What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 115 added, 114 removed, 229 unchanged (50% of the section changed)

28 unchanged sentences

Other auxiliary operations

For the three months ended June 30 , 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 96.2 % and 95.2 %, respectively, of total revenues of all operating segments.

For the six months ended June 30, 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 95.5 % and 94.9 %, respectively, of total revenues of all operating segments.

At June 30 , 20 20 and December 31, 201 9 , insurance operations’ total assets represented 85.9 % and 85.

For the three months ended September 30 , 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 71.1 % and 95.2 %, respectively, of total revenues of all operating segments.

For the nine months ended September 30, 2020 and 2019, revenues from insurance operations before intracompany elimination represented 86.2 % and 9 5 .

0 %, respectively, of total revenues of all operating segments.

At September 30 , 20 20 and December 31, 201 9 , insurance operations’ total assets represented 8 3.0 % and 85.

5 %, respectively, of the combined assets of all operating segments.

14 unchanged sentences

TypTap has been the primary source of our organic growth in gross written premium since 2018.

TypTap’s policies in force have increased from 6,721 in January 2018 to 31,715 at June 30, 2020.

TypTap’s policies in force have increased from 6,721 in January 2018 to 33,825 at September 30, 2020.

TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida.

In October 2020, TypTap began applying to offer homeowners coverage in other states.

In addition to the expansion in TypTap business, we expect the Anchor transaction will contribute to our future growth.

6 unchanged sentences

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 two Tampa office buildings and a secondary insurance operations site in Ocala, Florida.

Properties used in operations consist of one Tampa office building and a secondary insurance operations site in Ocala, Florida.

Our investment properties include one full-service restaurant, retail shopping centers, one office building, two marinas, and undeveloped land near our headquarters in Tampa, Florida.

Other Oper ations

In July 2020, the property in Tampa, Florida where our headquarters is located was acquired by the Florida Department of Transportation (“FDOT”) exercising the power of eminent domain for a highway expansion project.

See Note 9 -- “Property and Equipment, Net” to our unaudited consolidated financial statement s under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Other Operations

Information Technology

8 unchanged sentences

At present, we have no plan to reduce our workforce.

At June 30, 2020, the impact on our financial statements of COVOD-19 consists primarily of unrealized losses on our portfolio of investment securities and material losses from limited partnership investments.

At September 30, 2020, the impact on our financial statements of COVOD-19 consists primarily of unrealized losses on our portfolio of investment securities and material losses from limited partnership investments.

However, we may experience further material economic impacts in other areas of our business, such as in our real estate operations, in future periods.

Recent Events

On July 2, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on September 18, 2020 to stockholders of record on August 21, 2020.

On July 24, 2020, the Florida Department of Transportation (“FDOT”) exercised the power of eminent domain under the Florida Constitution in order to acquire for a highway expansion project the property in Tampa, Florida where our headquarters is located for compensation of $47,500,000.

Under the terms of the agreement, the FDOT assumed all contracts associated with this property, including the leases with existing tenants.

In addition, we agreed to donate a small portion of a separate tract of nearby undeveloped land we own to the FDOT for the same expansion project.

We will have no later than July 24, 2023 to vacate the property.

In connection with this transaction, we recognized a net gain from involuntary conversion of approximately $37,000,000.

On July 29, 2020, we made an early repayment of our 4% Promissory note, which was collateralized by our Tampa, Florida headquarters.

On October 16, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on December 18, 2020 to stockholders of record on November 20, 2020.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three and six months ended June 30, 2020 and 2019 (dollar amounts in thousands, except per share amounts):

The following table summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019 (dollar amounts in thousands, except per share amounts):

Three Months Ended

Six Months Ended

Operating Revenue

Nine Months Ended

September 30,

Gross premiums earned

6 unchanged sentences

Policy fee income

Total operating revenue

Operating Expenses

Gain on involuntary conversion

Total revenue

Losses and loss adjustment expenses

3 unchanged sentences

Loss on repurchase of convertible senior notes

Loss on extinguishment of debt

Other operating expenses

Total operating expenses

Total expenses

Income before income taxes

7 unchanged sentences

Earnings Per Share Data:

Comparison of the Three Months ended June 30 , 2020 to the Three Months ended June 30 , 2019

Our results of operations for the three months ended June 30, 2020 reflect income available to common stockholders of approximately $8,936,000 or $1.08 earnings per diluted common share, compared with approximately $7,553,000, or $0.90 earnings per diluted common share, for the three months ended June 30, 2019.

