating of A+ at September 30, 2023[235] Item 4. Controls and Procedures The company's disclosure controls and procedures were evaluated and determined to be effective as of September 30, 2023. No material changes in internal control over financial reporting occurred during the most recent quarter - Disclosure controls and procedures were evaluated and concluded to be effective as of September 30, 2023[238] - No material changes in internal control over financial reporting occurred during the most recent quarter[239] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is routinely involved in claims and legal actions arising in the ordinary course of business. Management does not anticipate that any currently pending legal proceedings will have a material adverse effect on the company's financial position, results of operations, or cash flow - The company is involved in routine legal actions, but management does not anticipate a material adverse effect on financial position, results, or cash flow from currently pending proceedings[240] Item 1A. Risk Factors There have been no material changes to the company's risk factors since the filing of its Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors have occurred since the 2022 Annual Report on Form 10-K[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not Applicable[242] Item 5. Other Information During the three months ended September 30, 2023, no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during Q3 2023[242] Item 6. Exhibits This section lists the exhibits accompanying the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and other corporate filings incorporated by reference - The section provides an index of exhibits, including certifications (Rule 13a-14(a)/15d-14(a), 18 U.S.C. Section 1350) and Inline XBRL documents[243][245] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy of the report - The report is signed by Ernesto Garateix (CEO) and Kirk Lusk (CFO) on November 6, 2023[249]