What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-11 compared with 2020-11-12 · 60 added, 209 removed, 165 unchanged (62% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Periods Ended September 30, 2020 and 2019

For the Periods Ended March 31, 2021 and 2020

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 11, 2021 with the U.

12 unchanged sentences

The majority of our employees are now working remotely in observance of “shelter-in-place” or “stay-at-home” government orders.

We experienced a $1.9 million reduction in the fair value of our equity portfolio for the nine months ended September 30, 2020, due to the stock market reaction to the Pandemic, which directly impacted our results of operations.

And, a significant portion of our revenues are generated from the hospitality sector of the U.S.

A significant portion of our revenues is generated from the hospitality sector of the U.S.

economy which has seen unprecedented contraction, at least in the near term, in an effort to mitigate the effects of the Pandemic.

24 unchanged sentences

There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions.

During the three months ended September 30, 2020, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020.

During the three months ended March 31, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.

Executive Overview

The Company reported net income of $541,000, or $0.06 per share, and a net loss of $2.7 million, or $0.28 per share, for three and nine months ended September 30, 2020, respectively.

The Company reported a net loss of $1.2 million, or $0.13 per share and $4.8 million, or $0.55 per share, for the three and nine months ended September 30, 2019, respectively.

Adjusted operating loss, a non-GAAP measure, was $2.4 million, or $0.24 per share, and $5.6 million, or $0.58 per share, for the three and nine months ended September 30, 2020.

Adjusted operating loss was $1.9 million, or $0.18 per share, and $11.7 million, or $1.35 per share for the nine months ended September 30, 2019.

Our underwriting combined ratio was 110.7% and 107.7% for the three and nine months ended September 30, 2020, compared to 109.2% and 110.0% for the same periods in 2019, respectively.

Both the commercial and personal lines of business have improved current accident year loss ratios.

We believe we are seeing the benefits of an improved mix of business as we have, and continue to, move out of higher loss ratio business and into more profitable areas while continuing to improve underwriting requirements in lines we are retaining.

Commercial lines also experienced low claims activity during the third quarter due to COVID-19.

While substantially all businesses maintained their insurance, liability losses were lower as restaurants, bars, and other small businesses were required to limit business or totally shut down for a period of time.

This reduced the potential to incur liability losses and contributed to the lower current accident year loss ratio.

Potential exposures to COVID-19 losses, on the other hand, were minimal as we include strict exclusions to business interruption coverage related to bacterial or viral causes on most policies and require physical property damage for the business interruption coverage to be effective on all policies.

We also do not provide coverage relating to event cancellations, travel insurance or other coverages that could directly generate such losses.

We believe we also have limited exposures relating to our workers compensation coverages which are generally companion coverages with our existing commercial policies, which represents a small amount of our overall premiums and does not appear to be heavily exposed to COVID-19-related losses.

Our personal lines also performed much better this quarter as the Company continues to expand in the historically profitable low-value dwelling area while the wind-exposed and Florida homeowners business, specifically, is becoming insignificant.

Results of Operations For The Three Months Ended September 3 0 , 20 20 and 201 9

We reported $30.4 million of gross written premiums in the first quarter of 2021, representing a 21.1% increase as compared to the same period in 2020.

The increase was the result of growth in both commercial and personal lines business as we continue to penetrate markets where we have been the most successful while still reducing exposure to less profitable lines.

We reported a net loss of $4.6 million, or $0.48 per share, for three months ended March 31, 2021, compared to a net loss of $4.7 million, or $0.49 per share for the same period in 2020.

Adjusted operating loss, a non-GAAP measure, was $7.0 million, or $0.72 per share for the three months ended March 31, 2021, compared to an adjusted operating loss of $2.7 million, or $0.28 per share for the same period in 2020.

Our underwriting combined ratio was 129.0% for the three months ended March 31, 2021, compared to 111.6% for the same period in 2020.

Our combined ratio was higher in the first quarter of 2021, compared to the same period in 2020, due to catastrophe losses of $2.0 million, net of reinsurance recoverables, plus $318,000 of reinstatement reinsurance premiums, both related to Winter Storm Uri.