The quarter-over-quarter increase in pre-tax income was primarily due to a net increase in net premiums earned of $21,451,000, an increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $504,000, offset by an increase in policy acquisition and underwriting expenses of $2,914,000, an increase in losses and loss adjustment expenses of $15,550,000, and increased payroll costs of $1,733,000.

Gross Premiums Earned for the three months ended June 30, 2020 and 2019 were approximately $107,803,000 and $83,315,000, respectively.

Comparison of the Three Months ended September 30 , 2020 to the Three Months ended September 30 , 2019

Our results of operations for the three months ended September 30, 2020 reflect income available to common stockholders of approximately $15,390,000 or $1.70 earnings per diluted common share, compared with approximately $5,853,000, or $0.73 earnings per diluted common share, for the three months ended September 30, 2019.

The quarter-over-quarter increase in net income was primarily due to a gain on involuntary conversion of $36,969,000 and a net increase in net premiums earned of $8,029,000, offset by a decrease in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $884,000, an increase in losses and loss adjustment expenses of $24,416,000, an increase in policy acquisition and underwriting expenses of $3,222,000, and increased payroll costs of $1,920,000.

Of the $24,416,000 increase in losses and loss adjustment expenses, $17,700,000 related to Hurricane Sally.

Gross Premiums Earned for the three months ended September 30, 2020 and 2019 were approximately $106,694,000 and $86,002,000, respectively.

The quarter-over-quarter increase was primarily attributable to the policies transitioned from Anchor and increased policies in force from the growth in TypTap’s business.

Gross premiums earned related to the Anchor policies were approximately $9,300,000 for the quarter.

Premiums Ceded for the three months ended June 30, 2020 and 2019 were approximately $34,354,000 and $31,317,000, respectively, representing 31.9% and 37.6%, respectively, of gross premiums earned.

Premiums Ceded for the three months ended September 30, 2020 and 2019 were approximately $44,231,000 and $31,568,000, respectively, representing 41.5% and 36.7%, respectively, of gross premiums earned.

The $12,663,000 increase was primarily attributable to increased reinsurance costs effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

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The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.

For the three months ended June 30, 2020, premiums ceded included a decrease of approximately $3,240,000 related to retrospective provisions compared with a net reduction of approximately $1,226,000 for the three months ended June 30, 2019.

For the three months ended September 30, 2020, premiums ceded included a decrease of approximately $4,680,000 related to retrospective provisions compared with a net reduction of approximately $2,520,000 for the three months ended September 30, 2019.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended June 30, 2020 and 2019 totaled approximately $137,527,000 and $102,124,000, respectively.

Net Premiums Written for the three months ended September 30, 2020 and 2019 totaled approximately $72,220,000 and $65,763,000, respectively.

Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

The increase in 2020 resulted from an increase in gross premiums written from the growth of TypTap business and the transition of policies from Anchor.

We had approximately 164,000 policies in force at June 30, 2020 as compared with approximately 124,000 policies in force at June 30, 2019.

Net Premiums Earned for the three months ended June 30, 2020 and 2019 were approximately $73,449,000 and $51,998,000, 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 June 30, 2020 and 2019 (amounts in thousands):

We had approximately 157,000 policies in force at September 30, 2020 as compared with approximately 125,000 policies in force at September 30, 2019.