We also had adverse development of $5.8 million during the first quarter of 2021, of which $5.2 million was related to the Company’s commercial lines.

Results of Operations For The Three Months Ended March 3 1 , 20 2 1 and 20 20

The following table summarizes our operating results for the periods indicated (dollars in thousands):

1 unchanged sentence

Three Months Ended

September 30,

Gross written premiums

27 unchanged sentences

The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the three months ended September 3 0 , 20 20 and 201 9 (dollars in thousands):

Our premiums are presented below for the three months ended March 3 1 , 20 2 1 and 20 20 (dollars in thousands):

Summary of Premium Revenue

Three Months Ended

September 30,

Gross written premiums

7 unchanged sentences

Personal lines

Gross written premiums increased $2.8 million, or 10.2%, to $29.8 million for the three months ended September 30, 2020, as compared to $27.1 million for the same period in 2019.

Commercial lines gross written premiums increased $2.3 million, or 9.1%, to $27.3 million in the third quarter of 2020, as compared to $25.0 million for the third quarter of 2019.

The increase in gross written premiums was attributed to several new small business programs added to our commercial lines during 2020, as well as growth in our existing small business programs.

Personal lines gross written premiums increased $485,000, or 23.6%, to $2.5 million in the third quarter of 2020, as compared to $2.1 million for the same period in 2019.

The increased gross written premiums were due to a new program added to our low-value dwelling book of business, as well as growth in our existing low-value dwelling programs.

These increases were offset by a $98,000, or 62.6%, decrease in Florida homeowners premiums.

Net written premiums increased $1.2 million, or 5.2%, to $25.0 million for the three months ended September 30, 2020, as compared to $23.8 million for the same period in 2019.

The increase was mostly consistent with the increase in gross written premium for the comparative periods.

However, increases in reinsurance rates, effective January 1, 2020, diminished the increase to net written premiums.

Gross written premiums increased $5.3 million, or 21.1%, to $30.4 million for the three months ended March 31, 2021, as compared to $25.1 million for the same period in 2020.

Commercial lines gross written premiums increased $3.8 million, or 16.1%, to $27.2 million in the first quarter of 2021, as compared to $23.4 million for the first quarter of 2020.

The increase was due to $5.1 million of additional gross written premium in the Company’s small business programs during the first quarter of 2021, compared the first quarter of 2020.

This increase was offset by a reduction of $1.3 million of gross written premium in the Company’s hospitality programs during the first quarter of 2021, compared to the first quarter of 2020, as a result on the ongoing impact of the pandemic on restaurants, bars and taverns.

Personal lines gross written premiums increased $1.5 million, or 92.2%, to $3.1 million in the first quarter of 2021, as compared to $1.6 million for the same period in 2020.

The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $3.4 million, or 16.3%, to $24.5 million for the three months ended March 31, 2021, as compared to $21.1 million for the same period in 2020.

Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 15.5% to 19.2% in the first quarters of 2020 and 2021, respectively.

Winter Storm Uri resulted in $318,000 of reinstatement premiums that increased the ceded rate by 1.0 percentage point in the first quarter.

The remainder of the increase was due to a combination of:

1) a change in the mix of business to more property exposure which has a higher ceding rate;

2) general reinsurance rate increases;

and 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to only $200,000, from $340,000.

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.

Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.

Other income for the three months ended September 30, 2020, increased $78,000, or 13.8%, to $642,000 as compared to $564,000 for the same period in 2019.

The increase in other income was primarily due to additional unaffiliated commission income in the Agency operations as well as increased fees charged on existing business.

Other income for the three months ended March 31, 2021, decreased $102,000, or 15.5%, to $556,000 as compared to $658,000 for the same period in 2020.

The decrease in other income was primarily due to a decrease in revenue in the Agency operations in the first quarter of 2021, compared to the same period in 2020.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended September 30, 2020 and 2019 (dollars in thousands).

Three months ended September 30, 2020

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended March 31, 2021 and 2020 (dollars in thousands).

Three months ended March 31, 2021

Accident year net losses and LAE

4 unchanged sentences

Calendar year loss ratio

Three months ended September 30, 2019

Three months ended March 31, 2020

Accident year net losses and LAE

4 unchanged sentences

Calendar year loss ratio

Net losses and LAE decreased by $304,000, or 2.0%, for the three months ended September 30, 2020, as compared to the same period in 2019.

The calendar year loss ratios were 65.2% and 64.9% for the three months ended September 30, 2020 and 2019, respectively.

We believe the improving current accident year loss ratios is a result of an improved mix of business as we have, and continue to, move out of higher loss ratio business and into more profitable areas while continuing to improve underwriting requirements in lines we are retaining.

As discussed in the Executive Overview, Commercial lines experienced lower liability claims activity driven by the COVID-19 shut downs.

In addition, Personal lines fared well this quarter as the Florida homeowners line is becoming insignificant and growth in the low-value dwelling lines, which have historically performed well, continue to expand.

The Company's incurred losses during the three months ended September 30, 2020, included adverse prior-year reserve development of $4.7 million.

The commercial lines experienced $4.6 million of unfavorable reserve development of which $2.9 million was incurred in our hospitality programs, and $1.7 million was from our small business programs (mostly in the liability coverages).

The adverse development was attributable to the 2018 and prior accident years.

The Company's incurred losses during the three months ended September 30, 2019, included adverse prior-year reserve development of $2.7 million.

The Commercial lines experienced $2.3 million of unfavorable reserve development mostly attributable to hospitality liability lines in 2016 and 2017 accident years.

Personal lines was unfavorable by $393,000, partly attributable to the Florida homeowners line, and mostly related to the 2016 and 2017 accident years.

The total reserve development is net of the amortization of the deferred gain on the ADC of $481,000, of which almost the entire amount favorably impacted the commercial lines.

This provided $481,000 of benefit toward the adverse development for the three months ended September 30, 2019, leaving the benefit from the ADC fully recognized.

Net losses and LAE increased by $5.1 million, or 35.7%, to $19.4 million for the first three months in 2021, compared to $14.3 million for the same period in 2020.

As discussed in the Executive Overview, the Company experienced $2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri.

In addition to these losses, the Company experienced $5.8 million of adverse development for the three months ended March 31, 2021.

Of the $5.8 million in adverse development, $5.2 million was related to commercial lines, and $612,000 was related to personal lines.

The Company's incurred losses for the three months ended March 31, 2020, included adverse prior-year reserve development of $3.7 million from the commercial lines, mostly attributable to hospitality liability in 2018 and 2019 accident years.

Expense Ratio

5 unchanged sentences

Three Months Ended

September 30,

Commercial Lines

7 unchanged sentences

Operating expenses

Our expense ratio increased 1.2% to 45.5%, compared to 44.3% for the three months ended September 30, 2020 and 2019, respectively.

Our expense ratio decreased by 2.5 percentage points in the first quarter of 2021 as compared to the same period of 2020.

We saw the most improvement in the operating expense ratios.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.

The Company offsets direct commissions with ceded commissions from reinsurers.

For the three months ended September 30, 2020 and 2019, the percentage of policy acquisition costs to net earned premiums and other underwriting income increased to 30.1% compared to 28.7%, respectively.

The acquisition cost ratio was higher mostly due to higher ceded premium rates in 2020 compared to 2019.

For the three months ended March 31, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income increased to 30.2% compared to 30.0%, respectively.

Acquisition costs as a percent of gross earned premiums were lower by 1.0 percentage point in the first quarter of 2021 as compared to the same period in 2020.

However, the acquisition cost ratio (which is based on net earned premiums) was higher due to higher ceded premium rates discussed above.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.

Operating expenses as a percent of net earned premiums and other income were 15.4% and 15.6% for the three months ended September 30, 2020 and 2019, respectively.

Operating expenses as a percent of net earned premiums and other income were 14.4% and 17.1% for the three months ended March 31, 2021 and 2020, respectively.

The operating expense ratio was lower due to our expense reduction efforts, partially offset by higher ceded premium rates discussed above.

1 unchanged sentence

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.