Net Premiums Earned for the three months ended September 30, 2020 and 2019 were approximately $62,463,000 and $54,434,000, 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, 2020 and 201 9 (amounts in thousands):

Three Months Ended

September 30,

Net Premiums Written

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Net Premiums Earned

Net Investment Income for the three months ended June 30 , 2020 and 2019 was approximately $ 1,604,000 and $ 4,226 ,000 , respectively .

The $ 2,622,000 decrease was primarily attributable to lower income from limited partnership investments and cash equivalent instruments .

Net Realized Investment Gains for the three months ended June 30, 2020 were approximately $1,435,000 versus approximately $133,000 of net realized investment loss for the three months ended June 30, 2019.

The gains in 2020 resulted primarily from sales intended to rebalance our investment portfolio and manage overall portfolio risk.

Net Unrealized Investment gains for the three months ended June 30, 2020 and 2019 were approximately $2,884,000 and $1,326,000, respectively, reflecting an increase in the fair value of equity securities resulting from an improved economic outlook since the shock caused by COVID-19.

Our Losses and Loss Adjustment Expenses amounted to approximately $39,843,000 and $24,293,000 for the three months ended June 30, 2020 and 2019, respectively.

The $15,550,000 increase primarily resulted from the increase in gross premiums earned, change in premium mix and reserves for weather-related losses in the quarter, offset by a reduction in loss reserves related to 2019 loss year.

Net Investment Income for the three months ended September 30, 2020 and 2019 was approximately $1,832,000 and $3,621,000, respectively.

The $1,789,000 decrease was primarily attributable to lower interest income from fixed-maturity securities and cash equivalent instruments.

Net Unrealized Investment gains for the three months ended September 30, 2020 and 2019 were approximately $1,340,000 and $642,000, respectively, reflecting an increase in the fair value of equity securities resulting from an improved economic outlook since the shock caused by COVID-19.

Gain on Involuntary Conversion for the three months ended September 30, 2020 was approximately $36,969,000.

This one-time gain resulted from the aforementioned transaction with the FDOT.

See Note 9 -- “Property and Equipment, Net” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Our Losses and Loss Adjustment Expenses amounted to approximately $51,743,000 and $27,327,000 for the three months ended September 30, 2020 and 2019, respectively.

The $24,416,000 increase primarily resulted from $17,700,000 of reserves net of reinsurance recoverable for Hurricane Sally, losses from other weather-related events in the quarter, the increase in gross premiums earned, and change in premium mix, offset by a reduction in loss reserves related to 2019 and 2018 loss years.

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 June 30, 2020 and 2019 were approximately $12,991,000 and $10,077,000, 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 $2,914,000 increase was primarily attributable to higher agent commission rates and property inspection costs associated with the organic growth of TypTap business.

General and Administrative Personnel Expenses for the three months ended June 30, 2020 and 2019 were approximately $9,731,000 and $7,998,000, respectively.

Policy Acquisition and Other Underwriting Expenses for the three months ended September 30, 2020 and 2019 were approximately $14,210,000 and $10,988,000, 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 $3,222,000 increase was primarily attributable to higher agent commission rates, property inspection costs associated with the organic growth of TypTap business, and $605,000 of amortized transition costs related to Anchor policies.

General and Administrative Personnel Expenses for the three months ended September 30, 2020 and 2019 were approximately $9,871,000 and $7,951,000, respectively.

Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and employee benefit costs.

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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 $1,733,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2020, and lower capitalized and recoverable payroll costs.

Income Tax Expense for the three months ended June 30, 2020 and 2019 was approximately $2,887,000 and $2,762,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.4% for 2020 and 26.8% for 2019.

The decrease in the effective tax rate was primarily due to the recognition of 2018 Florida income tax refund and the reduced Florida corporate income tax rate effective in September 2019.

The loss ratio applicable to the three months ended June 30, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 54.2% compared with 46.7% for the three months ended June 30, 2019.

The period-over-period increase of $1,920,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, an increase in the headcount of temporary and full-time employees, merit increases for non-executive employees effective in late February 2020, and lower capitalized and recoverable payroll costs.