The following table provides the underwriting gain or loss for the three months ended September 30, 2020 and 2019 (dollars in thousands):

The following table provides the underwriting gain or loss for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

Three Months Ended

September 30,

Commercial Lines

3 unchanged sentences

Total Segment gain (loss)

Results of Operations For The Nine Months Ended September 30, 2020 and 2019

The following table summarizes our operating results for the periods indicated (dollars in thousands):

Summary of Operating Results

Nine months ended

September 30,

Gross written premiums

Net written premiums

Net earned premiums

Losses and loss adjustment expenses, net

Policy acquisition costs

Operating expenses

Underwriting gain (loss)

Net investment income

Net realized investment gains

Change in fair value of equity securities

Interest expense

Income (loss) before equity earnings in Affiliate and income taxes

Equity earnings in Affiliate, net of tax

Income tax expense

Net income (loss)

Book value per common share outstanding

Underwriting Ratios:

Loss ratio (1)

Expense ratio (2)

Combined ratio (3)

The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.

The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and other underwriting expenses to net earned premiums and other income from underwriting operations.

The combined ratio is the sum of the loss ratio and the expense ratio.

A combined ratio under 100% indicates an underwriting profit.

A combined ratio over 100% indicates an underwriting loss.

Percentage change is not meaningful.

Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy.

Almost all commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year.

The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the nine months ended September 30, 2020 and 2019 (dollars in thousa nds):

Nine months ended

September 30,

Gross written premiums

Commercial lines

Personal lines

Net written premiums

Commercial lines

Personal lines

Net earned premiums

Commercial lines

Personal lines

Gross written premiums increased $6.0 million, or 7.9%, to $82.5 million for the nine months ended September 30, 2020, as compared to $76.5 million for the same period in 2019.

Commercial lines gross written premiums increased $5.3 million, or 7.4%, to $76.3 million for the nine months ended September 30, 2020, as compared to $71.1 million for the same period in 2019.

The increase in gross written premiums was attributed to several new small business programs added to our commercial lines book of business in 2020, as well as continued growth in our existing small business programs.

Personal lines gross written premiums increased $728,000, or 13.5%, to $6.1 million for the nine months ended September 30, 2020, as compared to $5.4 million for the same period in 2019.

The increased gross written premiums were due to a new program added to our low-value dwelling book of business, as well as growth in an existing low-value dwelling program.

These increases were partially offset by a $630,000, or 76.4%, decline in Florida homeowners premiums (representing only 0.2% of our total gross written premium in 2020).

Net written premiums increased $3.6 million, or 5.5%, to $69.2 million for the nine months ended September 30, 2020, as compared to $65.6 million for the same period in 2019.

The increase was consistent with the increase in gross written premium for the comparative periods.

However, increases in reinsurance rates, effective January 1, 2020, dampened the increase to net written premiums.

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.

Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.

Other income for the nine months ended September 30, 2020, increased $446,000, or 28.5%, to $2.0 million as compared to $1.6 million for the same period in 2019.

The increase in other income was primarily due to additional unaffiliated commission income in the Agency operations as well as increased fees charged on existing business.

Other gains were $260,000 for the nine months ended September 30, 2020, compared to $0 for the same period in 2019.

The Company repurchased 36,761 units of the Notes during the nine months ended September 30, 2020.

These repurchases resulted in a gain of $260,000 on extinguishment of the Notes, which was reflected in the Consolidated Statement of Operations as Other gains.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the nine months ended September 30, 2020 and 2019 (dollars in thousands).

Nine months ended September 30, 2020

Accident year net losses and LAE

Net (favorable) adverse development

Calendar year net losses and LAE

Accident year loss ratio

Net (favorable) adverse development

Calendar year loss ratio

Nine months ended September 30, 2019

Accident year net losses and LAE

Net (favorable) adverse development

Calendar year net losses and LAE

Accident year loss ratio

Net (favorable) adverse development

Calendar year loss ratio

Net losses and LAE decreased by $3.0 million, or 6.7%, for the nine months ended September 30, 2020, as compared to the same period in 2019.

The calendar year loss ratios were 61.5% and 66.1% for the nine months ended September 30, 2020 and 2019, respectively.

As discussed in the Executive Overview, Commercial lines experienced lower liability claims activity driven by the COVID-19 shut downs.

In addition, Personal lines continues to improve as the Florida homeowners line is becoming insignificant and growth in the low-value dwelling lines, which have historically performed well, continue to expand.

The Company's incurred losses during the nine months ended September 30, 2020, included adverse prior-year reserve development of $11.5 million.

The Commercial lines experienced $11.4 million of unfavorable reserve development for the nine months ended September 30, 2020, of which $8.5 million was incurred in our hospitality programs, while $2.9 million was from our small business programs (mostly in the liability coverages).

The adverse development was mostly attributable to the 2018 and prior accident years.

The Company's incurred losses during the nine months ended September 30, 2019, included adverse prior-year reserve development of $7.1 million.

The Commercial lines experienced $4.7 million of unfavorable reserve development mostly attributable to hospitality liability lines in the 2016 and 2017 accident years.

Personal lines was unfavorable by $2.4 million, of which $1.5 million was attributable to the Florida homeowners line, and mostly related to the 2016 and 2017 accident years.

The total reserve development is net of the amortization of the deferred gain on the ADC of $5.7 million, of which almost the entire amount favorably impacted the commercial lines.

This provided $5.7 million of benefit toward the adverse development for the nine months ended September 30, 2019, leaving the benefit from the ADC fully recognized.

Expense Ratio

Our expense ratio is a measure of the efficiency and performance of the commercial and personal lines of business (our risk-bearing underwriting operations).

It is calculated by dividing the sum of policy acquisition costs and other underwriting expenses by the sum of net earned premiums and other income of the underwriting business.

Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate for segment reporting purposes.

The expense ratio excludes wholesale agency and Corporate expenses.

The table below provides the expense ratio by major component.

Nine months ended

September 30,

Commercial Lines

Policy acquisition costs

Operating expenses

Personal Lines

Policy acquisition costs

Operating expenses

Total Underwriting

Policy acquisition costs

Operating expenses

Our expense ratio increased by 2.3% in the nine months ended September 30, 2020, as compared to the same period in 2019.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.

The Company offsets direct commissions with ceded commissions from reinsurers.

For the nine months ended September 30, 2020 and 2019, the percentage of policy acquisition costs to net earned premiums and other underwriting income increased to 30.2% compared to 28.0%, respectively.

The acquisition cost ratio was higher mostly due to higher ceded premium rates in 2020 compared to 2019.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.

Operating expenses as a percent of net earned premiums and other income was 16.0% and 15.9% for the nine months ended September 30, 2020 and 2019, respectively.

The Company has made progress in reducing its overhead costs as part of its cost cutting initiatives.

Such efforts were partially offset by higher ceded premium rates discussed above.

Segment Results

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.

The following table provides the underwriting gain or loss for the nine months ended September 30, 2020 and 2019 (dollars in thousands):

Nine months ended

September 30,

Commercial Lines

Personal Lines

Total Underwriting

Wholesale Agency

Total underwriting income (loss)

Liquidity and Capital Resources

Sources and Uses of Funds

At September 30, 2020, we had $32.4 million in cash, cash equivalents and short-term investments.

At March 31, 2021, we had $17.1 million in cash, cash equivalents and short-term investments.

Our principal sources of funds are insurance premiums, investment income, proceeds from maturities and sales of invested assets and installment fees.

5 unchanged sentences

however, this is not the primary means in which the Parent Company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company.

There were no dividends paid from our Insurance Company Subsidiaries during the nine months ended September 30, 2020 and 2019.

There were no dividends paid from our Insurance Company Subsidiaries during the three months ended March 31, 2021 and 2020.

Operating Activities .

Cash used in operating activities for the nine months ended September 30, 2020, was $3.0 million, compared to $7.4 million of cash provided by operating activities for the same period in 2019.

The differences in cash used in operating activities was primarily due to a $4.0 million increase in paid claims in 2020 and the timing of premium balance settlements with agencies, representing approximately another $4.0 million of additional cash received in 2019 as compared to 2020.

Cash used in operating activities for the three months ended March 31, 2021, was $3.5 million, compared to $4.0 million provided by operating activities for the same period in 2020.