Income Tax Expense for the three months ended September 30, 2020 and 2019 was approximately $ 6,146,000 and $ 1,866 ,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 28.5 % for 20 20 and 2 4.2 % for 2019 .

The in crease in the effective tax rate was primarily due to the non-deductibility of certain executive compensation .

The loss ratio applicable to the three months ended September 30, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 82.8% compared with 50.2% for the three months ended September 30, 2019.

The increase was primarily due to the increase in losses and loss adjustment expenses, offset in part by the increase in net premiums earned.

The expense ratio applicable to the three months ended June 30, 2020 (defined as underwriting expenses, general and administrative personnel expenses , interest and other operating expenses related to net premiums earned) was 39.6 % compared with 4 6 .

2 % for the three months ended June 30, 2019 .

The de crease in our expense ratio was primarily attributable to the increase in net premiums earned, offset by the increase in losses and loss adjustment expense s and the increase in policy acquisition, underwriting and personnel expenses .

The expense ratio applicable to the three months ended September 30, 2020 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 49.2% compared with 45.8% for the three months ended September 30, 2019.

The increase in our expense ratio was primarily attributable to the increase in policy acquisition, underwriting and personnel expenses, offset by the increase in net premiums earned.

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 June 30, 2020 was 93.8% compared with 92.9% for the three months ended June 30, 2019.

Our combined ratio for the three months ended September 30, 2020 was 132.0% compared with 96.0% for the three months ended September 30, 2019.

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 June 30, 2020 was 63.9% compared with 58.0% for the three months ended June 30, 2019.

The combined ratio to gross premiums earned for the three months ended September 30, 2020 was 77.3% compared with 60.8% for the three months ended September 30, 2019.

The increase in 2020 was attributable to the factors described above.

Comparison of the Six Months ended June 30, 2020 to the Six Months ended June 30, 2019

Our results of operations for the six months ended June 30, 2020 reflect income available to common stockholders of approximately $9,483,000, or $1.23 earnings per diluted common share, compared with approximately $14,291,000, or $1.72 earnings per diluted common share, for the six months ended June 30, 2019.

The period-over-period decrease was primarily due to a net decrease in income from our investment portfolio of $14,936,000, an increase in losses and loss adjustment expenses of $16,632,000, an increase in policy acquisition and other underwriting expense of $5,067,000, and an increase in general and administrative personnel expenses of $2,736,000, offset by an increase net premiums earned of $31,913,000, which contributed to a decrease in pre-tax income of $7,118,000.

Gross Premiums Earned for the six months ended June 30, 2020 and 2019 were approximately $200,168,000 and $165,912,000, respectively.

Comparison of the Nine Months ended September 30, 2020 to the Nine Months ended September 30, 2019

Our results of operations for the nine months ended September 30, 2020 reflect income available to common stockholders of approximately $24,873,000, or $3.03 earnings per diluted common share, compared with approximately $20,144,000, or $2.49 earnings per diluted common share, for the nine months ended September 30, 2019.

The period-over-period increase was primarily due to an increase in gross premiums earned of $54,948,000 and a $36,969,000 gain on involuntary conversion, offset by a $15,006,000 increase in reinsurance costs, a net decrease in income from our investment portfolio of $15,820,000, an increase in losses and loss adjustment expenses of $41,048,000, an increase in policy acquisition and other underwriting expense of $8,289,000, and an increase in general and administrative personnel expenses of $4,656,000.

Gross Premiums Earned for the nine months ended September 30, 2020 and 2019 were approximately $306,862,000 and $251,914,000, respectively.

The $54,948,000 increase in 2020 compared with the corresponding period in 2019 was primarily attributable to a net increase in policies in force as described earlier.

Premiums Ceded for the six months ended June 30, 2020 and 2019 were approximately $65,073,000 and $62,730,000, respectively, representing 32.5% and 37.8%, respectively, of gross premiums earned.

Premiums Ceded for the nine months ended September 30, 2020 and 2019 were approximately $109,304,000 and $94,298,000, respectively, representing 35.6% and 37.4%, respectively, of gross premiums earned.

The $15,006,000 increase was primarily attributable to increased reinsurance cost per coverage limit effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

For the six months ended June 30, 2020, premiums ceded included a reduction of approximately $5,760,000 related to retrospective provisions.

For the six months ended June 30, 2019, premiums ceded included a net reduction of approximately $1,738,000 related to retrospective provisions.

For the nine months ended September 30, 2020, premiums ceded included a reduction of approximately $10,440,000 related to retrospective provisions.

For the nine months ended September 30, 2019, premiums ceded included a net reduction of approximately $4,258,000 related to retrospective provisions.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the six months ended June 30, 2020 and 2019 totaled approximately $183,326,000 and $138,321,000, respectively.

Net Premiums Written for the nine months ended September 30, 2020 and 2019 totaled approximately $255,546,000 and $204,084,000, respectively.

The $51,462,000 increase in 2020 resulted primarily from the factors described earlier.

Net Premiums Earned for the six months ended June 30, 20 20 and 201 9 were approximately $ 135,095,000 and $10 3 , 182 ,000, respectively, and reflect 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 six months ended June 30, 2020 and 2019 (amounts in thousands):

Six Months Ended

Net Premiums Earned for the nine months ended September 30, 2020 and 2019 were approximately $197,558,000 and $157,616,000, respectively, and reflect 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, 2020 and 2019 (amounts in thousands):

Nine Months Ended

September 30,

Net Premiums Written

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Net Premiums Earned

Net Investment Income for the six months ended June 30, 2020 and 2019 was approximately $1,412,000 and $7,504,000, respectively.

Net Investment Income for the nine months ended September 30, 2020 and 2019 was approximately $3,244,000 and $11,125,000, respectively.

The $7,881,000 decrease was primarily attributable to a loss of $2,058,000 from limited partnership investments in 2020 as opposed to income of $1,308,000 in 2019.

In addition, interest income from cash, cash equivalents, and short-term investments was lower by $1,627,000 in 2020 compared with 2019 due to a lowering of investment yields, particularly on cash.

Net Unrealized Investment Losses for the six months ended June 30, 2020 were approximately $1,921,000 versus net unrealized investment gains of approximately $6,619,000 for the six months ended June 30, 2019, reflecting a deterioration in the fair value of equity securities caused by COVID-19 pandemic.

Our Losses and Loss Adjustment Expenses amounted to approximately $67,921,000 and $51,289,000 for the six months ended June 30, 2020 and 2019, respectively.

The $16,632,000 increase was primarily attributable to the increase in gross premiums earned, change in premium mix and reserves for weather-related losses, offset by lower prior year development.

In addition, interest income from cash, cash equivalents, fixed-maturity securities, and short-term investments was lower by $4,041,000 in 2020 compared with 2019 due to a lowering of investment yields, particularly on cash.

Net Unrealized Investment Losses for the nine months ended September 30, 2020 were approximately $581,000 versus net unrealized investment gains of approximately $7,261,000 for the nine months ended September 30, 2019, reflecting a deterioration in the fair value of equity securities caused by COVID-19 pandemic.

Gain on Involuntary Conversion for the nine months ended September 30, 2020 was approximately $36,969,000, resulting from the transaction described earlier.

Our Losses and Loss Adjustment Expenses amounted to approximately $119,664,000 and $78,616,000 for the nine months ended September 30, 2020 and 2019, respectively.

The $41,048,000 increase was primarily attributable to the increase in gross premiums earned, change in premium mix and reserves for Hurricane Sally and other weather-related losses, offset by lower prior year development.

Losses after reinsurance recoverable for Hurricane Sally approximated $17,700,000.

See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the six months ended June 30, 2020 and 2019 were approximately $24,817,000 and $19,750,000, respectively.

Policy Acquisition and Other Underwriting Expenses for the nine months ended September 30, 2020 and 2019 were approximately $39,027,000 and $30,738,000, respectively.

The $8,289,000 increase was primarily attributable to the factors described earlier.