The differences in cash used in operating activities was primarily due to a $6.2 million increase in paid claims and $1.7 million of additional acquisition costs paid in 2021.

These increases in cash used in operating activities was partially offset by a $1.1 million increase in premiums collected, net of reinsurance premiums.

Investing Activities.

Cash used in investing activities for the nine months ended September 30, 2020 was $2.0 million, as compared to $8.4 million of cash provided by investing activities for the same period in 2019.

The $10.4 million increase in cash used in investing activities was driven by the deployment of additional cash from operations into our investment portfolio.

In addition, there was significant repositioning of our investment portfolio during the first nine months of 2020, due to the changing market conditions from the COVID-19 pandemic.

Cash provided by investing activities for the three months ended March 31, 2021, was $1.7 million, as compared to $4.1 million of cash used in investing activities for the same period in 2020.

The $5.8 million increase in cash provided by investing activities was driven by a reduction in the purchases of investments in the first quarter of 2021, compared to the first quarter of 2020.

There was a significant repositioning of the Company’s portfolio during the first quarter of 2020 from the COVID-19 pandemic, which caused an increase in the purchases of investments.

Financing Activities.

Cash provided by financing activities for the nine months ended September 30, 2020 was $5.1 million, compared to $4.3 million for the same period in 2019.

The $800,000 increase in cash provided by financing activities was due to the Company drawing down an additional $3.0 million from its line of credit during the nine months ended September 30, 2020.

The Company also received $2.7 million of funds from the PPP loan during the nine months ended September 30, 2020.

These increases were offset by the $5.0 million the Company raised through the issuance of additional common stock during the same period in 2019.

Non-GAAP Financial Measures

Cash used in financing activities for the three months ended March 31, 2021, was $2.0 million, compared to $754,000 of cash provided financing activities for the same period in 2020.

The $2.8 million increase in cash used in financing activities was mostly due to the Company paying down a net amount of $2.0 million of its outstanding balance on its line of credit during the first quarter of 2021.

Statutory Capital and Surplus

Statutory capital and surplus is a non-GAAP measure.

The Company’s insurance subsidiaries’ aggregate statutory capital and surplus was $60.6 million and $59.6 million at September 30, 2020 and December 31, 2019, respectively.

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators.

These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP.

The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $58.7 million and $64.1 million at March 31, 2021 and December 31, 2020, respectively.

Non-GAAP Financial Measures

Adjusted Operating Income and Adjusted Operating Income Per Share

Adjusted operating income and adjusted operating income per share are non-GAAP measures that represent net income allocable to common shareholders excluding net realized investment and other gains, net of tax.

Beginning in 2018, the change in fair value of equity securities, net of tax, and the deferred gain on losses ceded to the ADC are also excluded from net income to arrive at adjusted operating income.

all net of tax.

The most directly comparable financial GAAP measures to adjusted operating income and adjusted operating income per share are net income and net income per share, respectively.

4 unchanged sentences

Three Months Ended

September 30,

Nine months ended

September 30,

Net income (loss)

Net realized investment gains and other gains, net of tax

Tax effect of investment unrealized gains and losses

Change in fair value of equity securities, net of tax

Net decrease (increase) in deferred gain on losses ceded to ADC, net of tax

Adjusted operating income (loss)

3 unchanged sentences

Net realized investment gains and other gains, net of tax

Tax effect of investment unrealized gains and losses

Change in fair value of equity securities, net of tax

Net decrease (increase) in deferred gain on losses ceded to ADC, net of tax

Adjusted operating income (loss) per share

2 unchanged sentences

The change in fair value of equity securities and realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions.

Adjusted operating income also excludes the deferment of ceded losses related to the ADC (“deferred gain”) that are directly related to gross losses reported in the current period.

Deferring these ceded losses (while required under GAAP) does not reflect the economics of the reinsurance agreement which allows gross losses subject to the ADC to be offset by ceded losses in that period.

Accordingly, adjusted operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying loss or profitability of our business.

We believe that it is useful for investors to evaluate adjusted operating income and adjusted operating income per share, along with net income and net income per share, when reviewing and evaluating our performance.

2 unchanged sentences

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