General and Administrative Personnel Expenses for the six months ended June 30, 2020 and 2019 were approximately $18,098,000 and $15,362,000, respectively.

The period-over-period increase of $2,736,000 was primarily attributable to higher share-based compensation expense and merit increases for non-executive employees, and lower capitalized and recoverable payroll costs.

Interest Expense for the six months ended June 30, 2020 and 2019 was approximately $5,990,000 and $7,221,000, respectively.

General and Administrative Personnel Expenses for the nine months ended September 30, 2020 and 2019 were approximately $27,969,000 and $23,313,000, respectively.

The period-over-period increase of $4,656,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, merit increases for non-executive employees, and lower capitalized and recoverable payroll costs.

Interest Expense for the nine months ended September 30, 2020 and 2019 was approximately $8,846,000 and $10,128,000, respectively.

The decrease resulted from the repayment of our 3.875% Convertible Senior Notes in March 2019.

Income Tax Expense for the six months ended June 30, 2020 and 2019 was approximately $2,997,000 and $5,307,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.0% for 2020 and 27.1% for 2019.

The decrease was primarily attributable to the recognition of windfall tax benefits related to share-based awards in addition to the factors described previously.

The loss ratio applicable to the six months ended June 30, 2020 was 50.3% compared with 49.7% for the six months ended June 30, 2019.

The expense ratio applicable to the six months ended June 30, 2020 was 41.2% compared with 46.9% for the six months ended June 30, 2019.

Income Tax Expense for the nine months ended September 30, 2020 and 2019 was approximately $9,143,000 and $7,173,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 26.9% for 2020 and 26.3% for 2019.

The loss ratio applicable to the nine months ended September 30, 2020 was 60.6% compared with 49.9% for the nine months ended September 30, 2019.

The expense ratio applicable to the nine months ended September 30, 2020 was 43.7% compared with 46.5% for the nine months ended September 30, 2019.

The decrease in our expense ratio was primarily attributable to the increase in net premiums earned.

The combined ratio is the measure of overall underwriting profitability before other income.

Our combined ratio for the six months ended June 30, 2020 was 91.5% compared with 96.6% for the six months ended June 30, 2019.

The decrease was attributable to the increase in net premiums earned, offset in part by the increase in losses and loss adjustment expenses as described above.

Our combined ratio for the nine months ended September 30, 2020 was 104.3% compared with 96.4% for the nine months ended September 30, 2019.

The increase was attributable to the increase in losses and loss adjustment expenses, offset by the increase in net premiums earned as described above.

The combined ratio to gross premiums earned for the six months ended June 30, 2020 was 61.8% compared with 60.1% for the six months ended June 30, 2018.

The combined ratio to gross premiums earned for the nine months ended September 30, 2020 was 67.2% compared with 60.3% for the nine months ended September 30, 2019.

The increase in 2020 was primarily attributable to the increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.

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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.

Our insurance subsidiar ies 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.

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Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases

The following table summarizes the principal and interest payment obligations of our indebtedness at June 30, 2020:

The following table summarizes the principal and interest payment obligations of our indebtedness at September 30, 2020:

Maturity Date

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March 1 and September 1

4% Promissory note

Through February 2031

1 st day of each month

3.75% Callable promissory note

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Three 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 remaining three funds have expired, the general partners may request additional funds under certain circumstances.

At June 30, 2020, there was an aggregate unfunded capital balance of $13,660,000.

Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances.

At September 30, 2020, there was an aggregate unfunded capital balance of $12,178,000.

See Limited Partnership Investments under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

Real Estate Investments

Real Estate Investment s

Real estate has long been a significant component of our overall investment portfolio.

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Sources and Uses of Cash

Cash Flows for the Six Months Ended June 30, 2020

Net cash provided by operating activities for the six months ended June 30, 2020 was approximately $109,988,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $32,597,000) and $28,745,000 of net cash receipts from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Cash Flows for the Nine Months Ended September 30, 2020

Net cash provided by operating activities for the nine months ended September 30, 2020 was approximately $77,530,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $39,624,000) and $27,092,000 of net cash receipts from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Due to the inclusion of the cash receipt from Anchor, net cash provided by operating activities was higher than usual.

Net cash provided by investing activities of $85,995,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $90,641,000, and the proceeds from redemptions and maturities of fixed-maturity securities of $52,594,000, offset by the purchases of fixed-maturity and equity securities of $48,673,000, the purchase of real estate investments of $2,522,000, limited partnership investments of $1,470,000, and the purchases of property and equipment of $5,349,000.

Net cash used in financing activities totaled $2,686,000, which consisted of $9,496,000 used to repay a 3.95% promissory note, $6,162,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, and $6,467,000 used in our share repurchases, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000 and draws from our revolving credit facility of $14,000,000.

Cash Flows for the Six Months Ended June 30, 2019

Net cash provided by operating activities for the six months ended June 30, 2019 was approximately $28,834,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $45,832,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $45,836,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $35,826,000, the proceeds from redemptions and maturities of fixed-maturity securities of $47,788,000, and the proceeds from sales and maturities of short-term and other investments of $69,897,000, offset by the purchases of fixed-maturity and equity securities of $91,505,000, the purchase of real estate investments of $9,892,000, and limited partnership investments of $1,751,000.

Net cash used in financing activities totaled $97,000,000, which was primarily due to the repayments of long-term debt of $90,647,000, $6,428,000 of net cash dividend payments, and $9,029,000 used in our share repurchases, offset by $9,500,000 of borrowings from our revolving credit facility.

Net cash provided by investing activities of $133,800,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $96,669,000, the proceeds from redemptions and maturities of fixed-maturity securities of $60,870,000, and $44,000,000 of compensation received for the property taken by the power of eminent domain, offset by the purchases of fixed-maturity and equity securities of $57,375,000, the purchase of real estate investments of $3,052,000, limited partnership investments of $2,951,000, and the purchases of property and equipment of $5,928,000.

Net cash used in financing activities totaled $28,151,000, which consisted of $16,533,000 used to repay 3.95% and 4% promissory notes, $9,279,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, $6,499,000 used in our share repurchases, and net repayment of our revolving credit facility of $1,000,000, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000.

Cash Flows for the Nine Months Ended September 30, 2019

Net cash provided by operating activities for the nine months ended September 30, 2019 was approximately $38,094,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $74,355,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $44,511,000 was primarily due to the proceeds from redemptions and maturities of fixed-maturity securities of $50,738,000, the proceeds from sales of fixed-maturity and equity securities of $39,570,000, and the proceeds from sales and maturities of short-term and other investments of $66,902,000, offset by the purchases of fixed-maturity and equity securities of $98,633,000, the purchase of real estate investments of $10,475,000, limited partnership investments of $1,899,000, and the purchases of property and equipment of $2,166,000.

Net cash used in financing activities totaled $107,439,000, which was primarily due to the repayments of long-term debt of $90,980,000, $9,599,000 of net cash dividend payments, and $16,214,000 used in our share repurchases, offset by $9,750,000 of borrowings from revolving credit facility.

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 June 30, 2020, we had $139,302,000 of fixed-maturity and equity investments, which are carried at fair value.

At September 30, 2020 , we had $ 135,445,000 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.

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OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2020, we had unexpired capital commitments for limited partnerships in which we hold interests.

As of September 30, 2020, 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.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of June 30, 2020 (amounts in thousands):

The following table summarizes our material contractual obligations and commitments as of September 30, 2020 (amounts in thousands):

Payment Due by Period

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Long-term debt obligations (3)

Represents a lease for office space in Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment and storage space.

Represents leases for office space in Tampa and Miami Lakes, Florida, a lease and maintenance service agreement for office space in Noida, India, and leases for office equipment and storage space.

Liabilities related to our India operations were converted from Indian Rupees to U.S.

dollars using the June 30, 2020 exchange rate.

dollars using the September 30, 2020 exchange rate.

Represents the unfunded balance of capital commitments under the subscription agreements related to limited partnerships in which we hold interests.

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Estimating the IBNR component of our Reserves involves considerable judgment on the part of management.

At June 30, 2020 , $ 166,238,000 of the total $ 211,162,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

At September 30, 2020, $165,274,000 of the total $219,345,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

The remaining $54,071,000 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 June 30, 2020 , $ 32,393,000 of the $ 44,924,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $214,697,000 at December 31, 2019 to $211,162,000 at June 30, 2020.

The $3,535,000 decrease is comprised of reductions in our Reserves of $28,490,000 specific to Hurricane Irma in 2017 and Hurricane Michael in 2018 and reductions in our non-catastrophe Reserves of $14,324,000 for 2019 and $11,203,000 for 2018 and prior loss years, offset by $50,483,000 in reserves established for 2020 loss year.

The $50,482,000 in Reserves established for 2020 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of June 30, 2020.

At September 30, 2020, $31,125,000 of the $54,071,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves increased from $214,697,000 at December 31, 2019 to $219,345,000 at September 30, 2020.

The $4,648,000 increase is comprised of $81,691,000 in reserves established for the 2020 loss year, of which $18,628,000 related to Hurricane Sally, offset by reductions in our Reserves of $43,328,000 specific to Hurricane Irma in 2017 and Hurricane Michael in 2018 and reductions in our non-catastrophe Reserves of $19,058,000 for 2019 and $14,657,000 for 2018 and prior loss years.

The $81,691,000 in Reserves established for 2020 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of September 30, 2020.

The decrease of $77,043,000 specific to our 2019 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 June 30, 2020 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us.

Based on all information known to us, we consider our Reserves at September 30, 2020 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.

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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 June 30, 2020 and 2019, we accrued benefits of $3,240,000 and $1,026,000, respectively.

For the three months ended June 30, 2020, there was no adjustment in ceded premiums whereas we recognized a reduction in premiums ceded of $200,000 for the three months ended June 30, 2019.

In combination, for the three months ended June 30, 2020 and 2019, we recognized decreases in ceded premiums of $3,240,000 and $1,226,000, respectively.

For the six months ended June 30, 2020 and 2019, we accrued benefits of $5,760,000 and $1,304,000, respectively.

There was no adjustment in ceded premiums for the six months ended June 30, 2020.

For the six months ended June 30, 2019, we recognized a decrease in premiums ceded of $434,000.

In combination, for the six months ended June 30, 2020 and 2019, we recognized decreases in ceded premiums of $5,760,000 and $1,738,000, respectively.

As of June 30, 2020, we had $1,560,000 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.

For the three months ended September 30 , 2020 and 2019 , we accrued benefits of $ 4,680,000 and $ 2,520 ,000, respectively .

F or the three months ended September 30, 20 20 and 2019 , there was no a djustment in ceded premiums .

In combination, for the three months ended September 30 , 2020 and 2019 , we recognized decrease s i n ceded premiums of $ 4,680,000 a nd $ 2,520 ,000, respectively .

For the nine months ended September 30, 2020 and 2019, we accrued benefits of $10,440,000 and $3,824,000, respectively.

There was no adjustment in ceded premiums for the nine months ended September 30, 2020.

For the nine months ended September 30, 2019, we recognized a decrease in premiums ceded of $434,000.

In combination, for the nine months ended September 30, 2020 and 2019, we recognized decreases in ceded premiums of $10,440,000 and $4,258,000, respectively.

As of September 30, 2020, we had $6,240,000 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.

In June 2020, we received a $13,680,000 premium refund under the retrospective reinsurance contract that ended May 31, 2020.

Accrued benefits related to this expired contract w ere $9,480,000 at December 31, 2019.

Accrued benefits related to this expired contract were $9,480,000 at December 31, 2019.

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.

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 6, 2020.

For the six months ended June 30, 2020, there have been no material changes with respect to any of our critical accounting policies.

For the nine months ended September 30, 2020, there have been no material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis